Buying a rental property is an enormous investment. It’s one you should avoid rushing into without understanding what you’re getting involved with, which is why you should utilize a due diligence checklist.
There are many things to consider when buying a rental property, and overlooking any of them can have significant consequences.
Here’s a breakdown of what to consider before buying a rental property.
Real Estate Due Diligence Checklist for a Rental Property
Here are 15 items to mark off your due diligence checklist when purchasing a rental property:
- Run a Value Projection
- Assess the Location
- Make Sure There’s Adequate Parking
- Conduct a Thorough Physical Inspection
- Analyze HOA Rules
- Review Environmental Issues
- Collect Repair Estimates
- Conduct a Property Appraisal
- Expand Your Search
- Consult with a Financial Advisor
- Ask for a Title Examination
- Request an Insurance Claim Report
- Look at Seller Disclosures
- Shop for Insurance
- Review Your Property Rights
1. Run a Value Projection
Once you purchase a rental property, one of the first things you should do is talk to a mortgage lender or real estate agent and request a long-term valuation assessment.
You may notice a property that’s undervalued, putting you in a great position to make a low offer and potentially land a bargain on a great property that will deliver steady cash flow. Or you may see that a property’s price is too high and something you should avoid.
2. Assess the Location
You also need to look beyond the border of your property and consider its surrounding location. As a real estate investor, you need to be aware of any external factors that might influence the value of an investment property.
Check Out the Neighbors
The last thing you want is to invest in a rental property without knowing the full picture.
Take a look at the local sex offender registry to see if there are any dangerous neighbors living in your neighborhood. This is something a prospective tenant may check when deciding to rent your space, so it’s good to know who your neighbors are before signing on the dotted line.
It’s also a good idea to check out the surrounding property values and community. Strike up a friendly conversation with some neighbors to see what it’s like to live in the community.
This is even more important when buying a property in a shared building or multifamily home.
You should probably steer clear of cranky neighbors who may call and issue unreasonable noise complaints or engage in other types of nefarious behavior.
Identify Zoning Issues
Head to town hall and speak with someone in zoning to gather information about local developments so that you can see how secure your investment will be.
It’s a good idea to ask if there are any condos or commercial developments planned nearby that could either help or hurt your property value.
During the due diligence process, you will also want to determine whether there are any easements on the property. If you’re investing in a multifamily unit, make sure you understand the legal occupancy rates.
Consider the Rental Demand
If you’re buying a short-term rental, make sure the property is in the heart of town near bars, restaurants, and other attractions. Think about where you would want to stay if you were on vacation. Avoid places on the outskirts of town or in industrial areas where there’s nothing happening.
If you’re looking to buy a place for long-term rentals, it’s less important to be in the heart of things. However, it’s still better to find a place close to stores, gas stations, and major roads.
3. Make Sure There’s Adequate Parking
Parking is a big issue if you’re looking to rent your property. If you buy a place with only one parking spot, you could run into issues when trying to find tenants.
This is a minor detail, but it’s important and something you could potentially use to your advantage when negotiating a selling price.
4. Conduct a Thorough Physical Inspection
You may want to brush over the inspection phase or hire someone who can give you a quick assessment of a property to expedite a sale. Yet that’s only going to come back and bite you later on.
A property inspection benefits the buyer. It’s your chance to discover structural issues like electrical or HVAC problems that could pose a threat to you and your tenants. You might also find that the property has a radon problem that requires remediation.
When you stop to think about it, inspections are almost like insurance policies or warranties: They either give you a way out of an agreement after you submit a security deposit, or the ability to get the seller to give you more money at closing to pay for repairs.
Suffice it to say that it’s best to take inspections seriously and do a comprehensive job. Let no detail go uncovered during this process.
5. Analyze HOA Rules
Most condo and apartment units abide by homeowners administration (HOA) rules. Some places can be very strict about renting units, limiting the number of guests at a particular time, and possibly even putting other restrictions in place.
Make sure to scour your HOA rules before buying a condo unit so that you don’t run into any conflicts when trying to rent your space. HOA boards can make life very difficult for property owners.
At the same time, a solid HOA can also protect your property value by enforcing restrictions that keep other tenants and property owners in line.
It’s also a good idea to review HOA financial statements to make sure the property is being managed appropriately.
6. Review Environmental Issues
When inspecting your property, you should go above and beyond physical analysis and conduct environmental tests as well.
Consider running special assessments for mold, asbestos, or termites. Mold can often hide behind tubs and walls, leading to tenant complaints and expensive renovations down the line.
You should also look for external environmental issues in the surrounding area. Check historical water conditions for patterns of drought. You should also pay attention to threats like wildfires, floods, tornadoes, and hurricanes.
7. Collect Repair Estimates
One of the best things you can do when managing an investment property is to have a team of trusted contractors on call.
When looking into a property, arrange a visit and bring your contractors along. Have them give you an approximation of how much you can expect to pay in repairs and capital improvements.
This is a good idea even if you’re handy around the house. Contractors can give you professional estimates on everything from flooring to paint and lighting fixtures. They’ll be able to tell you precisely what you need to do to maximize your rental income… as well as what you should avoid.
8. Conduct a Property Appraisal
If you’re applying for a mortgage loan, you won’t have a choice about running a property appraisal. But it’s still something to tack onto your list.
A property appraisal is an independent valuation conducted by a third-party organization, which basically confirms the price of a home.
9. Expand Your Search
It’s important not to jump on a property before you assess the entire local area. This requires some research. But the point is to avoid getting something and realizing after you close that you could have gotten a better property for less money.
Do your due diligence when shopping for real estate and leave no stone unturned. Don’t be afraid to hold off if you don’t like what you see.
10. Consult with a Financial Advisor
Buying a house is extremely expensive. And it could also be a big risk if you already have a mortgage.
Before you move forward with a transaction, one of the first things you should do is consult with a financial advisor. That way, you can avoid biting off more than you can chew with metrics like mortgage payments, utility bills, and property taxes.
This could also help you determine whether you can afford to hire a property management company or if you’ll need to take care of things on your own.
A financial advisor will take a look at your overall investment portfolio and determine whether your portfolio is in a good position to take on a real estate investment. He or she might make recommendations to reallocate funding before making an investment to reduce risk and maximize your chances of success.
Bottom line: Do your financial due diligence before moving forward.
11. Ask For a Title Examination
A title examination is a critical part of the sale process, as it involves assuring that the property in question is suitable for sale.
Enlist the services of a lawyer or a title company during this process. Once you receive a title report, you can look for things like unpaid tax liens and the history of ownership.
It also confirms rightful ownership of the property and determines whether someone else can potentially lay claim to it.
This is a huge deal. Imagine buying a single-family home that someone else claims to own. Even if they’re wrong, talk about a headache!
12. Request an Insurance Claim Report
You’ll also want to ask the seller’s insurance provider for an insurance claim report.
This report lets you see any historical claims against the property. It can give you a better sense of the history of the property, including insight as to why someone may be selling.
13. Look at Seller Disclosures
Have your real estate agent review the seller disclosure, which is the seller’s description of the condition of the property.
In this document, the seller must disclose anything that might possibly be wrong with the property. For example, if the seller knows about a foundational issue, they have to list it in the report. Failure to do so could be grounds for future legal action.
14. Shop for Insurance
Shop around for insurance providers and look for a company that will give you the best renter’s insurance rates with the most comprehensive coverage.
Remember too that you’ll need both renter’s insurance and homeowners insurance on your property. Unless you can come up with a 20% down payment, you may also need mortgage insurance.
15. Review Your Property Rights
You should also take a look at your property rights, which will outline things like where your property line ends, as well as any water or forest area rights.
Don’t leave anything to chance when buying a property. Know what you’re buying, or you could run into unexpected disputes down the line.
Frequently Asked Questions
Is buying commercial property a good investment idea?
Commercial real estate can be a great investment. It can also be a terrible investment. As with any investment decision, it depends on a variety of factors: cost, the quality of the property, the location, and your thoroughness when vetting it.
Are real estate transactions good for beginner investors?
Real estate transactions can be very risky for beginner investors who lack experience and market knowledge. A safer bet could be to invest in real estate investment trusts (REITs), which are publicly traded companies that own and operate properties.
Starting with REITs can help you learn the market and gain a foothold before investing in real estate directly.
What is a multifamily home?
A multifamily home is a property that houses numerous families under one roof. For example, you may have a multifamily property with apartments on two or three floors and different families living in each unit.
Multifamily homes can be great investments because they allow you to maximize income and pay down your mortgage at a faster rate.
Make Sure To Complete Your Due Diligence Checklist
Buying rental property for real estate investing is a complex process with many moving parts. Consider the above-mentioned due diligence items before buying a place you plan on leasing to tenants.
You should also consult with your real estate agent and financial advisor and form an exit strategy early on. Eventually, you may want to flip the property for a profit before moving on to your next investment.
Here’s to inching closer to financial freedom by making wise real estate investment decisions.
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