Due Diligence

Due diligence is the checking a buyer does between signing a contract and closing, to make sure the property matches the seller's description. For income property, much of it is verifying NOI: the rent roll, leases, expense bills and the physical condition that drives future repairs.

Start with the seller's trailing twelve-month statement and check it against bank deposits, tax bills and insurance declarations. Read every lease to confirm rents and terms, and compare the rents to the market. Order an inspection to estimate the reserves the property really needs.

Then rebuild NOI yourself with market vacancy, a management fee and a replacement reserve, and run it through the calculator. If your NOI comes in well below the seller's, the price should come down by roughly the difference divided by the cap rate.