What is Due Diligence in Real Estate?

Due diligence means doing thorough research to make sure a home is a good investment before you sign the dotted line. Many first-time real estate investors struggle with the due diligence process, as it can be intimidating and stressful when you need to know where to start, what information to gather and review, so you can make a good decision if the property you are considering is a smart investment or not.

Remember all of the following before investing hundreds of thousands of dollars on your next investment property and if you don't do the job of finding property defects, weak real estate cash flow, or other reasons not to buy property, you won't find them until it's too late. If you don't want to make a bad investment, learn how to do your due diligence.

Return on investment.

Before making an offer, you need to know the exact real estate cash flow that you can count on and this starts with determining the market rent for the property. So again, make sure to do our homework. Do everything you can to make sure you are buying the right property and that it's going to be a great deal that will bring a positive return on your investment. Take a little extra time on your due diligence and on getting multiple bids for mortgage financing as well, as you may have many financing options when investing in real estate. Determine the options at your disposal based on your credit score, down payment, and the loan programs available in the area, as finding proper financing is a large part of due diligence in property investing.

Due diligence process.

Due diligence includes a huge amount of homework that you must complete before buying your next real estate investment. Find out the crime rate of the area, the noise level, demographics, income levels, and estimate the demand in the area by examining the vacancy rates, this will also help you calculate the cash flow of the property. Make sure to do a thorough research of various properties and spend time looking for what the market has to offer. Also, drive around the neighborhood, look at other homes and see who lives there, take time to talk to tenants to see if the value of the home is rising or falling. And you're going to find that these factors can greatly influence which markets to buy and which to avoid.

Estimate.

If you need financing to buy a property or maybe even use your own cash, make sure to pay for the appraisal. The appraiser does not even conduct a high-level inspection of the property, but he also looks at the property and the size of the lot, the location, and the condition of the property. He/she will take note of any improvements and compares the property that was recently sold to comparable homes in the area and this will help you not to overpay for the property.

Tenant screening.

When you buy a rental property already occupied by tenants, you need to make a lease audit and do an analysis on the rent roll. Start by requesting copies of the rent to view their payment history, make sure to pay attention, as sellers may not provide an accurate history of rental payments, so request copies of the original tenant verification reports. Check documents like, credit reports, eviction history, criminal records, identity, and referrals, these are all key factors in the tenant verification process. The last place you want to be is locked up in a yearlong legal battle attempting to evict bad tenants who are damaging and causing problems in your property. Tenant due diligence is an important part of the real estate investment process when you buy property from inherited tenants.

Inspection.

There are several different types of checks that you can and should do. Make sure to hire a professional home inspector to examine every component on the property, including foundation problems, plumbing, electricity, heating and cooling, kitchen appliances, water heater, roofing, termites, and other potential damage. The inspector or contractor will provide a full report of any problems found and how serious the problems might be. Also consider testing for lead paint, radon, asbestos, and mold if you have reason to believe there is a risk. If you can, visit the property with the inspector and ask probing questions and get a feel for the red flags the inspector is looking for to improve your vision for future deals. As you're going to find that sometimes the cost of such a necessary renovation is enough for a buyer to abandon their offer and continue looking for a property with less risk.

Due diligence is a very important process when acquiring an asset worth hundreds of thousands of dollars and you cannot afford to be wrong in that situation. So always make sure to do your homework before investing your hard-earned money, do it right and you'll never make a bad investment again.