If you are investing in real estate, you’re probably intending for your investment to be a success. But, this isn’t always in your control. What is in your control, however, is the ability to practice due diligence to ensure you are much more likely to have a successful investment.
Due diligence is crucial for any investment or large purchase, whether you are buying a condo unit or an entire apartment building.
Equiton knows a thing or two about due diligence. The firm has a long track record of successful investments in commercial and residential properties due in part to their thorough due diligence practices. We talked to Ryan Donkers, VP of Acquisition at Equiton, about their approach to due diligence when buying property and the role it played in Equiton’s recent acquisition – the Riverain District developments in Ottawa.
According to Donkers, due diligence is “of the utmost importance” to “the Fund”.
“If we didn't do it, we'd essentially be guessing the value of an asset,” said Donkers. “We are looking to achieve certain returns on our investments so our job, when we buy an asset, is to make sure the returns we are forecasting will have some merit. To date, we have been very successful in achieving the returns we have forecast.”
“It's all very fluid,” he continues. “And each market is different. So you have to really roll up your sleeves on each acquisition opportunity to make sure it all comes together and makes sense for the Fund at the end of the day.”
For someone just buying a home to live in, they may think that due diligence means simply getting a home inspection before buying. But, when you are buying for investment purposes, at any scale, there are many more aspects involved that can play a big role in the performance of your investments. While the physical aspect is naturally a factor, things like market trends and financial analysis are equally as important.
Listing just some of the many aspects that go into a thorough due diligence process, Donkers enumerates: “We do physical condition inspection which includes looking at the roof and the underground parking garage, so it's a little more complex than buying a house, for example. We do environmental studies to make sure there's no contamination of the land.”
“But the other aspect is making sure we're comfortable with the expected revenue – what's there today, what could be there tomorrow, and also be sure we have a great understanding of the operating costs. We have to be very mindful of the simple things like property tax increases. It's especially tricky coming out of COVID because there have been a lot of increases on some of the operation costs, so you really have to be cognizant of what's coming down the road because a lot of other individuals will be playing catch up in some of these operating costs that we have to have our eye on.”
Especially in today’s market where properties sell fast and the market is seemingly changing all the time, competition is at an all-time high. While at the same time, the need for due diligence is as important as ever. An investor who hopes to make returns must still conduct their due diligence – sometimes with much less time to complete the process.
“These days, the market is really aggressive, it's competitive, “said Donkers. “So these time periods have really shrunk, and in most cases, you only have a short amount of time to do your due diligence before a bid date, and that's really because of the market demand.”
“We have a very thorough process to ensure we dot our “i’s” and cross our “t's” before committing to a deal. The last thing we want is to have any unknown surprises coming our way. It's very exciting and fluid how it all comes together in short order.”
In terms of what to watch out for the most, Donkers warns that even “little things can add up to a sizable decrease in your expected return” if you don’t account for everything in your purchase.
“You’ve got to be very conscious of your costs. Even the simple things have shown great increases in cost over a short period of time. I often see people underestimate these costs, so you have got to be very careful.”
For Equiton, due diligence has no doubt played a role in their success. Most recently, the firm announced plans to partner with Main and Main on a massive residential development project in Ottawa. Later this year, construction is planned to begin on the development of approximately 1,000 rental units across three towers in the 4.2-acre Riverain District, along the shores of the Rideau River. The firm has invested $30,000,000 into the project, with an estimated value of $500,000,000 upon completion.
“It's a really nice way to create value for investors because we are able to develop units for a lower cost than purchasing a completed building.”
Donkers explains that new developments offer their own challenges for due diligence as it requires a very forward-thinking look at the market and where it will be years down the line.
“It’s a little more complex because you need to be forecasting what's going to happen in the next couple of years. One of the biggest components of risk is going to be what our construction costs will be. So it's not only about getting comfortable with the developer and the general contractor that they hired, but also making sure there is a contingency involved because developments often require some change orders along the way and economic conditions can change for material costs.”
Equiton’s team boasts an average of over 20 years in real estate investing and has an impressive track record of success in the field. Their aim is to bring the benefits of private equity to investors through their various investment funds. Visit Equiton online to learn more about what they do and how they can help you achieve your financial goals.
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