Introduction

The blog aims to empower readers with the knowledge and tools needed to navigate the complex terrain of commercial real estate investments, specifically in Multifamily ensuring a well-informed and confident approach.

As a dedicated full-time investor and general partner, I often receive inquiries about due diligence in commercial real estate. In this blog, I aim to shed light on the critical aspects of the due diligence process, particularly for passive investors exploring opportunities in multifamily, storage, industrial, and similar assets. Multifamily includes residential, student, etc.

Unpacking the Due Diligence Process

The due diligence process is the linchpin for passive investors. This blog is a comprehensive guide that breaks down the steps involved before committing to a specific commercial real estate investment.

Offering Memorandum Review

Upon receiving an Offering Memorandum (OM) or Investment document, delve into it comprehensively. Analyze financials, underwriting, trailing financials, rent rolls, and business plans before progressing to the subsequent stages of due diligence.

Asset Research

The primary focus of our research lies in scrutinizing the asset itself, with the key information predominantly found in the OM document. Essential inquiries should revolve around the asset’s age, total unit count, unit pricing, and the date of its last rehabilitation. Additionally, it is crucial to evaluate the presence of amenities such as a gym, laundry room, and clubhouse, as these significantly enhance the property’s appeal, especially for families.

Furthermore, investigate whether the asset provides the sought-after amenity of in-unit washer and dryer facilities, a feature highly coveted by potential tenants.

I recommend targeting assets that are no more than 40 years old. If the asset surpasses this age threshold, thorough scrutiny should ensure both interior and exterior renovations have been conducted

than that, ensure that it has been renovated both interior and exterior.

Assessing the Sponsoring Team

In recent times, there has been a significant rise in green syndicators, propelled by numerous education programs nationwide. While some programs are reputable, others may lack credibility. I’ve encountered cases where individuals with minimal experience offer expensive education programs after completing just one deal.

The sponsor team is paramount. Similar to a founder’s role in a startup, the operating team’s expertise is crucial. I draw parallels between venture capitalists (VCs) and limited partners (LPs), emphasizing the importance of scrutinizing the team’s experience and complementary skills.

I stress the significance of live webinars hosted by sponsoring teams. The webinar offers insights into sponsor backgrounds, asset details, city/metro demographics, and returns. Engaging in a Q&A session at the end of webinar. is helpful in gaining a deeper understanding. If you miss the live webinar, you can listen to the recording.

Conducting Thorough Online Research

I advocate for thorough online research on each sponsor, leveraging Google. Identifying any red flags during this phase is essential and sets the stage for informed discussions during subsequent calls.

Location and Demographics

Location and demographics are super critical in real estate investments. Evaluate population and growth, job markets and household income. You can find information on google with a simple query like — population Kansas city or jobs Kansas city or income Kansas city.

One of the best online demographic information sites that I use actively is www.Justicemap.org You can find the information at the micro level using the exact address or zip code.

You can also check other online resources such as www.cesus.gov, www.city-data.com

In addition, you have to check what kind of companies exist in that area. Ideally, you would want a diverse mix of companies and industries. Some of this information is generally available in the OM. So if there is a slow down in one industry, the rest of the industries are doing well to accommodate jobs.

Next, check nearby amenities in 1–5 miles radius like grocery stores, coffee shops like Starbucks, retail malls, and hospitals, tailoring considerations to the needs of residents in multifamily properties. Please note that these amenities are not important for other asset classes like storage, industrial flex, this may not be that important.

Additionally, it’s crucial to examine whether the city is equipped with essential transportation infrastructure, such as an airport and highway connectivity.

I would recommend considering a population threshold of at least 150K for smaller cities and above 300K+ for metropolitan areas.

When evaluating household income, it’s advisable to set a baseline of at least $45K to $50K. This recommendation is grounded in ensuring financial feasibility for potential tenants. For instance, consider a monthly rent of $1,200, resulting in an annual rent of $14.4K. To afford this comfortably, the income requirement should be a minimum of three times the annual rent, totaling $43.2K. This approach safeguards a reasonable income-to-rent ratio, promoting financial stability for residents.

Schools

School rating plays an important role not only for single family houses but also for multifamily. It’s important to have a strong rating as it attracts and retains quality residents.

You can use the online resource greatschools.org to check for schools and ratings in that neighborhood and district.

Crime

Crime is another important factor. The crime should be low if nonexistent. Avoid property with medium to high crime rate. Avoid Class D properties as they tend to have a higher crime rate.

Best site to check is spotcrime.org. The site provides visual representation of the crimes in and around the specific address.

One-on-One Calls with Sponsors

Once the due diligence process is completed, the next most important step is to have a 1:1 call with the lead sponsors and/or the sponsor(s) who introduced the investment opportunity. Key questions revolve around sponsors’ backgrounds, skills, experience, deal history, returns provided, and lessons learned. In addition, understand their knowledge of the city/metro and relationships they have in the area (Property management companies, vendors, City Office, etc).

An essential inquiry involves identifying asset managers and on-site operators (aka boots on the ground), ideally residing in or near the city. Local presence guarantees effective oversight, while relying solely on remote operators may impede prompt on-site management.

Ask for two or more referrals who have invested with them, ideally invested more than once. If they refuse to provide references, consider this as a red flag.

Summary and closing thoughts

Once you have completed due diligence and feel comfortable with the asset, and sponsors, you can proceed to investing in the deal.

If the investment does not meet your criteria in terms of growth, or high crime or lack of experience in the sponsors, you should not proceed and look for the next one.

Author: Bharat Kona is a full time commercial real estate investor and sponsor. He worked in the tech industry for over two decades including startups and large tech in Silicon Valley. He teaches the importance of portfolio diversification and investing in alternative assets such as commercial real estate. All his blogs on real estate are published at https://medium.com/me/stories/public

Disclaimer: Bharat Kona not a certified financial advisor. This should not be considered as professional advice. All investments including real estate have market risk due to macro and micro factors way beyond our control