the-abcs-of-real-estate-investing-ken LifeFeeling

Books and Records
As important as it is to know everything about the physical property, you absolutely
need to dig just as deep into its operations. That means looking at the books and records.
This is also the time to begin gathering information for your operating budget by
categorizing the income and expenses. These are the things I review in great detail:
• Twenty-four months of income and expense statements: I compare the income and
expenses to the projections. This is the time to make notes for the operating budget and
flush out all the unusual expenses or major periods of rent loss. Discuss these with yo ur
seller or broker before the due diligence period ends. You absolutely want to meet your
deadlines.
• All service agreements: I look for those agreements with termination clauses longer
than thirty days. I verify that these costs are in the operating budget, whether the service is
needed, and also what services are missing. I assess the current management company and
determine whether they stay or go. I review all advertising agreements for effectiveness. It’s
worth your time to look at all these agreements because you could find yourself locked into
them. Any contract you don’t want to assume, you need to spell it out before the completion
of due diligence.
• Current rent roll: This is when I verify the actual income, the actual potential income,
and the future potential income to the penny. Take a hard look at every unit that is under the
market rent. This is your golden egg “Advance to Boardwalk” card that will create an
increase in your cash flow after you purchase the property. Take detailed notes for your
management plan and operating budget.
• Utility bills: Here I verify all the utilities. Call the utility companies and get the last
twelve months’ operating history on each account. Ask about increases for the next year.
Finally, insert the revised figures into your budget.
• Payroll information: On larger properties I look at who is working at the property and
how much they are paid, especially if I want them to stay and work for me or the
management company. When assuming these employees, treat them like new hires. Be sure
to find out the accrued vacation information. We also run a criminal and credit background
checks on all new hires as well as complete a drug screening before we acquire them.
For me the due diligence process is an exciting time. Sure I get some great stories out of
what I see, but more importantly, I know that whatever I find will be documented for the
next round of discussions with the seller. The due diligence document is my report card to
evaluate how well I estimated the numbers during the Five Step Property Evaluation. In
many cases the problems I find during due diligence either result in a reduction in the price
of the property or, better yet, they are fixed before we close escrow.
It’s this kind of information that is only going to help you be more successful with
whatever property you purchase—this one or another. We recently found a new landscape
company in this way. I received a monthly landscape contract on a property we were
considering. The landscaping looked great and I was surprised to see the cost was much
lower than what I was paying at some of my other properties. In fact, it was lower than what
I budgeted for this project! This one find is saving me thousands because now this
landscaping company does the bulk of our work at this and our other properties.