rental property investing

Due Diligence Checklist for Real Estate Investing

Having recently placed a new 5 unit property under contract with the seller, I thought today would be a good article to highlight the different due diligence steps you should take after contracts are signed.

In most cases, you have between 30 and 45 days to get your due diligence done on the property and ready for closing where you’ll then take possession.

Here is a list of things to do that I recently went through as well:

  1. Hire a home inspector
  2. Get property insurance
  3. Schedule contractor walk throughs
  4. Analyze utilities, rents, and other expenses

Home Inspection

Your typical home inspection will cost between $300 and $500. In your purchase contract it will outline how many days you’re allowed to get your home inspection completed but it’s best to call and schedule right away.

Here’s what I did.

I quickly found a list of home inspection companies by typing in a search on Google. You’ll see a list of Google Business listings pop up with their contact information and reviews.

I spent 30 minutes making several calls to different companies to see their availability and cost.

In my case, a 5 unit apartment building is different than a home inspection for a house, but I was able to find a home inspector who did multi family pretty easily.

The cost for the multi-family home inspection was $500, which $450 covered the inspection and $50 was for termite inspection. It took the guy about 4 hours to complete it and send me the 36 page report.

Get Property Insurance

You’ll also want to start calling local property insurance companies and get quotes to compare which offers the best coverage at the cheapest price.

Again, I went on to Google and did a quick search and then began dialing the phone numbers for each property insurance company. After about 30 minutes of work I had 3 companies working to send me a quote.

They’ll typically ask you questions like square footage, year built, number of stories, and date you’ll be taking ownership of the property to start your coverage.

As far as cost of home insurance.. it depends. Every state has different policies and coverage.

When analyzing a real estate deal, we always estimate $0.35 per square foot but the official way to get an insurance price is to call and request a quote for the property.

For my 3 unit apartment building we acquired in 2017, the insurance bill is roughly $1,900 for a two story brick apartment building with over 2,500 square feet. Therefore, the $0.35 rule of thumb isn’t always accurate.

Contractors

As mentioned above, the home inspector will usually email his report within the same day or 24 hours of the home inspection.

Review the report to learn about defects and things that need addressed in the property.

Then call different contractors specific to each problem you find with the property and have them scheduled to come out and inspect the repairs needing made.

Each contractor will then give you a bid or quote for what it will cost you to have them complete the work as well as a time frame for how long their job should take them.

Lastly, go back to the seller with this information and try to negotiate the seller to make repairs or give you credits off the purchase price.

This way you can still cover the expenses of the needed repairs with a credit if the seller doesn’t want to make these repairs prior to closing day.

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Analyze the Utilities

The next step I took with my 5 unit apartment I had under contract was request the rent roll and expenses from the current owner.

This way I could analyze which tenants pay on time, how much rent each tenant pays per month, and determine if there is any room to raise rents to market value.

Additionally, I want to know what utilities cost as this will play a factor in raising the rents.

As a landlord, you can have tenants pay for the utilities in their names if the utilities are separately metered. Or you can pay for the utilities and add these costs into the rents by charging higher rents.

In the case of the 5 unit apartment building, all utilities were being paid by the landlord.

I checked into the costs of splitting the heating system and electrical into separate units but it made more sense to leave things as is.

Water & sewer & trash pick up are common expenses most landlords pay for as well due to the challenge of billing separately in multi-unit properties.

With single family houses, it’s easy to assign the utilities to the tenant and make them pay for everything in their own name.

This leaves the landlord responsible for just the property taxes and insurance.

Analyze the Rent Roll

If you’re buying multi-family property, most landlords should have a rent roll handy to email to you.

Bigger properties will often be managed professionally by property management companies and they often use accounting software like Quickbooks.

Upon analyzing the rent roll, look for consistency.

You want to see that tenants are paying on time every month and that you won’t be taking on a new property with problem tenants who get behind every few months.

If you notice a tenant with a backlog of rent owed, you can begin deciding how you will handle that tenant upon taking ownership. Maybe you’ll need to prepare an eviction notice with your attorney.

You should also analyze the rental market around you and determine what rents are being charged by other properties nearby.

This can give you an idea if there is room to raise rents in your property, helping you earn more revenue and return on investment.

The more you can increase rents on a multi family property, the more valuable the real estate becomes!

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