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Welcome to this week’s CPI Capital’s news briefing. Our regular, weekly newsletter contains a mixture of updates, commentary and informative related articles about the lucrative world of passive real estate investment.
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Investing in any form of real estate such as multifamily apartments and/or BTR-SFR assets can involve large amounts of money, with funds being provided by a variety of entities, both major investors and smaller, passive investors. Of course, all parties want to mitigate risks and enjoy receiving positive cashflows and, in due course, capital appreciation.
So, doing the necessary preliminary investigations, both legal and financial,and detailed feasibility studies (collectively “due diligence”) is a pre-requisite to help ensure that the proposed project meets the investment objectives.
Let’s explain a little more about due diligence
Due diligence is, without doubt, a critical aspect of passive real estate investing. In summary, it is the process of thoroughly examining a potential investment opportunity before making a final decision to invest. The purpose of due diligence is to identify any potential risks or issues that may impact the investment and to ensure that the investment aligns with the investor’s goals and objectives.
This week we will discuss the role of due diligence in passive real estate investing and the key factors that investors should consider when conducting due diligence.
Some of the key issues to consider and address include:
Identifying potential risks and issues
One of the primary goals of due diligence is to identify any potential risks or issues that may impact the investment. This includes examining the property’s physical condition, reviewing the financial statements (if any) and future operating projections, as well as evaluating current market conditions The key goals are to identify any potential obstacles that may prevent the investment from meeting its objectives or generating the expected investment returns.
Evaluating the physical condition of the multifamily or BTR-SFR property
The physical condition of the property is a major factor to consider when conducting due diligence. Investors should evaluate the property’s condition to determine if any repairs or renovations are needed. This includes examining the roof, foundation, electrical systems, plumbing and HVAC systems. Investors should also evaluate the property’s compliance with local building codes and regulations to ensure that there are no issues which may prevent the property from being rented or sold.
Reviewing the financial statements and/or proposed operating projections
Another important aspect of due diligence is reviewing the financial statements and operating projections. Investors should review the property’s income statement, balance sheet and cash flow statement to gain an understanding of the property’s financial performance. They should also review the projections to evaluate the property’s potential for growth and to identify any potential risks or issues that may impact the investment’s performance.
Evaluating market conditions
Investors should also evaluate current and, as far as possible, expected future market conditions when conducting due diligence. This includes examining the local real estate market and assessing the demand for multifamily rental properties in the area as well as looking at, for example, financing costs. Investors should also evaluate the competition to determine if there are any other properties that may impact the property’s ability to attract tenants or buyers.
Ensuring alignment with investor goals and objectives
Another important role of due diligence is to ensure that the investment and its expected returns align with the investor’s goals and objectives. This includes evaluating the investment’s potential for generating income or appreciation and determining if it fits within the investor’s risk tolerance. Investors should also evaluate the investment’s liquidity and consider the potential tax implications and fee levels and costs involved.
Reviewing the potential for generating (additional) income or appreciation
Investors should evaluate the investment’s potential for generating income (cashflow) or appreciation. This includes reviewing the property’s rental history and projections, as well as assessing the potential for appreciation based on market conditions and potential improvements to the property. In the case of a new build, accurate forecasting is, obviously, vital.
Determining risk tolerance
Investors should also consider their risk tolerance when evaluating a potential investment opportunity. This includes assessing the level of risk associated with the investment, such as the potential for vacancies, property damage, or changes in market conditions due to the real estate cycle. Investors should also assess the potential risks and determine if they are comfortable with the level of risk associated with the investment.
The liquidity of the proposed investment should also be considered when conducting due diligence. This includes evaluating the potential for selling the investment if needed and assessing the potential impact on the investment’s performance if the property must be sold quickly.
Investors should also consider the potential tax implications associated with the investment. This includes evaluating the potential tax benefits of owning the property, such as deductions for mortgage interest and property taxes. The potential impact of capital gains taxes if the property is sold at a profit also needs to be factored in..
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CPI Capital is well aware that undertaking appropriate and extensive due diligence is a critical aspect of passive real estate investing and always thoroughly examines a potential investment opportunity before making a final decision to invest.
By using a combination of its experienced and knowledgeable in house team, supplemented with appropriate external financial and legal advisers, CPI Capital is confident that its due diligence process for its investments into multifamily and /or BTR-SFR projects is second to none!
CIO, Co-Founder CPI Capital