Real Estate DUE DILIGENCE

1. Current rent roster with paid to dates

2. List of security deposits
3. Mortgage payment information
4. Personal property list
5. Floor plans
6. Insurance policy, agent
7. Maintenance, service agreement
8. Tenant information: leases, ledger cards, applications, smoke detector forms
9. List of vendors and utility companies, including account numbers
10. A statement of structural alterations made to the premises
11. Surveys and engineering documents
12. Commission agreements
13. Rental or listing agreements
14. Easement agreements
15. Development plans, including plans and specifications, and as-built architectural,
structural, mechanical, electrical, and civil drawings
16. Governmental permits or zoning restrictions affecting development of the
property
17. Management contracts
18. Tax bills and property tax statements
19. Utility bills
20. Cash receipts and disbursements journals pertaining to the property
21. Capital expenditure disbursement records pertaining to the property for the last
five years
22. Income-and-expense statements pertaining to the property for two years prior to
the submission date
23. Financial statements and state and federal tax returns for the property
24. A termite inspection in form and content reasonably satisfactory to the buyer
25. All other records and documents in Seller’s possession or under Seller’s control
which would be necessary or helpful to the ownership, operation, or maintenance
of the property
26. Market surveys or studios of the area
27. Construction budget or actuals
28. Tenant profiles or surveys
29. Work-order files
30. Banks statements for two years showing operating account for property
31. Certificate of occupancy
32. Title abstract
33. Copies of all surviving guarantees and warranties
34. Phase I Environmental Audit (if it exists)

Rich dad would always ask two questions:

1. What is the cash-on-cash return for a real estate deal?
2. Have you done your due diligence for a real estate property?

For rich dad, these were two sides of the coin that were essential for moving forward on
any deal.

Most people focus on cash-on-cash return, but financial models are only a reflection of
what you know in a moment in time. If an investment property cash flow provides a
good return on your cash invested, but you don’t do your due diligence, then you run the
risk of finding a hidden expense that will blow up your financial models in real life.

As an investor, you don’t have the full story. Due diligence is essential for finding out the
full story so you can adjust your financial assumptions as necessary.

How to calculate the cash-on-cash return in real estate

First things first, you never want to buy an investment property that doesn’t cash flow
and provide a positive return on the money you’ve invested. It seems obvious, but there
are investors that buy investment property using complicated equations such as:

Internal Rate of Return: This is a return on an investment that assumes all the income
(passive/cash flow) you receive is immediately reinvested so that you would be getting
a return on that money as well.

Net Present Value: This takes into account an estimated discounted rate for the future
value of money. It takes the value of the money invested today and compares it to the
value of the future cash flow at a discounted rate of return.

Each equation has its strengths and weaknesses, and none of them are as
straightforward as cash-on-cash return. They rely on estimates, which can create widely
varying valuations depending on the quality of the analysis. As the old saying goes,
“Garbage in; garbage out.”
While these are important levers for a good investment, the most important lever is
simply knowing you’ll make money via cash flow on the money you put in. The best part
is that calculating cash-on-cash return is easy.

The cash-on-cash return calculation:

Cash-on-cash return = Positive net cash flow / Down payment

Here’s an example with some sample numbers.

Let’s say you buy an apartment building for $500,000. You put $100,000 down and
secure the mortgage for the $400,000 balance.

After all expenses are paid, you have a monthly cash flow of $2,000.

Your cash-on-cash return would be 24%, or $24,000 ($2,000 x 12 months) divided by

$100,000.

Depending on your situation, a 24% return could be either good or bad. Only you and
your investors can decide that. But understanding your expected rate of return is simple
and an easy way to quickly decide if you should move forward or not.

To me, cash-on-cash return is the easiest and surest way to know if a real estate
investment is worth your time and money.