In 2020, RM Communities launched as a sister-company to RealtyMogul to directly acquire multifamily apartment complexes and offer those investments on the RealtyMogul.com platform. Since then, RM Communities has built its own proprietary playbook and processes. Today we want to shed light on what we view as best practices when acquiring assets.
The Future Success of Our Investments Starts with Due Diligence
All of us at RM Communities deeply believe that exceptional due diligence is key to successfully protecting and growing our investors’ wealth. Only those investments that meet or exceed our highest due diligence standards make it through our due diligence process.
While a typical due diligence process might only last two or three months, this is a critical stage in every successful investment’s lifecycle. This is the time when decisions are being made that can affect the investment for many years ahead. By going far beyond standard due diligence procedure, RM Communities sets operational priorities that can reduce expenses and speed the pace of value-add improvements. We remain laser-focused on efforts intended to maximize the return on investment for our investors and ensure a smooth path for the property when it is appropriate to exit the investment.
What Makes Up the RM Communities Acquisitions Due Diligence Process?
Our process for acquiring assets is designed to develop a deep understanding of the property and our ability to execute our contemplated business plan. Although there is significant overlap, the diligence process can be broken into five key categories briefly outlined below.
Category 1: Financial Due Diligence
An essential diligence step is to investigate a property’s cash flow to ensure that income and expenses match the seller’s representations and determine whether the property’s achieved rents and occupancy are sustainable. Key steps in this category typically include:
- Analysis of the market and sub-market trends
- Profit & loss and rent roll analyses
- Property tax and insurance considerations
- Contract and lease file audits
- Budgeting and benchmarking analysis – stabilized costs in collaboration with our property manager
- Evaluation of contemplated exit strategies
Category 2: Physical Due Diligence
RM Communities targets value-add and core-plus multifamily opportunities, which means our business plans frequently include significant expenditures to support physical and/or operational improvements intended to create additional value at the property for the benefit of investors. Accordingly, we do a deep dive into the physical condition and property characteristics to solidify the business plan to add value to the investment. In addition to spending significant time at the property ourselves, we work with a wide range of outside consultants during our due diligence review to understand the physical condition of the property and the key mechanical systems before proceeding with an acquisition. Relevant steps typically include:
- Independent assessment of value - appraisal
- Evaluating the property’s physical condition, including recent expenditures and deferred maintenance
- Refining and validating capital expenditure budget
- Engaging additional consultants
Category 3: Operational Due Diligence
We strive to ensure that our deal team is highly coordinated and ready to execute the business plan for the new property immediately upon purchase. Relevant steps typically include:
- Working closing with our chosen property management team
- Vetting and hiring professionals and service providers
- Developing a positioning plan that includes target renter profiles, marketing plans and the execution of capital expenditures
Category 4: Legal Due Diligence
Our trusted set of attorneys, including our General Counsel and outside counsels, endeavor to ensure that we understand the extent and limitations of our rights and obligations as owners, in order to ensure we have mitigated as much risk as possible and have a business plan that is achievable. Relevant steps typically include:
- Ensure clean title
- Survey and other related third-party reporting
- Environmental due diligence
- Legal description of the property
- Any pending or threatened litigation or claims against the property
Category 5: Facilitating Lender Due Diligence
The beginning of the acquisition diligence period typically coincides with the early stages of the financing process. Our lender is typically the largest portion of the capital stack, meaning their interests are generally aligned with ours. We work alongside our lender to conduct many of the same analyses our acquisitions team conducts; thus our lenders serve as a second set of eyes in evaluating potential risks to the investment. Critical workstreams typically include:
- Collaborating in review of key third party reports
- Identifying any critical repair or maintenance items
- Ensuring clean title and compliance all relevant regulatory requirements
- Determining the best debt product to facilitate execution of the final business plan
Understanding how to win in the multifamily investing business comes down to understanding risks—which ones to take and which ones to avoid—and looking at every deal with a long-term perspective.
Every due diligence process we undertake is overseen by myself, as Managing Director of RM Communities, and Christian Popoff, our Vice President of Asset Management. Together, we leverage significant backgrounds in underwriting, acquisitions, finance, law, asset management, and economics to act on behalf of clients in providing the final assessment of each investment that we consider.
Every real estate transaction is different and requires a unique due diligence plan. Moving too quickly — and failing to perform comprehensive due diligence — can create problems for even the most experienced investors. RM Communities investors expect and deserve a manager that can oversee that risk responsibly and increase the likelihood of a favorable risk-adjusted return.
This article is for informational purposes only, and is not a recommendation or offer to buy or sell securities. This content is intended for accredited investors only. Information herein may include forward looking statements and is for informational purposes only. Forward-looking statements, hypothetical information, or calculations, financial estimates and targeted returns are inherently uncertain. Past performance is never indicative of future performance. None of the opinions expressed are the opinions of RealtyMogul. Advice from a securities professional is strongly advised, and we recommend that you consult with a financial advisor, attorney, accountant, and any other professional that can help you to understand and assess the risks and tax consequences associated with any real estate investment.