During a recent property tour I took in San Antonio, TX, I took with me a notepad on which I wrote the items you will see below, adding notes under each as we progressed through the property. I do this because, when considering either purchasing or investing in a property, the property tour is a critical step in your due diligence process. While the bulk of your due diligence includes things such as the property financial/T12(or 24/36) audit, the full inspection and the market report, which can be done remotely or through third parties, you will still certainly benefit from examining a handful of items on site. Focus your attention on these four areas to successfully navigate through a property tour, asking yourself (or the Sponsor/property manager) the subsequent questions along the way.
Units / Unit Comps
The physical dwelling is the core of any rental property. It is the product you are providing and without it there is no business. Find answers to the following as you view the units:
- Are there opportunities to implement upgrades that will demand a rent premium? – Focus on upgrades that have market demand. Over-upgrading will kill ROI
- What is the current condition? Is it rentable as is?
- What is the unit mix – i.e. 1/1, 2/1, 2/2, etc. – and how many layout plans are there?
- What kind of upgrades do comps have and what kind of premiums are they realizing?
- Is this a place that you would live or have your children live?
Other Value-Add Opportunities
Interior upgrades will likely provide the most significant value-add opportunity for any property, but should not be the only opportunity. During your tour, you will ideally identify further NOI increasing possibilities:
- Does the property already have reserved/covered parking? If not, are there particular areas that naturally call for them?
- Is there a trash valet in place?
- Is there a laundry facility? Are there washer/dryer hook-ups in the units that allow the possibility of renting washer/dryer combos to tenants?
- Are there too many staff members employed? Maybe you have a PM that can bring on equally or more talented staff at a lower cost.
- Is there a costly amenity that is underutilized and can be removed to save on expenses?
- More creative ideas? The potential here is only limited to your imagination.
Major Systems / Amenities Condition
It is vital to separate value-add opportunities from deferred maintenance. Neglecting major systems to the point that incurring a large expense is necessary just to get up to par can kill a deal before you even get to the offer. While a full property inspection will give you all of the details you’ll possibly need in order to complete thorough due diligence, you’ll still want to pay close attention to the condition of the following during your property tour:
- Plumbing and drainage systems
- Roofs
- AC, heating and ventilation
- Electrical and lighting systems
- Parking lots
- Is it in an area that threatens flooding?
Sub-Market
The sub-market is a major force behind any property’s potential. Nearby job availability plays a key role in vacancy rates. Nearby properties will clue you in as to what amenities are desirable and what upgrades will put you at the bottom or top of the market. The list goes on. Ask yourself the following questions as you explore the area:
- What is the surrounding area like? Do you feel safe or would you hesitate to walk across the street to the store at night?
- Are there a lot of businesses nearby? – This is important in terms of jobs, entertainment, food, leisurely shopping, etc.
- Is the property in close proximity to major throughways?
- Is it surrounded by same-grade residential real estate? Lower? Higher? – This will be a key indicator as to upgrade potential for units and amenities as well as high and low end achievable rents
- What would you grade the sub-market as a whole?
Next time you’re on a property tour, take a note pad with you and jot down anything you notice about the units (and unit comps), any additional value-add opportunities, major systems/amenities condition and the sub-market – the good, the bad and the ugly. By no means is this an all-inclusive check list for your due diligence process, but it will certainly provide a solid starting point or serve as an excellent supplement if you’ve already started your due diligence elsewhere.
What do you think? Is there anything else that you pay close attention to when touring a property that you’re considering?
