The 6 due diligence steps everyone should take before buying a rental

One could write an entire book on this subject, but in my experience, if you are buying a rent ready property, you can avoid most mistakes by following these six steps.

Step 1: Visit the area
I´ve sold hundreds of renovated single family homes to out of state investors over the years and I was always surprised by the number of them who purchased sight unseen. If you’re going to spend a six-figure sum on an investment, why not take 24-36 hours of your time and spend $700 - $1,000 on a flight and hotel?

While it is true that you can do a lot of research online, your best bet is to visit a new location in person before buying anything there. I find that four or five hours is generally enough time to get a feel for the neighborhood, and I don’t always need to see the actual house if I’m meeting a seller who buys and renovates many similar homes in a well-defined area.

Step 2: Get it inspected
Getting a full inspection from a licensed third party is vital. Don’t ever skip this step to save a few hundred bucks. An inspector will catch stuff that even a professional rehabber is going to miss. They test every appliance, outlet, window, door and faucet. More importantly, they know how to spot potential problems with foundations, roofs, HVAC units, boilers, electrical panels, water heaters and septic tanks. Don’t accept the seller’s “free” inspection either—always get your own independent one just in case.

Finally, take time to read the inspection report. The main issues are often summarized towards the bottom, and you have nothing to lose by (politely) sending the relevant ones to the seller and request that they get rectified prior to close.

Step 3: Request an appraisal
Most people purchase rental properties with a conventional loan and will have to pay for an appraisal whether they want one or not. However, I would encourage cash buyers to pay for a professional appraisal as well, to ensure they aren’t overpaying.

Step 4: Review photos and videos
With the technology that is available and with the complexities of social distancing, sending a few photos just isn’t enough anymore. Any seller can (and should) include a video tour of a home and a sweep of the street outside. Professional services like Matterport virtual tours can also be purchased for about $125. Take the time to study those photos and videos carefully.

Step 5: Request referrals from other investors
If you are purchasing a house from a turnkey specialist who is selling a large number of houses to investors, then you should request a list of 3–4 referrals and actually follow up and have conversations with them. Again, we are talking about a six-figure investment, so spending an hour or two on the phone with people who have already done this in the same area is an excellent use of your time. Ask about the service before, during and after a purchase, the property management, any unexpected repairs or vacancies they’ve experienced and whether they would invest again.

Step 6: Speak to more than one property manager
Most sellers price their homes fairly and give accurate rental estimates. However, you still need to verify their numbers, because not everybody is honest and even the best people can make mistakes. While appraisers will give you a second opinion on the value of the house, a property manager will give a second opinion on how much it will rent for. Both are equally important for real estate investors.

Vetting property managers will be discussed in more detail in the next blog post, but for the purposes of your initial due diligence, you should try to speak with (and meet) at least two different property managers. These people operate on the front lines, and if you are considering specific houses, their feedback on the neighborhoods, tenant profiles and rental values is very important.

Happy investing!