Understand Property Due Diligence Before Investing
Introduction:
Due diligence is a crucial step in the process of investing in any kind of property, especially in the residential rental income property market.
It is a comprehensive process that involves extensive research and analysis of various factors that can affect the potential of the property to generate rental income.
This guide will provide step-by-step instructions on how to conduct due diligence on residential rental income properties in India. It will also provide examples of how to conduct due diligence on different types of residential properties – a multi-family apartment complex, a 4-bedroom villa, an Airbnb rental property, and a serviced apartment.
Step 1: Identify the Purpose of the Investment
Before conducting due diligence on any residential rental income property, it is essential to identify the purpose of the investment. The purpose of the investment will determine the type of property that is suitable for the specific investment objectives. For example,
if the purpose of the investment is to generate steady rental income, then an apartment complex or a serviced apartment may be the best option.
Step 2: Research the Location
The location of the property is a crucial factor that can affect the potential for rental income. Research the location of the property to determine if it is in a desirable neighborhood, close to public transportation, schools, shopping centers, hospitals, and other amenities. Also, research the crime rate and the local real estate market trends to determine the potential for rental income.
Step 3: Analyze the Property’s Financials
The financials of the property are an essential factor to consider when conducting due diligence. Analyze the property’s financials, including the rental income, expenses, taxes, and current and future maintenance costs. Calculate the net operating income (NOI) of the property, which is the income generated from the property minus the expenses. The NOI will help determine the potential value of the property.
Step 4: Inspect the Property
Inspect the property thoroughly to determine the condition of the property. Check for any structural damage, plumbing issues, electrical problems, and other maintenance issues that may require repairs or upgrades. This will help determine the potential costs of repairs and maintenance, which will affect the potential rental income.
Step 5: Review the Lease Agreements
Review the lease agreements of the property to determine the terms of the lease, including the length of the lease, the rent amount, and any other terms and conditions. This will help
determine if the property has a steady stream of rental income and if the tenants are reliable.
Step 6: Conduct a Market Analysis
Conduct a market analysis to determine the potential rental income of the property. Research the local rental rates for similar properties in the area and compare them to the rental income of the property. This will help determine if the property is undervalued or overvalued.
Step 7: Determine the Potential for Appreciation
Determine the potential for appreciation of the property by analyzing the local real estate market trends. Research the historical appreciation rates of the area and compare them to the current market trends. This will help determine if the property has the potential to appreciate in value over time.
Examples:
Example 1: Multi-family Apartment Complex
Purpose of Investment: Generate steady rental income
Location: Mumbai, Maharashtra
Financials: Rental income – INR 10,00,000 per month, Expenses(including mortgage payments) – INR 6,00,000 per month
Property Inspection: The property is in good condition, with no major repairs or upgrades required
Lease Agreements: The lease agreements are in place with reliable tenants, with a steady stream of rental income
Market Analysis: The local rental rates for similar properties in the area are INR 1,50,000 per month, which is higher than the rental income of the property
Potential for Appreciation: The local real estate market trends indicate a steady appreciation rate of 5% per year, which indicates a potential for appreciation over time
Example 2: 4-Bedroom Villa
Purpose of Investment: Vacation Rental Income
Location: Goa
Financials: Rental income – INR 3,00,000 per month, Expenses –
INR 1,50,000 per month, Taxes – INR 3,00,000 per year
Property Inspection: The property is in good condition, with slight repairs or upgrades required
Lease Agreements: The lease agreements are in place with trustworthy tenants, with a steady stream of rental income.
Market Analysis: The local rental rates for similar properties in the area are INR 2,00,000 per month, which is lower than the rental income of the property
Potential for Appreciation: The local real estate market trends indicate a steady appreciation rate of 10% per year, which indicates a potential for appreciation over time.
Example 3: Airbnb Rental Property
Purpose of Investment: Short-term Rental Income
Location: New Delhi
Financials: Rental income – INR 1,50,000 per month, Expenses – INR 50,000 per month, Taxes – INR 2,50,000 per year, Maintenance Costs – INR 25,000 per month
Property Inspection: The property is in excellent condition suitable for tourists and travellers, with no major repairs or upgrades required
Lease Agreements: The lease agreements are in place with property managers who take care of the tenants ensuring a 70% occupancy of the property, with a steady stream of rental income.
Market Analysis: The local rental rates for similar properties in the area are INR 1,20,000 per month, which is lower than the rental income of the property
Potential for Appreciation: The local real estate market trends indicate a steady appreciation rate of 8% per year, which indicates a potential for appreciation over time.
Since these assets are professionally managed and produces higher rental yield, there is also a huge demand for the property at the time of selling.
Example 4: Serviced Apartment
Purpose of Investment: Corporate Rental Income
Location: Bengaluru
Financials: Rental income – INR 2,50,000 per month, Expenses –INR 1,00,000 per month, Maintenance Costs – INR 50,000 per month
Property Inspection: The property is in good condition, with few major repairs or upgrades required.
Lease Agreements: The lease agreements are in place with property managers, with a steady stream of rental income from the corporate tenants/tourists.
Market Analysis: The local rental rates for similar properties in the area are INR 2,75,000 per month, which is higher than the rental income of the property
Potential for Appreciation: The local real estate market trends indicate a steady appreciation rate of 6% per year, which indicates a potential for appreciation over time.
These assets come with a long term lease with property managers and hence there will be a huge demand for such high yield and professionally managed property at the time of selling.
Conclusion:
Conducting due diligence on residential rental income properties in India is a comprehensive process that requires extensive research and analysis of various factors that can affect the potential for rental income.
By following the easy step-by-step instructions provided in this guide, real estate investors can conduct due diligence effectively and make informed decisions when investing in
residential rental income properties.