When you invest in real estate, you are investing in a physical asset. For your investment to be successful, you need to ensure that your asset is in workable condition. While the property doesn’t need to be perfect, you need to do your best to avoid unexpected expenses. If you skip your due diligence, you could be setting yourself up to lose money down the road. Due diligence falls into three categories: financial, physical and legal.
Complete all these items, and you can ensure that your rental property will meet your expectations.
Financial Due Diligence
Financial due diligence is much more than making sure you have enough money in the bank to make the down payment. Before purchasing a rental property make sure:
- The property qualifies for conventional financing (if you aren’t paying all cash)
• You receive a copy of the past 12 months of utilities and/or any other expense items
• You have copies of the lease and rental history if the property is currently rented
• You research the tax history of the property
All of this financial due diligence will lead to you being able to complete this equation:
Rent – (Monthly Expenses + Mortgage Payment) = Cash Flow
You want the final cash flow number to be positive after your due diligence.
Physical Due Diligence
A home inspection is an important step in the real estate process. Unless the property is a brand new construction, it is unlikely that it is in perfect condition. As an investor, you should expect minor cosmetic renovations with each purchase; however, it’s the big-ticket items you need to look out for. A home inspection will reveal when you need to replace expensive items such as the:
Major repairs like this can dramatically impact your monthly cash flow as an investor. The condition of the home contributes to its value, so make sure the condition of the home matches your monthly cash flow goals.
Legal Due Diligence
If you are purchasing a distressed property, legal due diligence is incredibly important. Make sure that there are no liens or judgments placed against the property. Many liens convey with ownership of the property and will be your responsibility once you own it. Consider hiring a professional title company to research the title and ensure it is free and clear.
Due Diligence + Buying a Rental Property
In the fast-paced world of real estate investing it’s easy to see a low-priced property and have the urge to jump on it! Making a snap decision on purchasing a rental property can have long-term consequences so be sure to complete this due diligence checklist before submitting an offer.