Due Diligence for Income Producing Properties

No matter what type of property you are purchasing, the Due Diligence process is a necessary part of acquiring real estate. Whether you’re managing the properties yourself or having someone else do it for you, you must take the time to research each property thoroughly. When you do your due diligence, you must take into consideration all of the different aspects and requirements that come with this investment.  Keep in mind: if you don’t complete these extra steps, no one is going to do it for you.

Property Plan

It is essential to have your management team accompany you through the Due Diligence process. They should understand their target market regarding the quality of tenants, the renters’ lifestyles, competitors’ properties, housing market conditions, and potential for increased value or income. As you review the property with them, discuss what your goals are and make sure that both you and your team have the same end game in mind.

Physical Inspections

Physical inspection should be completed by a professional home inspector, a licensed contractor, an engineer or an architect. Due Diligence is the time to find out if anything is structurally wrong with the property.

Zoning

Go to your city building zoning department and make sure that the building has proper building permits for the use stated in the purchase agreement, as well as a certificate of occupancy or zoning compliance letters. Never assume a four unit building is approved for that use simply because it has four electric and four gas meters. By taking a comprehensive look at the zoning permits, you can make sure that the building is being used for what it was legally intended.

Local Codes

Be familiar with local laws regarding properties that are greater than two stories. This falls into what we call the multiple residence law (MRL). These laws govern buildings such as mixed use or multi-family properties, where the first floor might be used for commercial purposes and the second and third floor for residential.   There are very comprehensive sets of rules put in place to protect fire safety and entrances and exits. You will want to make sure that the units are in compliance with all state and local laws.

Environmental

Anytime there is oil, hazards or waste, a Phase One Environmental Inspection is always recommended. This procedure will allow for any environmental issues to be addressed. These inspections take a long time, so you will want to make sure to give yourself enough time for the due diligence period.

Leases and Applications

Review all rent roles and records for all existing tenants. Verify that leases are signed by both the landlord (landlord can make better look and feel of their home with Curb Appeal, Curb Appeal helps in fast home selling) and the tenant, keeping the expiration of those leases in mind. Verify all security deposits with seller’s records. Make sure that you get certified rent roles and estoppel certificates signed at closing as well.

Expenses

All maintenance contracts such as lawn, snow, elevator, pest, trash, security, and any other maintenance agreements should be verified. Gas, electric, sewer, water, cable and any other utility bills should be verified as well.