Due Diligence

Due diligence is the investigation a buyer completes before closing to confirm that the property is what the seller says it is. For a rental, much of it is confirming the rent. A gross rent multiplier used to make an offer is only as reliable as the rent figure behind it.

Ask for signed leases, a rent roll and a rent ledger showing payments actually received. Compare each rent with market listings. A GRM of 10.4 built on the seller's rent roll becomes 11.9 if the real rent turns out to be $3,500, not $4,000.

Due diligence also covers what GRM leaves out: inspections, expense bills, insurance quotes, tax records and title. Those items decide net income and the capital spending ahead. The GRM got the property onto the list, and due diligence decides whether it stays there.

Further reading: Due Diligence on Wikipedia.