20 Due Diligence Items Missed by Investors Because They Don't Look Past the Property!
• Learn which offsite issues are even more important than anything your own eyes or a property inspector can tell you.
• Why items #7, #9, and #18 are particularly critical if you are investing in an unfamiliar area far from where you live.
• How item #11 can prevent you from ever getting a tenant!
• Four reasons (#3, #6, #19 & #20) to drive the neighborhood.
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20 Offsite Due Diligence Factors for Rental Property
1. OUT OF SIGHT?
OUT OF MIND…
Out of Pocket!
Offsite Due Diligence Checklist for Rental Property Investors
“The 20 Most Overlooked, Costly, and Irreparable Elements of
Investment Property Due Diligence”
2. While property inspection checklists are fairly
commonplace, few go beyond the structure or borders
of the property. Oddly enough, the physical property is
the one thing a new owner can do most about
changing. What about the host of crucial aspects of a
rental property evaluation that originate off the
premises? Most of these can’t be “fixed” by a new
owner. Thus an “offsite” due diligence checklist is
arguably more important than your property
inspection, since you may be stuck with irreparable
items on this list for much longer with little ability to
mitigate their impact on your investment.
Why Offsite Due Diligence?
3. 1 Crime
One of the most obvious but also most overlooked is crime level. Examine not just
census tract of subject but surrounding tracts and area as a whole. Distinguish
between property and violent crime. Note that crime statistics are readily available to
consumers now, so they can and will research this data even if you don’t.
4. 2 Schools
Key when your property serves the demographic that includes school-age children.
(e.g., if you have a 2 bed / 1 bath this may not be a factor). Good schools promote
longer tenancies, as tenants don’t like to change schools, particularly if within walking
distance. Schools are also correlated to economic development, stability, and property
appreciation.
5. 3 Zoning and Housing Mix
Examine not just the site and neighboring parcels, but the entire census tract.
Diversity of zoning is a red flag to pull zoning records. Greater zoning and housing
diversity is not your friend: homogeneity is best. Having a nice 3/2 in an area of
townhouses and apartments won’t bode well, or vice versa. Presence or proximity of
commercial to your residential unit is also unfavorable.
6. 4 Tenant Demographics
Understand the density and demographics of tenants in the neighborhood and focus
on the attractiveness to your prospective tenants of the demographic in the area. What
type of tenant you plan to seek for your property? How will you market to them?
Examining demographics can also lead to more effective marketing strategies.
7. 5 Tenant Mobility
How frequently do tenants in this area move? Examine the alignment between mobility
and the demographic (e.g., students and/or military). Mobility reflects stability of
neighborhood and will impact your bottom line.
8. 6 Competition
How many other units are available for rent in the neighborhood?Review comparables
(in person or online): how does subject compare in desirability to competition? Do you
have the best or worst presentation – this will dramatically affect vacancy duration and
should be part of your rent pricing strategy.
9. 7 Local Regulatory Matters
Is the state, county, or city landlord or tenant friendly? What is the eviction process,
timing and cost? What are the recoverable costs of eviction? Local regulations,
licensing of rentals? Rent control? Security deposits: amount, interest bearing,
segregated, mandatory timing of refunds?
All of these things impact the value and profitability of a rental unit.
10. 8 Appreciation Rates
Historic appreciation rate is generally an unreliable metric. Understand the 1, 5, 10-
year appreciation, but look more for deviation from the norm for area and timeframe.
Also be cognizant of where things are in the real local estate cycle.
11. 9
Property Management
Availability/Matching
Once you are comfortable with the availability of good property managers, examine the
alignment of tenant base and management style. Consider the philosophy between
manager and owner (e.g. more inspections lowers tenancy duration), knowledge and
experience of a manager makes him/her less swayed by owners’ input. Certain
management tactics are required at lower economic tier, less so at higher tiers.
12. 10 Property Taxes
In addition to learning the tax and how it may change upon sale, seek an
understanding of the components thereof: county, city, schools, community
development, etc. Know which are ad-valorem vs. non ad-valorem. Also what are the
limitations of annual increases? What is the value challenge procedure and history
(how aggressively has the jurisdiction increased values?).
13. 11 HOA Regulations
More and more, HOAs have enacted anti-rental provisions. Even without that specific
prohibition, consider how restrictions on age, children, cars, fences, home businesses,
etc. can impact rentability. Consider screening local court cases to determine how
litigious a given HOA might be?
14. 12 Insurability
Insurance is often postponed until just before closing, but costs or even the ability to
insure should be examined early on. Characteristics like physical structure, age,
elevation, wind resistance, flood Plains/Maps, bodies of water, etc. all impact both
value and profitability. Property loss history, which may require permission from current
owner, is also an important but often ignored data point.
15. 13 Distance to Economic Center
Is there a single common economic center, or multiple ones? How long are typical
commute times for workers in this neighborhood. This single metric has one of the
biggest impacts on total cost of tenancy, a little-understood concept by many
investors and landlords.
16. 14 Access and Boundary Issues
Sometimes these are obvious, but many times they are not. These include access
rights, shared driveways, fences, even the exact location of lot lines. A survey
referenced in your title policy is a good, inexpensive way to avoid problems in this area.
17. 15 Condominiums
Condos bring their own unique set of issues, in particular their bylaws and covenants,
which may be decades old and not reflect current needs. Secondly, maintenance
issues often surprise new owners. Strive to find out what you own? What are you
responsible for? What fees are passed on to you? What is the financial state of the
association? Are sufficient reserves in place to cover any upcoming significant capital
improvement projects such as roofing, roads, HVAC, etc.?
18. 16 Utilities
Another data sector often creating post-closing surprises is utilities. Such information
as availability of utilities and who provides them, sewer vs. septic, city water vs. well,
cable vs. fiber, etc. When researching utilities, consider reputation/competition,
options, connections, costs, turn-on or reconnect fees, procedures (inspections?).
19. 17 Public Transportation
In lower and middle income areas, bus stops/routes, train stations, even distance to
and/or ease of access to freeways can impact desirability and thus rents. Separately
but related, airport access can also be a consideration for some.
20. 18 Weather/Natural Hazards
Especially for out of area investors, understanding local weather threats should be part
of the due diligence review. Events like tornados, sinkholes, earthquakes, and hail can
be a normal occurrence but create problems for unsuspecting or unfamiliar owners
(e.g., freezing of pipes, heating fuel costs, etc.).
21. 19 Distance to Amenities
Often this is most critical to tenants, but overlooked in the transaction by the investor.
Distance/ease of access to shopping (principally grocery), retail centers (clothing, gifts,
etc.) and recreational areas should be evaluated.
22. 20 Noise
Have you considered the site at all times of the day and night? What about distance to
airports, train tracks, schools, fire stations, freeways, etc.? These can affect daily noise
levels, while sporting/concert venues, other infrequent noise-generating activities could
be of lesser concern.
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