Due diligence is critical when you are deciding whether to buy an investment property or not. Doing your homework properly can help you avoid unpleasant surprises and minimize your investment risk. After a quick analysis to determine if the property is worth pursuing, in-depth due diligence is a must. Performing due diligence means taking the time to learn about the local real estate market, hiring a professional to inspect the property, and examining documents that pertain to the building.
1. Check the Assumptions
There is no sense spending time studying details of a property until you do the math for a fast overview to determine if it is a worthwhile investment. Do the math to make sure your Cash Flow and the Return on your Investment will provide a sufficient return. It’s important to check your underlying assumptions that are key to the calculations by verifying the numbers you use for factors like the vacancy rate. Local agents, property managers, and databases can provide you with that information. Go through each line item and check for future insurance rate hikes or tax changes after the acquisition. Remember, if your assumptions are flawed, the math will be wrong.
2. Inspect the Property
Perform physical due diligence by inspecting the property and enlisting the services of a professional inspector. The property inspector will identify red flags that may lead you to rethink the investment. A licensed inspector should be able to tell you if the electrical wiring is adequate and up to code and if there are any structural problems like uneven floors or damage to the foundation or support beams. Roof repair and replacement of exterior siding can be an expensive undertaking, and a deteriorating furnace can trigger an immediate sizable capital expense. While the inspector may list a number of problems on the inspection report, keep in mind that not all problems are serious enough to be addressed immediately, or at all.
3. Property Records Review
If the property and the numbers look good, proceed to the records review step. Examine the documents that relate to the property such as the title policy, Certificate of Occupancy, Americans with Disabilities Act (ADA) compliance, current leases, and any other public records. The insurance policy can yield a great deal of information and the latest risk assessment can give you an overview of any risks associated with the property. The claims history can also be helpful. Study all the elements in every lease to find out if there are any unusual clauses. Get Estoppel Certificates for every tenant to verify lease terms, amount, etc. You will also want to see contracts for maintenance where they apply.
Tips for Performing Due Diligence
Before you sign on the dotted line and purchase a property, make sure you perform proper due diligence. The goal of due diligence is to make sure that the property is a good investment and meets your investment criteria. It will also help you uncover any risks that will affect your acquisition decision and future risk mitigation plan. Make sure that all the figures presented to you by the owner are reasonable and comprehensive. Then verify that the figures are accurate by examining rent rolls and bank statements. If at all possible, check the information provided against the seller’s tax returns to ascertain if there are any discrepancies. If there are, dig deeper to find out why. While there are no guarantees, performing detailed due diligence can help you avoid unpleasant surprises and minimize your risk prior to the acquisition which will put you on the road to achieving the success you are seeking with your investment property.
Real estate is a popular investment choice because it can offer a stable asset that produces an immediate cash flow. You can leverage the capital investment to build wealth faster…
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