Explain how due diligence is carried out on real estate investments and the approaches used to value them

Buyers verify the facts behind a valuation before completing. Due diligence covers the leases and rent roll, operating expense history, physical and environmental condition, title and survey, zoning and permitted use, and any litigation. Three valuation approaches follow. The cost approach values land plus replacement cost less depreciation, useful for new or specialised buildings. The sales comparison approach adjusts prices of similar recent sales. The income approach capitalises income. Under direct capitalisation, with a cap rate roughly equal to the discount rate minus expected growth in income, value is V = next year's net operating income ÷ cap rate. A discounted cash flow model instead projects income and a resale price. The trap is dividing current NOI by the cap rate, or dividing by the discount rate.