How to perform your due diligence on rental property purchases

5 Replies

Hi All,

I've had few acquaintances who has started turnkey investments recently and doing well, and looking into doing a turnkey investment myself.  I live in NY and all the properties here are very expensive, so I am looking out of state to invest.  I want to make sure that I perform enough due diligence before I jump into investing, and I need some help on how to perform the due diligence.  I read a post by Ali Boone somewhere on BP, and came across three factors to consider before jumping into investing, and those were Numbers, Macro Economic of the area, and the quality of PM.

I'm a numbers guy so I like to crunch numbers first to see what kind of cashflow I can generate and what my IRR looks like. All the properties shown on various websites look great with respect to price to rent ratio, but how can I get more detailed stats and perform due diligence on my part? Here are things I would like to incorporate into my cashflow analysis:

1. Rental Income - how do I know if the stated rental income is a reasonable one? How do I know how much the rental income should appreciate or decline on average over time?

2. Property Taxes

3. Home Insurance

4. Property Appreciation/depreciation - how much does real property increase or decrease in value on average in the area?

5. Vacancy Rate

6. Repairs/Maintenance - Is this covered by PM, or does the bill ultimately come to me? I'm new to this so I wasn't sure what's covered in "Property Management". If I'm the one ultimately liable, how much should I anticipate?

7. Insurance

These are the things I factor into my cashflow analysis, but I was wondering if there is a good reliable source to get these stats? If there are other factors I should consider, please let me know.

Aside from cashflow analysis, I'd like to know more about the area.  I suppose I can google these, but factors that I think are important are:

1. Local Population Increase

2. Local Job creation (in my mind, if job creation is greater than population increase, that's also a good thing?)

3. Local School District

4. Local Attractions/Tourism

5. Local Public Transportation.

Let me know if there are any other things I should be paying attention to.

Finally, in regards to quality of PM, is there a good site that has in-depth reviews of PMs? I've been looking at Yelp, but not sure if that's the best source to be checking the quality of PM.  

Thank you all for your help in advance!

@Michinori Kaneko Ok from that long post the second set of questions is best found here http://www.city-data.com/

For the rest of your questions

1. Call a local property manager not associated with the turnkey company

2. This can be looked up with the county

3. Call and get some quotes

4. Nobody knows this but historical data is available on zillow, city-data and other websites

5. Call a local property manager not associated with the turnkey company

6. No you pay for repairs it will depend on the property but I usually use 5-8% of total rents

7. You already asked this in number 3

Hopefully I helped somewhat, feel free to reach out if you have more questions.

@Michinori Kaneko   Almost every webinar on BP covers a lot of your questions. I would definitely recommend signing up for the next one. Most of the ones I have seen will also walk you through an evaluation start to finish (not surprisingly using the tools available on BP). Also before even checking out the webinar you can click on "tools" up top then look at the "Rental Property" calculator. Every field within the calculator has help content that will give you a good baseline and each of the fields will also show you high level what other considerations you should account for when trying to figure out your cashflow etc.   

The investing out of state book promoted on here is also a good read and covers a lot of your questions in detail and recommends sites and apps to use. Grain of salt, it does of course make the whole thing sound all peachy and low risk.

Hope that helps

@Michinori Kaneko let me know if you would like a spreadsheet I made with footnotes for those lines. As a general rule of thumb when I buy turnkeys is to use 55-65% of the rents as take home. But then you need to pay the piti.

@Chris Bodden Thank you, will check out the webinar. Right after i posted this, I saw the calculator and realized i was missing a few things (no wonder i was calcing a whopping 15% IRR on some properties I was looking at).

@Lane 

@Lane Kawaoka yes any inputs would be helpful.  I created a spread sheet with amortization schedule and all that jazz, but would be great to see how other people go about analyzing.  Thank you in advance.