As the mortgage rates continue to remain low, and many of the current investors leaving the market, new investors are beginning to invest in the market. When buying an investment property you should do your due diligence and run all of your numbers before you buy.
Many investors have their own list of criteria that a property must meet prior to viewing and making an offer. Depending on what type of investment you plan to purchase your list might be longer or shorter. For instance, when an investor is looking to purchase a multifamily home of up to 4 units, they will pick a price range in an area they would like to purchase. With that in mind they begin shopping online to see if there are any properties that meet their criteria. When a potential investment has passed the first hurdle, the second hurdle the investment must pass could be a basic ROI calculation.
Some investors have a set ROI% they would like to meet after expenses. When running the ROI% make certain you use the current real estate tax that is owed and the current or potential rental income, if the property is vacant. If your research reveals a range of rental incomes use the median rental income for that area. After the property has passed this hurdle of due diligence investors will then move to the next step which is a property drive by. You would be surprised how much wear or damage a pretty picture can mask which you may deem undesirable. It depends on the willingness of the investor to put money and sweat equity into an investment. Some of the properties might not make it past this point. The properties that are still in the running and currently have tenants have to now pass the lease agreement test. Make certain you look at the current lease agreements. You would be surprised what you can find or don’t find while looking at the current lease agreements. Make sure you can live with the terms of the current lease agreements.
By now you should have eliminated many of the properties and have a much shorter list. Now it is time to complete a walk through to check the internal condition of the property. When you are not comfortable running your own repair numbers take a contractor with you who can give you an on the spot repair estimate of what it will take to get the property back into shape. Also, don’t forget to call your insurance agent and have them run a CLUE report on the property to find out if it is even insurable.
This is just a short list of due diligence items you should do prior to buying an investment property. Your list of criteria may be shorter or longer depending on what type of property it is and what type of tenants you would like to have.
The bottom line is you should do your due diligence prior to making an offer.