When we consider investment property options, doing the math is generally straightforward as we determine ROI’s, cashflow projections, and the like. It’s how those numbers are arrived at and the ‘legitimacy’ of them, that is the next important exercise.
On the income side, we need to review the current lease agreements in place and confirm the rental amounts, in order to reconcile the gross revenue numbers which are represented. The lease will contain the balance of the term(s) remaining with the lease - including future increases, balance of time remaining, renewal details, and deposits which may apply. As a matter of best practice, time should be taken to review all leases in their entirety, to ensure there are not provisions which you may not be aware of (ie. early termination clause, additional rent caps, expiration of personal guarantees - just to name a few).
On the expense data, year end reports are typically provided and are ok for the initial review. But best practice is to verify the amounts against the owner’s income tax return(s), depending on the corresponding years being considered. Three years history is probably a reasonable period and again, we are looking for the figures to balance against what has been represented.
Just a further note on the tax return request – this would generally be something that would be incorporated in to the Offer to Purchase and form part of the Due Diligence process. The Seller needs to know that a deal is at hand and that the providing of such confidential details, is ultimately leading towards a sale of the property. Strict confidentiality provisions may also be required by the Seller.
In any type of rental property investing, as they say -- ‘the devil is in the details’. Make sure you verify those details, before proceeding to finalize any purchase.
Next up…discussing strategies and objectives with rental properties. Again, seek out experienced commercial realtors within your market to assist in finding the best rental properties available.
