Education Centre

Due Diligence Checklist Before You Invest in Private Real Estate

By Gregory M. Colford, B.A., J.D., C.I.M.®

Many investors struggle with the private real estate investment due diligence process. It can be intimidating and stressful (especially if you’ve never done it before), to know where to start, what information to review, and how to gather the right information to help you decide whether or not the property you’re looking at is a smart investment. We’re here to make that process a lot less intimidating by explaining essential due diligence to-dos for investors. 

Passive Investments: Do I choose a Fund, Service, and/or Platform?

Purchasing real estate directly might be the most widely-known way to invest in the asset class, but it’s far from the only method. Today, there’s a wealth of options for accessing the market for investors of all kinds. With “hands-off” passive investment methods, the acquisition and management of the real estate is left to dedicated and experienced professionals. Public REITs and online platforms can considerably streamline the investment process. However, these models also come with their own list of crucial questions equally important to review if you decide this is the approach that’s right for you.

Do you qualify?

We recommend leading off with one of the most basic but relevant questions. Before spending too much time envisioning your future with a particular service, be sure to check and confirm which kinds of investors it admits.

For example, some funds provided by famous private equity real estate companies, like Blackstone, have a history of only admitting investors that meet certain salary thresholds, while newer platforms, like Fundscraper through Fundscraper Property Trust, allow anyone to invest.

Find out your investor eligibility

So, what should we look for?

What is the investment manager’s historical performance?

You should always remember that past performance does not guarantee future results — but looking at track record is one way to gain an impression of the organization’s expertise. How has the manager that you’re considering fared in prior years? Had the manager shown responsible custodianship over investors’ funds in the past? If available, look at the portfolio of assets being managed. What does the portfolio say about the manager’s investment biases? Also question how the portfolio is weighted – is the manager giving too much or too little to a particular kind of asset. Are returns seemingly being generated from a questionable corner of the manager’s portfolio? Each of these factors can help you determine what your investment experience might be like with a particular service.

What are the expenses and fees? 

A real estate investment has a number of built-in expenses whether it’s done actively or passively. These are a simple, inescapable byproduct of the asset type itself: in order to generate dividends, for instance, a property incurs a certain amount of ongoing expenses – properties have to be managed, capital has to be set aside for future upkeep, etc. Make sure you understand a service’s fee structure and confirm that it makes sense in light of the value the investment manager is creating for you using your capital.

How well can you track and manage the investment through the service?

One of the big advantages of investing in real estate directly is that you never have any doubt about what your money is up to or how to track it. On the other hand, when you invest through a third party like a fund, partnership or corporation, you can only track those things into which the service gives you visibility. What does that access look like? Is the information easy to access and understand? Now that most services are online, there are expectations for dynamic reporting and easy management. Be sure you understand how you’ll interact with your investment after your capital is handed over to the investment manager.

Would a public market fund or private market fund better serve your portfolio?

One of the biggest reasons people turn to real estate is to improve their portfolios’ overall diversification. Public REITs are terrific products and Canadians have done well by them. But if your investment portfolio is generally made up of publicly tradeable shares, you should be cautious if your concern is diversification. Public REITs in Canada correlate very closely with our public markets. When the markets go up, so do the REITs; when the markets go down, so the REITs will follow. Private real estate investment does not correlate with the public market. It is one of the very important reasons folks look to “anchor” their investment portfolios with private real estate investment. It sits at the bottom of your portfolio and just chugs along regardless of what is happening in the public markets.

Check out the article: 6 Ways to Earn Passive Income From Real Estate

New Investor Due Diligence Checklist

Do you need a real estate due diligence checklist for a direct real estate property investment? The Fundscraper team has created and curated several helpful resources for private real estate investors. Please feel free to download and use the following due diligence checklist template.

Check out the article: Breaking down the Offering Memorandum

Would you like to connect with an expert?
Schedule a Call

ABOUT THE AUTHOR

Gregory Colford
Gregory Colford

PRINCIPAL BROKER, EXECUTIVE VICE-PRESIDENT & CHIEF COMPLIANCE OFFICER

Gregory Colford, JD, CIM, was a senior partner at Heenan Blaikie LLP, once one of Canada’s ten largest law firms. Over his 12 years at Heenan Blaikie LLP, he headed the Toronto Securities Department, the Corporate Services Department, the Precedent Committee, the Legal Opinion Precedent Committee, and was the Toronto representative on the firm’s Stock Trading Committee. Through the course of his practice, he brought many companies to the public capital markets and advised extensively on corporate governance, board integrity, and market compliance. He was also the co-founder of Carlisle Capital Structures Corporation and helped the company grow to over $1 billion CAD in AUM of mortgage securities on behalf of a top tier Ontario pension fund.

Share This Article With Friends

Subscribe to our newsletter to get access to special offers, webinars, helpful tips and insights sent straight to your inbox.

JOIN