Due Diligence Checklist On Rental Property
BATTLECALL GUEST
EXPERT: Steve Gillman, Real Estate Investor
Use the following due diligence
checklist when you buy rental properties. It should keep you from having any
day-after-closing surprises.
What is "due diligence?" Simply
put, it is investigating the details of a potential investment, so you know what
the real numbers are and what you are getting into. You'll often start this
process before you even make an offer, but your offer will normally have
provisions allowing for you to review (and approve) certain documents and have
certain inspections done before you close on the property.
A Due Diligence
Checklist
Auditing The
Files
To verify actual income, obtain and
review:
___ Rental agreements - signed by
the tenants and specifying the amount of the rent.
___ Documents showing deposit
amounts.
___ Any rental histories showing
late payments, problem tenants, etc.
Interior
Inspection
To learn about the place, the
residents, and the future repairs you'll have to make, watch for:
___ Any empty apartments listed as
rented.
___ Any pest problems.
___ Missing, old or broken
appliances.
___ Any water or fire
damage.
___ Any obvious "problem
tenants."
___ Anything that will need
repairing soon.
Exterior
Inspection
___ Roof condition, age and
problems.
___ Electrical and plumbing systems
up to date, and to codes.
___ Heating, ventilation and
cooling systems - age and condition.
___ Paint and trim
condition.
___ Driveways and parking
areas.
___ Landscaping and irrigation
systems.
Service Agreement
Reviews
To know what contracts and
agreements there are, and whether they will transfer:
___ Property management
agreements.
___ Pool cleaning.
___ Cooling system
maintenance.
___ Heating system
maintenance.
___ Laundry machine
contracts.
___ Cable or satellite television
services.
___ Alarm system
services.
___ Landscaping
services.
___ Snow plowing
services.
___ Anything else.
Government Compliance
Check
To see if property is in compliance
with codes, zoning, etc:
___ Ask about any permit
problems.
___ Ask local authorities about
zoning violations or encroachments.
___ Check into fire code
violations, see if fire department will inspect for you.
___ Inspect for environmental
problems (asbestos, mold, lead paint, radon).
Books And Records
___ Get 24 months income and
expense statements.
___ Look for any unusual things in
the books (expenses too low, income too high).
___ Review service agreements and
whether you have to assume them as the new owner.
___ Review the current rent roll -
see if rents are under or over the market rates for the area.
___ Look at utility bills for the
last year.
___ Call utility companies and ask
in increases are coming soon.
___ Check payroll records for
unusual arrangements, accrued vacation time you'll have to pay, etc.
Follow Up
___ Get an accountant to review any
suspect documents.
___ Have your lawyer review your
offer and other paperwork.
___ Ask your attorney about any
other due diligence you should do.
___ Take notes on any problems, and
list costs to correct, to use during subsequent negotiations.
Most problems that investors run
into when buying income properties are not really unforeseeable. Most problems
that show up later could have been known if a simple due diligence checklist
like this one was actually used during the buying process.
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