Real Estate Investor Magazine South Africa August 2015 | Page 23

COVER STORY

and compares it to the value of the future cash flow at
a discounted rate of return.
Each equation has its strengths and weaknesses, and
none of them are as straightforward as cash-on-cash
return. They rely on estimates, which can create widely
varying valuations depending on the quality of the
analysis. As the old saying goes, “Garbage in; garbage
out.”
The importance of due diligence
Once you have determined whether a real estate
investment provided enough cash-on-cash return, then
make sure what you are getting is what you paid for
through due diligence.
The words “due diligence” are some of the most
important words in the world of financial literacy. It
is through the process of due diligence (the careful
evaluation of a potential investment to confirm all
material facts) that a sophisticated investor sees the
other side of the coin.
When people ask me how I find good investments, I
simply reply, “I find them through the process of due
diligence.” Kiyosaki says, “The faster you are able to do
your due diligence on an investment, the better able
you will be to find the safest investments with the
greatest possibility for cash flow or capital gains.”
Kiyosaki Due Diligence Checklist
Have a thorough due diligence checklist. It includes
items that did not exist years ago (such as “Phase I
Environment Audit”). When working through this
list, if you have any questions about the property, then
I often bring in the experts and have my attorneys and
accountants review the deal.
1.
2.
3.
4.
5.
6.
7.
8.

Current rent roster with paid to dates
List of security deposits
Mortgage payment information
Personal property list
Floor plans
Insurance policy, agent
Maintenance, service agreement
Tenant information: leases, ledger cards,
applications, smoke detector forms
9. List of vendors and utility companies, including
account numbers
10. Statement of structural alterations made to the
premises

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11. Surveys and engineering documents
12. Commission agreements
13. Rental or listing agreements
14. Easement agreements
15. Development plans (including plans and
specifications, and as-built architectural, structural,
mechanical, electrical, and civil drawings)
16. Governmental permits or zoning restrictions
affecting development of the property
17. Management contracts
18. Tax bills and property tax statements
19. Utility bills
20. Cash receipts and disbursements journals
pertaining to the property
21. Capital expenditure disbursement records
pertaining to the property for the last five years
22. Income-and-expense statements pertaining to the
property for two years prior to the submission date
23. Financial statements and state and federal tax
returns for the property
24. A termite inspection in form and content
reasonably satisfactory to the buyer
25. All other records and documents in Seller’s
possession or under Seller’s control which
would be necessary or helpful to the ownership,
operation, or maintenance of the property
26. Market surveys or studios of the area
27. Construction budget or actuals
28. Tenant profiles or surveys
29. Work-order files
30. Banks statements for two years showing operating
account for property
31. Certificate of occupancy
32. Title abstract
33. Copies of all surviving guarantees and warranties
34. Phase I Environmental Audit (if it exists)
Management by walking around
In addition to securing everything on this list, I also
physically walk and inspect the property, including
each unit if purchasing an apartment building. I take
inventory of all damages and use that inventory list to
negotiate a fair price.
Kiyosaki says that he has seen lots of investors who
just skip their due diligence who always get burned
big time by not following this process. In the end, the
recipe for real estate success is easy, cash flow plus due
diligence. Do these two simple things right, and your
investments will be in great shape.
AUGUST 2015 SA Real Estate Investor

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