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When investing in real estate, it’s always important to do your due diligence. However, when you are looking at the possibility of investing in a commercial real estate portfolio that is valued at tens–or even hundreds–of millions of dollars, it’s critical to employ a thorough due diligence process.
Property analysis dives into the financials and sifts through the numbers with a fine-tooth comb. This process involves a minimum of three key areas.
Numbers. As with any investment, the numbers are the first item to evaluate If the numbers don’t make sense, your due diligence process can stop and you can move on to the next investment opportunity. When reviewing the numbers, you want to evaluate the proforma, several years of historical data, the age of the asset, and other pertinent financial information.
Narratives. Every property has a history and inquiring into the ownership transitions, reason for investment, reason for the sale, and the debt ratio can give you insight into the performance and value of the commercial real estate that the numbers do not reveal.
Indicators. Discovering the property owner’s intentions and motivation to sell can help you determine more than what the property is worth. It can help you negotiate terms by meeting the needs and desires of the seller. Oftentimes, a creative financing strategy can lead to a lower price for you, but more advantages to the seller.
After your due diligence is completed in these three key areas, it’s important not to stop there. There are three additional analyses that are vital in determining whether this is a wise and profitable investment.
The first is a building and lot analysis. During this process, gathering square footage, acreage, zoning, and other data can help you determine whether the building will meet your intended purposes.
The second is an investment analysis, and while some of this was covered during the initial analysis, there are some continuing factors that can affect the validity of the investment. Looking at the asset type, location, and micro-location within an urban area, and whether the asset has been held for 10 years or more, can determine whether the owner is willing to negotiate and sell. Property sales patterns can provide quite a bit of insight.
Finally, the property debt analysis can determine the margin on a commercial property. The origination and maturity dates can provide insight into the timeline a seller might be aiming for.
Although this is not a complete picture of the due diligence and analyses you want to run on a commercial portfolio, starting with these components can give you an indicator as to whether you “green light” the investment or not.