How to Perform Due Diligence on a Long-Distance Real Estate Investment
Imagine receiving a $20,000 check to purchase a rental property. How about step-by-step guidance from some of the most experienced real estate investors in the industry? Well, that’s exactly what the Dream Investment Adventure series is all about.
Follow along with our contest winner, Joe, and his journey of purchasing an out-of-state rental property. Through the mentorship of Steve Rozenberg, Head of Investor Education for Mynd Property Management, they learn about investing remotely. Over the next two months, the pair will research markets, build a team, purchase a property, complete a renovation, lease the property, and everything in between—without Joe ever seeing the property in person.
Dream Investment Adventure Recap
So far, we have learned how to identify investment goals and strategy, determine a rental market, find a local team, and analyze real estate deals. This week, we followed up with Joe as he confirmed that his property is under contract! Let’s step through the process of finding a property remotely and doing due diligence using a local investment team.
For those new to real estate investment, due diligence is the process of auditing a deal to confirm the data, information, and facts while under contract.
Use Non-Negotiables to Narrow the List of Properties
Before diving in, let’s review the final steps of finding a rental property to make an offer on.
Previously, Steve discussed the importance of taking a list of properties and entering them onto a spreadsheet to analyze. Use this to quickly narrow a list down to only the properties that fit your non-negotiable criteria. This prevents you from basing decisions on feeling and wasting time on properties that don’t fit your goals.
When faced with a lot of properties to analyze, Joe found that this technique made the decision-making process easier. Apply this tactic to your investment strategy for best results!
Touring Properties Remotely with a Local Agent
Touring a property remotely is easy thanks to technology like Zoom and FaceTime. Your local agent can walk you through the property and answer questions as if you were there. Have the agent take plenty of photos and videos for you to review later. This is going to be part of the “rehab estimate,” as these images will help to determine what fixes will be needed on the property.
Contact Your Property Manager for a Rental Analysis
The next step is to find out how much the property will rent for (also known as the “value and financial estimate” step of due diligence). This includes looking at income items (rental income, other income, and vacant loss) versus expense items (management fees, repairs, insurance).
This is an important part of the due diligence process. Request a rental analysis from your property management company. If you are self-managing, find a way to get your hands on reliable rental analyses.
If you choose the property management route, your team will also be able to give you some feedback, such as:
- Is it the type of home people are looking for?
- Is this location good for rentals?
- What are the average days on market?
- What can you expect to rent it for?
Your property manager is your expert in the rental market. Knowing this, take advantage of their knowledge and experience.
Mynd Property Management ran a rental analysis for Joe. He can expect to rent the property for $1,400 a month. Days on market for similar properties are low, so he can expect it to be rented in about 30 days. During the due diligence period, ensure that you are looking at these numbers on your property, as well.
Run the Numbers Using the BiggerPockets Calculator
Finally, try the BiggerPockets BRRRR calculator. Joe’s property will exceed his minimum cash-on-cash return goal. Joe was looking for 12%, and this property is going to give him about 20%.
Calculators can also help with rehab estimates. After Joe and Steve did the calculation, they determined that this property fits Joe’s strategy and goals!
The next step when performing due diligence is to find out what the house needs to rehab it properly. Videos and photos of the property recorded by your agent can be a good place to start. Make a list of necessary repairs or renovations using these photos and videos.
Hire an Inspector to Gauge the Condition of the House Accurately
Inspections that uncovered major problems saved Joe on the properties he dropped out of, so it is money worth spending. You want to know the condition of all the major systems and structure of the home including:
Get Bids From Contractors
After compiling a list of renovations, it is time to find some contractors and get bids on the project. The BiggerPockets Forums are a great place to find contractor recommendations. Contact investors that do rehab in your chosen market and ask them who they use. But remember, it is important to do due diligence on the list of potential contractors.
Joe’s plan is to have contractors in place and ready to start as soon as closing takes place in 20 days. At this point, it looks like the ARV will be around $170,000 with rehabbing costs just over $20,000. He will have better numbers to work with once he has some bids to look at.
Pro tip: Compile a list of contractors and vet them early. You want to be ready to send them into the property for a bid once you are at that point in the remote investing process.
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Know Your Rehab Budget Variable
Rehabbing can easily go over budget. Run the numbers and know what your maximum make-ready budget is. What is the most you can spend and still make the profit levels you are looking for?
Joe ran the numbers and knows that even if the rehab costs almost twice his projection, he will still make his target cash-on-cash return.
Homework Week 5
- Find contractors and collect bids on the rehab.
- Bring options to select a contractor next week.
Tune in next week to learn how to complete a rehab on an out-of-state investment. We will overview what the bidding and selection process look like.
To learn more about Joe’s investing journey, gain access to investor tools and resources, and help your own remote investment journey, check out the exclusive destination page for BiggerPockets fans only. You’ll also find a limited-time BiggerPockets exclusive offer for property management!
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