As a real estate investor, you will be presented with properties in a variety of financial and physical conditions. Depending on your investment style, location and financial goals, you may be looking for something very different than your fellow investors. No matter what type of property you are looking for, be sure to complete your due diligence before it ends.
Financial Due Diligence
As a real estate investor, you are an investor first and a homebuyer second. While your personal home search was about forming a connection to your future home, an investment property is very different. As an investor, it’s all about the numbers.
When doing your financial due diligence, complete this checklist:
- Is the price fair? Understand what has sold in the area and for how much.
- Are there any liens on the property or is the property in the process of foreclosure? Tax liens come with a property, so knowing how much they are before purchasing the property is critical.
- Does the property have a tenant in place and/or a rental history? If you are purchasing the property as a buy-and-hold investment, you will need to know how much monthly income to expect.
- Does the property require any specialty insurance? Flood insurance can be a large annual expense.
- What are the average utility costs and, as a landlord, will you be responsible for any of the utilities?
- What is the cost to maintain the property?
- What is the going rate for a property management company?
As you can see, financial due diligence is much more than just getting the best price. Answering these questions will help set any investor up for long-term financial success.
Physical Due Diligence
The physical condition of a property is closely tied to its financial value. No matter how well the numbers from the financial section add up, the physical condition of the investment needs to be accounted for.
Before purchasing an investment property, find out:
- When the major home systems were last replaced (HVAC, water heater, major appliances, )
- How many years are left on the roof
- If there is any structural damage
- If there is evidence that routine maintenance has been completed
- If the flooring need to be replaced
- What year the home is and if you will be dealing with any code violations
To get that new feel to your investment property, new carpet and a coat of fresh paint are recommended. However, as an investor, you need to look out for the big-ticket items that will require cash up front. Taking the condition of these items into account will help you determine your initial investment, as well as your capital investment over the course of owning the property.
Finding the Right Investment Property
Due diligence is a critical element in finding the right real estate investment property. Many “real estate gurus” claim they “go with their gut,” but nothing can replace due diligence! Don’t be tempted by a “too good to be true” price. Complete your due diligence to ensure the property will meet your investment goals.