When you invest in real estate, you have to do your homework. Many aspects of the deal can go wrong, and if you don’t introduce a process to do your due diligence on a property, you can lose both yours and someone else’s money.
Generally speaking, investments in hard assets are more secure than investments in stocks, but this doesn’t mean that there aren’t any risks involved. And these risks have to be addressed. This is why real estate investors use checklists to make sure they don’t forget about a deal breaker for each investment property they come across. In this article, we’ll show you how this is done, so stick around.
Now, checklist can refer to different types of documents in the real estate investing industry. Here we’ll specifically focus on reviewing investment property checklists, i.e. those checklists that serve to analyze a specific deal.
Other checklists include:
So, what’s the scoop on investment property checklists? Simply put, they are your best bet against committing to a failed investment.
The checklist covers all aspects of the deal that might influence the returns: financial structure, value of the property, potential legal issues, calculations about the returns (cash flow, appreciation over time etc), property management, costs of repairs and so on. In essence, it’s a breakdown of the investing strategy into actionable steps. The end goal of the investment property checklist is to help investors (and their lenders) to decide whether to buy a specific property or to pass.
To create a property checklist, you’ll need to crunch a lot of inputs: real estate market data, house inspection notes, estimates about rehab costs, demographics (job market data, crime rates), zoning plans, legal documents, and to project the effect of all these factors on the value of the property over time.
Don’t worry if you are a novice and the sheer volume of data on this list overwhelms you. No matter how complicated this sounds at the moment, as you close deals you’ll internalize the list, and when you gather experience, you’ll be able to place offers for properties on the spot.
Each deal has its own investment property checklist. And the checklist items differ based on the investing strategy you use. So, if you use more than one investing strategy, you’ll have different types of investment property checklists.
This comes naturally. If you prefer house flipping, or wholesale deals, estimates of rehab costs will be important for you. If you go after rental properties for passive income, metrics like rental vacancy rate, employment rate, and crime rate will be prominent in the checklist, while rehab costs might play a lesser role. Those real estate investors who use the BRRRR strategy (buy-rehab-rent-refinance-repeat) or buy-rent-eventually sell, will probably consider both the rehab costs and the rental data when they make a decision.
The type of property dictates checklist items as well. For example, investments in land will have an item about property accessibility, while roads to residential properties are taken for granted. Also, the documentation for investments in commercial real estate is more elaborate, including environmental liability reports, so a checklist for commercial property will have a different set of items.
We’ll review a checklist for investments in residential real estate, and we will provide an addendum with checklist items that are relevant for rental properties and rehab projects respectively.
Real estate investors are usually interested in residential real estate, so we will review a checklist for this type of properties. There are many sub-types of residential properties (single-family unit, multi-family unit, condominium, etc.), however, we will discuss general guidelines.
The investment property checklist includes items like: investment financing, property value, property title and liabilities, property management, calculations (cash flow for rentals/rehab costs for flips), tenant screening (rentals), after repair value (ARV, for flips), etc.
Let’s take a look at each of them.
Maybe you didn’t expect this, but the capital for the investments is the first item on the checklist. There are two reasons for this. First, without capital there is no deal – you may find the perfect property, but if you don’t have the means to buy it, you will miss the investment opportunity.
Second, lenders, be they a bank, venture partner, or a private lender, want to make sure that the investment is profitable before they hand out cash. Often, the investment property checklist is a requirement for approving a loan to real estate investing businesses. The lender wants you to succeed, because if you don’t, they won’t grow their capital (they won’t be able to collect their returns from the deal).
Lenders base their decision about the investment on specific data (about the property, the owner, or the market, exact items may vary) – sometimes the items on your checklist depend on what the lender wants to see.
So, the first item is access to capital (do you have enough money to close?), and the ability to use that capital on a short notice (within days).
To determine the actual value of the property, you need to take two elements into consideration: the house inspection report and the current state of the real estate market.
House inspections are a standard procedure – you can hire an expert appraiser, or you can check the property on your own (once you get more experience). It’s basically a rundown of potential issues with the property: structural integrity, leaks, code violation issues – anything and everything that would allow you to bring the price down.
This is where a house inspection checklist or property appraisal checklist comes into play. Let’s breakdown the house inspection checklist:
If you are the one doing the house inspection, you should also pay attention to indicators of potential trouble that are not obvious, but can affect the value of the property. For example, issues like noise pollution, odors, rodent infestation or exposure to environmental hazards (flood risk, wear and tear from hurricanes).
When you analyze all of these inputs, keep your focus on the prospective buyers. If the house is on the flight path of an airport that is close by, maybe you’d think that this house is not the perfect home. However, think in terms of the investment. Would anyone need to rent the property? Would someone would be happy to own it?
You know the old cliché – real estate is all about location, location, location. The underlying logic is: whatever is wrong with the house can be fixed, but you can’t alter the location. So, when you estimate the value of the house, you can consider the whole neighborhood as an amenity, and things like proximity of schools and recreational parks (or beaches) will affect the price.
However, the current state of the real estate market is very important, too. Real estate investors usually hold their cash when the inventory is low, and property prices are up, because they wait for the real estate market to become a buyers market.
Also, you can’t base your decision about investing on location alone. Although shifts in real estate markets happen over time, their influence shouldn’t be underestimated. Property appreciation is subject to changes in school district zones, employment rate (big company bringing new residents in the area), crime rates, and migration patterns.
Property appraisal should provide an answer to the question: will you make profit if you buy the house at the current price? In real estate investing, the profit is made when you buy the house from a motivated seller, because you use their lack of negotiation power as a leverage. When you sell the house, you can’t get more than it’s market price value, even if you put a lot of money into rehab projects. If you can get the property at a price that is below it’s market value, it’s probably a good deal.
Just make sure you compare apples to apples. Pull up property data from MLS listings and find comparable properties: house with the same number of rooms, in similar state, located on the same street – and you will have an idea about the market value of the house after repairs. Also, the ask price (listed price) is usually much higher than the close price, so bear this in mind.
This checklist item handles due diligence about the legal aspect of the deal. You can hire a lawyer to check the property title, or you can do it on your own.
In essence, you check who’s holding the legal title to a property and you are investigating the ownership structure. For example, if there are multiple co-owners, and only one of them wants to sell the property, you can’t secure the legal title to the house.
But it can be much more cumbersome than that. If the previous owner owes someone money, the property may serve as a collateral. In such cases, first you need to settle all outstanding debts, as the legal title can’t be transferred to you before you do this.
You are looking for any debt that’s tied to the property: tax liens, mortgages, HELOCs, etc. In a way, it’s good if you find that the owner is back on their mortgage payments, or they haven’t paid property taxes for years – this is your leverage to get a better deal. On the other hand, you should proceed with caution, because this might be the first in a series of unpleasant surprises.
Who will take care of the property? Are these costs included in the financial analysis? These questions are relevant for all real estate investors regardless of the strategy they use. Property upkeep, cleaning services, handyman interventions, landscaping and general maintenance – these bills can accumulate over time.
Of course, landlords should pay more attention to this figures because these are the fixed costs of their investment. But the issue of property management is relevant for house flippers, too. Rehab projects take time to complete (and usually extend past set deadlines), plus, once you own the property, you might have a hard time selling it back on the market.
In the meantime, property management costs pile up, and they can diminish returns from the investment if this risk isn’t taken into account.
This concludes our list of checklist items that apply to all real estate investors. We will continue with checklist items that are relevant for specific investing strategies (renting and rehabing).
Renters should add two checklist items to the list: calculations and tenant screening.
Unlike wholesale real estate deals, where the returns are apparent within a short period of time, investments in rental properties bring profit over time. And landlords need to stay on top of many real estate investing metrics if they want to maximize returns.
Some of the most relevant rental investment metrics include:
Capitalization rate = annual net operating income / cost (appreciated value)
In residential real estate, the cap rate is between 4% and 11%. The higher the cap rate, the greater the risk.
If you aren’t great in math, these metrics might seem too complex. Indeed, they aren’t easy, but don’t worry, there are many rental property ROI calculators available for free. And some of the costs are much easier to calculate. For example, the closing costs are up to $5000 and they are fixed.
The tenant screening procedures are used once you own the property to avoid potential eviction issues. Some landlords check credit report (or credit score), criminal records, eviction history, proof of employment, and similar data.
However, here we are referring to due diligence on tenant occupied rental property. Buying a property with tenants happens quite often, and, as property buyer, you need to check the terms in the rental documentation. There is a specific document – called Estoppel certificate – that allows prospective buyers to find out details about the lease. Usually, renters disclose the amount of rent payment to real estate investors through Estoppel certificates, but the certificate can contain other details, like security deposit, as well.
Rehabbers would benefit from adding another item to the investment property checklist: estimated rehab costs.
In theory, estimating rehab costs for your investment property is an easy task. I mean, the costs for remodeling a kitchen should be the same regardless of the contractor you hire to complete it, right? Well, that’s not how rehab projects work.
Rehab projects can become a liability, because contractors either:
You don’t want to be the real estate investor who lost a wholesale deal because the rehab took forever.
Always ask for quotes from at least three different contractors. This will limit the risk of miscalculated rehab costs because the contractors will check each other’s work.
For example, when you have three quotes for remodeling a bathroom, if one of the quotes is significantly lower than the other two, that’s a red flag. The contractor who gave you the lowest bid is either not fully aware of the extent of the work that’s required, or they bid low just to secure the project and will increase the costs once work is under way.
That’s how construction projects work.
The actual process you’ll use to fill in the investing property checklist can vary. For example, you can take the self-reported questionnaire that was filled by the house seller when they became your lead on one side. On the other side, you can put your property checklist and you can note the progress of your due diligence. You have to verify independently what the house seller reported anyway.
You can note results with a simple checkbox. Back in the day, real estate investors printed out checklists, now you can have it in digital form – what’s important is to have a separate checklist for each property. Depending on your workload, sometimes you’ll inspect half a dozen properties in a day. It’s easy to mix up data, if you don’t take notes. Investors tend to take photos of each room to have a reference to a particular property. If you do the same, you can include the photos in the checklist.
We shared a general template for property checklist. You’ll have to adapt it to the specific investing strategy you use. For instance, the checklist for investing in land would have items like access to roads, utilities, zoning permits, land use classification etc.
Property checklists are great tools that aid investment related decision making. Sometimes checklist items are proposed by the lender, sometimes they depend on the investing strategy, or the type of property. It’s recommended to novices in real estate investing to use a checklist to determine whether a deal is worth pursuing.
The basic checklist items include:
This investment property checklist can be further adjusted to fit your investment strategy and in house processes at your company.
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