The world of real estate investment can be exciting as well as a good money maker if you have a knack for it. It takes some serious education and preparation to invest in real estate, especially in this day and age of fraud and swindles.

Read on to learn more about how to do your due diligence when it comes to buying an investment property.

Home inspection due diligence
photo credit: Chris Potter / Flickr

First Thing First: What’s The Value of the Property?

Most importantly you will want to look at the potential value of an investment property to make sure that it’s a sound investment. How do you calculate your return on investment in real estate? Be aware of these are five factors: cash flow, tax advantage, amount of equity, any leverages, and the amount of appreciation you can realize over time. The two essential factors that you need to look at most closely are cash flow and equity build-up. These two things are vital if you want to make any kind of profit in real estate.

Doing your homework matters in investing, so take your time when you are considering these numbers on a potential property.

Due Dilligence: What are the Questions to Ask?

So, once you have run the numbers and decide to take a risk on a property, what next? In order to do your due diligence, you will have to add in all of the various factors before you actually write a check. Performing due diligence begins by asking yourself the following questions:

  1. Will you be the landlord for the property, or will you hire a property manager?
  2. If you decide to hire someone, have you factored this cost in?
  3. If you decide to be the landlord, are you prepared to learn the things you need to know to be a good landlord?
  4. Do you know enough about the Fair Housing laws and ADA compliance regulations to screen tenants yourself or will you hire a tenant screening service?
  5. Have you educated yourself on the process of eviction, tenant retention, avoiding tenant turnover, and avoiding issues like identity theft?

All of these decisions need to be considered before you buy an investment property. All of these decisions will affect your bottom line, which is why it is so important for you to do your due diligence before proceeding.

For example, the latest information on the Fair Housing laws can be found on the Housing Urban Development website. You will also need to study the various state laws that may apply to your state as well – laws and statutes will differ from state to state.

Building inspector

Hiring the Pros: Should you?

If you don’t have time or feel qualified to perform this step, you should consider hiring a professional tenant screening service to screen and find the appropriate tenants. This one step will save you time and money on the front and back end of your foray into real estate investing. A screening service will know exactly what the local and federal laws and regulations are; they will be responsible for conducting the following on each qualified applicant:

  • background checks
  • criminal record checks
  • credit checks
  • bankruptcy reports
  • foreclosure checks
  • reported collections
  • employment records
  • past history of addresses
  • eviction records
  • reference checks.

The proper screening process will also filter out those applicants who are not 100% legitimately who and what they say they are. A thorough screening will identify any fake social security numbers, driver’s licenses, and any other ID that the applicant may have fabricated. This saves you a ton of headaches down the road. Conducting this one step can get your property filled with the best people faster than anything, so consider it a good investment as well.

In addition to this, you will need to decide whether or not to be the landlord or hire a property manager. Hiring a PM also requires some research on your part – if you decide to hire someone you will need to factor this cost into your bottom line. This usually adds an extra 10 percent to the cost, so it’s worth weighing the pros and cons of both sides.

Another good step is to have the property evaluated by a licensed home inspector before you buy it. This will give you a better idea of how much repairs and maintenance will cost you over the years as a landlord. It will also tell you if there are any major issues going on that will cause the property to become a major money pit – think water damage, foundation issues, faulty wiring through the house, and so on. Again, this little bit of financial investment upfront can really help you turn a decent profit in the end.

Real estate investment growth

Conclusion

Overall, doing your due diligence and being prepared will help you in your pursuit of investing in real estate. The more you know, the better decisions you will make about what property is the best fit for you.