I’m Buying Investment Property! What do I do next?
The most common question I get from Real Estate Investors is “when do I need to hire you?” Typically, you hire me at the beginning to make sure everything runs smoothly, or you hire me after everything has hit the fan! To make sure things go smoothly, I’ve thought of some due diligence items I can help with on the front end, so that you don’t need to hire an attorney on the back-end, after the fact …
If you’re going to buy investment property, you may want to review the following documents, and while I’m writing about this from the perspective of multi-family due diligence, this information may also apply to the purchase of a single-family investment property too. You’ll also notice that many of these documents reflect similar information, allowing you to cross-reference and verify most of the necessary information you’ll want to see prior to purchasing the investment.
- Leases. You want to make sure that you know each tenant, that each tenant has a written lease, the amount of rent they pay and when, and the amount of their security deposit. You also want to know when the lease started (the commencement date) and when it ends so that you know how long you’ll have these tenants after you buy the property. If you close mid-month, rent is important to know as it should be pro-rated on the Closing Disclosure or HUD-1.
- Security Deposits. Similar to rents, you want to make sure that the seller gives you the security deposits in the event you have to either make repairs when the tenants vacate, or refund the security deposits, as appropriate. Typically, the seller will provide you a credit on the settlement documents, although some seller landlords may have the security deposits in reserve and can pay these to the buyer directly.
- Bank Records. You want to verify that what the seller says he collects in rent, and the tenant says he pays in rent, are actually deposited each month as rent. Depending on when tenants moved into the property, you can also verify payment of the security deposit by the tenant. What reserves have been created by the landlord to pay for unforeseen circumstances, regular maintenance, etc.?
- Rent Rolls. Again, the Rent Rolls will verify the amount of rent paid. The rent rolls should also identify whether the tenants have paid any rent late and whether those late payments are an anomaly or a regular occurrence. The rent rolls and the leases will also verify the length that a particular tenant has been in occupancy (did the seller fill up the building with poor tenants simply to make the property attractive to you?).
- Tenant files. You want to check to see whether any tenant has made unusual or numerous maintenance requests and the resolution of those maintenance requests. You’ll also want to see whether the landlord has had any documented problems with the tenants (are you simply buying someone else’s problem end-tenants?).
- Other Income. Does the property have coin-laundry or vending machines? Does it have other items that may produce additional cash flow for the property?
- Payroll. Do any maintenance personnel live on-site? Does the property manager? If so, is there any break in rent and is this information properly reflected in the rent rolls, leases, and bank statements? What other personnel are employed by the landlord / owner / seller?
- Vendors. Similarly, what other vendors are paid by the seller / landlord? Cable / Internet? Landscaping? Management? Insurance? Etc.
- Tenant Estoppel Letters. These are letters signed by the tenants confirming most of the above information, like when they took possession, the length of the lease, the amount of rent, the amount of the security deposit, and whether rent is current. These are valuable to verify that the landlord / seller is giving you accurate information.
Finally, you should visit the property before you close, rather than buying the property sight unseen. Regardless of the volume of paper you receive from the seller, you may learn additional information, or learn that you cannot verify the seller’s due diligence unless you physically visit the property. Do any units have undocumented pets, or undocumented additional occupants? Did mom & dad sign the lease but son or daughter lives there? If there is an on-site manager, what does the property look like? If there is a landscape contract, does the landscaping look professionally maintained?
Real Estate is one of the most expensive investments you will ever make in your lifetime. The right investment could set you up for financial freedom and early retirement through passive income. The wrong investment could bankrupt you or worse. You want to ensure that you’re discharging your due diligence and that you are intimately aware of the pros and cons of the property. Like I’ve heard many people say “Trust but Verify.”
If you have real estate questions, or want help reviewing or understanding the due diligence when purchasing property, investment property, homestead property, or otherwise, please contact us to schedule a free initial consultation to discuss your options at 813-774-5737 or email me directly at firstname.lastname@example.org. Please also check out the Crushing Debt book on Amazon. You can also subscribe to the Crushing Debt Podcast, on Apple Podcasts, Spotify, and other podcast players, including Amazon Echo (“Alexa”) for more free information about these topics.
Shawn M. Yesner, Esq., is the host of the Crushing Debt Podcast, author of the Crushing Debt book, and founder of Yesner Law, P.L., a Clearwater-based boutique real estate and consumer law firm that helps clients eliminate the financial bullies in their lives. We assist clients with asset protection, the sale and purchase of real property, Chapter 7 liquidation, Chapter 13 reorganization, bankruptcy, foreclosure defense, debt settlement, landlord/tenant issues, short sales, and loan modifications in Clearwater, Tampa, Westchase, Odessa, Oldsmar, Palm Harbor, Pinellas Park, Largo, St. Petersburg, and throughout the greater Tampa Bay area.