Due Diligence, Red Flags and Stress Testing

Building and site

• · Roof, exterior and drainage
• · Foundation and structure
• · Windows and doors
• · Plumbing and sewer
• · Electrical system
• · Heating, cooling and ventilation
• · Moisture, insulation and attic
• · Parking, grading and outdoor areas
• · Environmental or hazardous-material concerns where relevant

Rental configuration

• · Unit separation and entrances
• · Fire separation and alarms
• · Egress and ceiling heights
• · Utility metering and control
• · Laundry, storage and garbage

Documents and professionals

• · Leases, rent ledger, deposits and notices
• · Municipal zoning, permit and work-order records
• · Utility bills and property tax statements
• · Insurance history and quotes
• · Home inspector, lawyer, lender and appraiser
• · Insurance broker, accountant and contractor
• · Municipal planning or building staff

Red flags that require more investigation

• · Seller will not provide leases or rent records
• · Advertised income that cannot be documented
• · Unpermitted units, additions or electrical work
• · No permit history for an obvious conversion
• · Rents far above or below the local market
• · Deferred maintenance disguised by cosmetic finishes
• · Insurance or lender hesitation about the configuration
• · Pressure to waive conditions on a complex property

Stress test before you commit

• · What happens if a unit sits vacant for two or three months?
• · What happens if the mortgage renews at a materially higher rate?
• · What happens if a roof, furnace or sewer line fails in year one?
• · What happens if rent comes in below your estimate?
• · What happens if a tenancy issue takes months to resolve?

The analysis should remain understandable when at least one assumption goes wrong.