42 Questions Passive Investors Should Ask When Analyzing a Real Estate Deal

Passive real estate investing is mostly passive, but there is some upfront due diligence to decide if a particular offering aligns with your goals. The best way to do that is to ask the sponsor questions before you transfer your funds.

When considering investing in something, I ask questions about the sponsor, the property manager, the property, the surrounding market, the business plan, the construction plan, the loan, and the legal documents.

I curated 196 due diligence questions I ask to ensure I don't miss anything. It's a lot! I know. But I like the details. If you also like details, you can get all 196 questions here, but for now, let's focus on my top questions. Let's dive in.

Sponsor

The big question you must ask yourself: Can I trust the sponsor? If you invest with a good sponsor, the rest of these sections are easier because good sponsors tend to bring good deals.

1: What's the track record of the sponsor?

2: How well does the sponsor communicate with investors?

3: What are the industry standards for fees, and how much does the sponsor charge for their fees?

4: What does your gut tell you about the sponsor?

Property Manager

The project's success depends on the property manager because they're involved in the day-to-day running of the asset. You want to ensure they have the experience to manage the property well.

5: If the current property manager stays in place, is the sponsor projecting a significant increase in performance from the same management company, and how will the sponsor get that improved performance?

6: What other assets (number of units) does the property manager have in the area, and how are they performing?

7: How many people are on the property manager's staff?

Property Due Diligence

You want to understand the asset's physical and economic condition thoroughly. Counter-intuitively, problems are good because that's where the opportunity to add value lies.

8: What's the class of the property?

9: What percent of the units have already been renovated?

10: When was the last time the roof, plumbing, electrical, and other major systems were replaced?

11: Is the property poorly managed?

12: If rents are low, why are they low?

13: Are the expenses high, and if so, why?

14: How does the rent roll compare against the underwriting's gross potential rent and vacancy rates?

Surrounding Market

There's no such thing as "the market." Instead, every local area is a different market. Ideally, you want to be in a market where jobs are expanding and people are moving in. Those markets enjoy high rent growth and high occupancy rates. As they say, a high tide lifts all boats.

15: What has been the job growth over the last 5 years?

16: What has been the income growth over the last 5 years?

17: What has been the population growth over the last 5 years?

18: What's the current market cap rate, and how did the sponsor arrive at the market cap rate?

Business Plan and Projections

The overarching question: How conservative/realistic are the underlying assumptions on the significant determining factors of the property's performance, and how are they justified?

19: Where has the sponsor intentionally kept assumptions conservative?

20: What's the strategy?

21: If vacancies are high, what needs to happen to achieve the occupancy targets?

22: What is the assumed increase in rent rates?

23: What are the primary KPIs and their projections?

24: What are the major risks of this offering?

25: Does the plan have enough reserves?

26: Are all sponsor fees included in the financial projections?

Construction Plan

The construction plan is a critical component of the business plan. The two crucial questions are: Does the construction plan/budget (aka Capital Expenditure or CapEx) support the business plan? And is the right team in place to complete the work?

27: Has the construction company successfully completed a project similar to this?

28: What is the renovation/improvement plan/budget, including details about estimated repairs?

29: Does the renovation "fit" with the property's market/neighborhood?

30: How long is the sponsor projecting to complete the capital expenditure?

31: How will the sponsor take care of tenants?

32: Is this a project you're proud to put your money in?

Financing and Loan

At a high level, you want to know if the debt matches the business plan and the level of risk the debt creates.

33: How much leverage is used to purchase the property?

34: Is there preferred equity in the deal that would be senior to your investment?

35: To what extent does the property cash flow from day one?

36: Is the interest rate fixed or floating?

37: Who is signing the loan guarantee?

38: What do the projections look like without a refinance?

Legal Documents

These can take a lot of effort to understand. Ask clarifying questions and ask where it's represented in the legal documents because these are what legally guide decisions.

39: What is the legal structure of the offering?

40: Under what circumstances do the investors get a vote?

41: How will it be determined that the investment requires additional capital?

42: What is the split above the preferred return?

Final Thoughts

These questions help me make wiser investment choices because they help me get past the initial sales pitch on a deal. If you found these helpful, check out all 196 questions I curated, which will help you dive deeper into the areas you care about most.