Wisely investing into an asset requires plenty of planning, preparation and patience, otherwise known as due diligence. This lengthy process of determining whether you should acquire a property involves seeking out all material facts and information so as to make an informed decision. Undertaking this process smartly and effectively can mean the difference between a successful investment and a dud.
We’ll take a look at some general components of real estate due diligence, what addy undertakes when it comes to crowdfunding real estate, as well as what members can expect with their fractional investment.
What is due diligence?
Due diligence is an important step in buying and selling assets, particularly when it comes to real estate. Essentially due diligence is a series of fact-gathering processes and targeted assessments to ascertain if what you’re buying is fit and legit. It is typically an involved endeavor that can take weeks or months to complete; it usually requires a bit of financial commitment as well.
The reason for conducting due diligence is simple: you want to know if an investment you’re making is a smart one. Due diligence can determine risk and reward so you can make the best decision possible.
6 real estate due diligence considerations
Due diligence takes a lot of different forms. We’ll take a look at some of the more important real estate due diligence methods, many of which also apply to residential properties as well.
Assigning accurate value is an important beginning step in real estate due diligence. This process can be time consuming but fairly straightforward. If a piece of property is for sale, it’s vital to investigate the value of similar properties.
Most of us do this in our day-to-day lives with any number of purchases. Consider shopping for food or electronics or household items. While one company or seller may assign a specific value, we as a consumer will get a better understanding of its value by finding out what other companies have listed the price as. The same goes for real estate.
Location, location, location! Consider everything that the immediate area offers and lacks. Public transportation, access to major highways and parking as well as walk and bike scores all influence accessibility. Nearby amenities are important to keep in mind as well, such as grocery stores, retail spaces, pharmacies and restaurants that make a location more appealing and bustling. Our Smart Hotel at 874 Sherbrooke in Montreal sits right on the edge of downtown in a lively, diverse neighbourhood.
Some may also want to consider proximity to important institutions like universities, primary schools and hospitals that drive more people to the area.
An analysis of the area goes beyond what’s physically there. Keep in mind important statistics like employment, crime rate, average income and market vacancy. It’s also worth looking into any developmental or revitalization programs set forth by the local or provincial government. Our property at 231 Bay St. in Hamilton, for example, sits right next to a heavily invested area where the city is building mixed-use buildings, green spaces and recreational fixtures.
An appraisal of the property is commonly required when purchasing the property will require a loan. Basically, this appraisal determines if needed the listed price of a property is worth it. An appraiser takes into consideration the location, size and potential for future upgrades and profits. All of which is useful when deciding whether or not the property is worth investing in for both the short and long term. Once a property is appraised, you can calculate how targeted upgrades can add value to the property. Such is the case with our Clearview on the Park property in Toronto.
One of the more familiar forms of due diligence involves a physical inspection of the property. This can include any number of tests and examinations, including looking for pests, soil contamination, leaks, holes, drafts and other issues that will affect the performance, durability and livelihood of the property. Any such issues will require potentially costly repairs. While some issues may be minor, a physical inspection can unearth potentially serious problems that could irrevocably damage the investment.
A written report is produced following the inspection to help the potential buyer make an informed decision.
This inspection dives into bylaws, restrictions and other legal contracts that could influence profit and use of the property. For commercial real estate, zoning bylaws need to be paid close attention to so that the property operates within the law. Zoning bylaws also inform what potential additions and expansions can be made to a property. If you want to turn an empty lot into a mixed-use building, you need to be zoned for it!
Concerning residential properties, it’s important to review any guidelines and rules set forth by a homeowners association. Similar to zoning bylaws established by a government, HOA rules may restrict usage and incur costs.
Financial due diligence takes into account history in order to accurately forecast future earnings and expenses.
Concerning commercial real estate, a financial audit is often conducted to determine income and expenses of a property. This involves looking at bills, employee records, rent rolls, utilities, tax and anything else that influences the bottom line.
addy and real estate due diligence
As a limited partner investing in the property, addy conducts due diligence into the General Partner (GP) to ensure the property will be managed effectively and efficiently. Legal, financial and physical due diligence takes place before any property becomes available. addy invests alongside members so that it’s a win-win deal for all those involved.
addy believes in real estate for all, which means we strive to make investments as simple and accessible as possible. We do all the heavy lifting setting up the opportunity, while the GP takes care of maintaining the property. All you have to do is signup to join as a member, read the Offering Memorandum, invest anywhere from $1 to $1,500 and then await your return. You don’t even need to keep your membership to maintain your investment and earn potential distributions.