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With the recent downturn in the Real Estate Market, many investors are faced with less money for due diligence on each property. There’s a lot more to Real Estate Investing than just putting money down on a deal and hoping it returns a profit. Many new investors think they can cut corners on due diligence in multifamily real estate investing. This can be a costly decision. Let us discuss how to conduct thorough research and perform a pro forma analysis on your future investments to make sure you are not missing out on hidden costs, future expenses, or details that could impact your bottom line.

What is Due Diligence?
Due diligence is a critical step in any investment process and multifamily real estate is no exception. Due diligence includes, but isn’t limited to: examining a variety of factors including, but not limited to historical crime data and nearby infrastructure, performing credit and background checks on individuals involved with the property, inspecting the property and its systems firsthand, obtaining copies of leases, permits, and licenses that have not yet expired

There are three major types of due diligence one needs to keep in mind

1. Financial Due Diligence
The purpose of performing due diligence on a potential multifamily property is to ensure that more value will be created than what was originally invested in the acquisition of the property. For an investor to develop an accurate picture of what type of tenant base will occupy a particular development, every single possible aspect relative to a specific property is investigated by professionals before they make any final decisions regarding whether or not they wish to proceed with the purchase. As part of the financial due diligence process, four major areas should be examined:
1. Assessment of past performance
2. Future forecasts
3. Off-balance sheet liabilities
4. Cash flow models

2. Physical Due Diligence
Multifamily real estate investors are always looking to acquire the best properties possible, and a huge part of that due diligence process is physical inspection. Physical Due Diligence is an inspection of the property and its systems by a licensed professional, usually an engineer or home inspector. They will look at all aspects of the property including Roofing and water damage, electrical, plumbing and much more. This is concerned with the physical features and structure of the building and its surroundings. Some of these reports include zoning compliance, appraisal, environmental investigation, and engineering reports. Hiring these third parties can be expensive so buyers usually hold off on these reports until after preliminary due diligence which can be dangerous in the long run

3. Legal Due Diligence
The most important part of legal due diligence is examining the existing title policy, which is supplied by the seller and title insurance company. By hiring an attorney, you can review the existing policy and order an update. Once your conditions are met, then the title company can issue the updated title policy. A lot of people try to jump through this process as attorneys can be very expensive and time-consuming

As a real estate investor, one must understand all your investment options. The goal of this write-up is to help you make better-educated decisions when investing in multifamily. Multifamily Real Estate Investing is a numbers game. If you play it right, it can be a source of passive income for decades to come. If you don’t play it right, you could lose it all in one fell swoop. Due diligence is one of the most important factors in any multifamily investment, whether you are after a single-family home or an entire apartment complex.

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