Home Investment The Importance of Due Diligence When Investing in a Rental Property

The Importance of Due Diligence When Investing in a Rental Property


Rent rolls

Proof of actual rents received. This can be deposit slips, receipts, bank statements, or even tax returns. It is very important to have this because you’ll know who pays and when. Also, you’ll if the property has truly been earning that income or if it was just a recent rent increase.

History of expenses

It’s good to get a copy of the tax returns with the expenses related specifically to this property. You need this for two reasons: first, it will give you a feel for how much maintenance the property truly needs. Second, owners generally over-state their expenses on their taxes. You can use this information to negotiate down the price.

Additionally, prior to spending any money on an inspection, do the following:

Benefits Of Renting To Own Strategy

Verify Town & City Data

Most municipal governments require permits for major work that is done on a property. If you go to the building department in that city, you should be able to get a list of permits that have been pulled. Cross reference this against work that is advertised on the listing. If they advertise a “New Roof” and there is no permit, how could there possibly be a new roof? Same goes with that new heating system, HVAC, or new half bath on the second floor.

Additionally, the assessor’s office should have information about the property, commonly called a property card. Major work with permits may feed into the assessor’s office where they will record changes to the property and re-evaluate taxes.

– If it was a 3 bed 1 bath house and the owner did a renovation to make it a 2 bathroom house, the property card should clearly show it has two bathrooms.

– If it has only one bathroom on the card and no permit, the city could eventually have the work ripped up and inspected.

– It is extremely common that work is done without permits in order to cut corners and/or avoid additional taxes.

This can be a very strong negotiation point. Once it is revealed to the real estate sales person that work was done without a permit, they legally are not allowed to advertise that work as “new” and they are also bound to disclose the un-permitted work on the property. This may put you in a very strong negotiating position under the right circumstances.

Talk to Municipal Agencies – health department, police department etc

You are looking for evidence of “problem tenants.” If there are several outstanding health code violations, you will inherit these problems. The police department or online records can provide information about when they were dispatched to that property.

Unless you are an expert landlord with a strong background in evictions, avoid problem tenants. If you are an expert, then use this to seriously negotiate down the price.

What to Think About prior to Acquiring Investment Rental Property 2

Always Get Certificate of Municipal Liens

You don’t want to find out six months later that there is 2 years of back taxes. Every state is different, but most require that all liens are paid at closing.

Chat with tenants

Sales agents and current owners absolutely hate this, but it is a must.

Tenant’s are nervous about their owner selling. They are afraid they will lose their home or that the rent will jump suddenly. Because of these fears, they will do anything to get into the good graces of the new owner, including telling you about every single drip, spot, crack, or speck of mold. Ignore the owner and agent and make sure you have very long conversations with all current tenants.

Check to see if it’s in a flood zone

This seems obvious but most people don’t check. Flood insurance is extremely expensive and will blow your numbers out of the water. Check before you spend any money on inspections

Finally, once I have done all the leg-work, I’m ready to spend some money on:

What Are The Characteristics Makes You To Become A Successful Property Investor

Property inspection

This is a tough one because I’ve seen it from both points of view. You don’t want someone who will miss things but you also don’t want someone who will blow things out of proportion. The problem is, the most recommended inspectors are actually the worst ones. The one that blows small problems into huge ones gets the referrals because everyone things they were saved from disaster, even though the inspector really just killed a deal.

Instead, look for a good inspector who will put things into perspective, find all the problems, and recommend solutions.

Pest inspections

Every region has different pest issues, but at the minimum you should check for termite, ant, and beetle infestations as these cause serious structural problems that are expensive to fix.

—Property Seminar

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