What are the biggest mistakes investors make during the buying process? Due Diligence.
It’s a broad term. Due diligence is involved in every step of the investment process, from market research to deal sourcing and from team assembly to tenant screening. While it is time-consuming, frustrating, and potentially costly, due diligence is crucial to a successful investment.
Think of it as the foundation of a building: it’s expensive to dig and no one will ever see it, but without a good foundation, the house will collapse.
Performing Due Diligence
The first step of due diligence is to take a deep dive into market research. If you are investing in a new city, look up the city’s regulations on rent control, evictions, zoning, permitting process, and any laws that may impact your investment strategy. From speaking with brokers, investors, and residents, you can become familiar with the area. By the time you start sourcing deals, you should have a very good idea of how much properties are trading and renting for, what the supply and demand look like, and what amenities tenants value the most.
Work with Experts
Rather than learning everything about the market yourself, a more efficient approach is to gather a team of experts who will provide you with their insights. Your team could consist of an agent, a contractor, a property manager, and/or a lender.
Don’t simply hire the first person you meet, even if they seem knowledgeable. By speaking with multiple brokers, for example, you not only have a better idea of who has the most experience and the best practice, but you also gain free information from all of your conversations. You might learn something extremely valuable from a broker who you don’t even end up hiring.
If you need a property manager, make sure to get referrals and bid proposals from various managers so that you can determine what resources are the best fit for your investment strategy. Luckily, there is an easier way that doesn’t involve calling and interviewing dozens of property managers. You can solicit bids and perform due diligence on your property managers by leveraging reviews and word of mouth.
As you go through the hiring process, here are our tips for hiring a property manager.
After you have assembled a team of experts, you can start looking for deals. Before putting in an offer, make sure to perform extensive due diligence on the property. If possible, bring in a contractor to make a preliminary estimate on how much work needs to be done. An undiscovered issue could turn a great deal into a terrible deal. By taking into consideration what these issues would cost, you can minimize the risk of overpaying for a property.
In addition, it is actually very common for brokers to inflate the property’s expected performance to get higher offers. When the projections are far off, it’s not because brokers are being purposely deceitful. They are trying to help buyers see the property’s potential in the most optimistic scenarios. The right approach is not to accuse them of lying, but to point out specific lines on the proforma and ask how they arrive at their conclusions. There might be information you were not aware of, and you may be pleasantly surprised if their projections are achievable.
When you or your property manager are screening new tenants, make sure to call their referrals, browse their social media pages, and learn as much about them as possible. Make sure to underwrite a higher vacancy in the first year so you can allow yourself more time to find a great tenant, rather than desperately settling for a bad one just to fill the unit quickly.
Due diligence is key to limiting your mistakes in real estate. The majority of the problems landlords and investors face could be mitigated or even prevented with proper due diligence.
Lastly, what happens when you discover an issue? If the issue is too problematic, move on. There will be more deals that fit your investment strategy. However, if the issue is not a complete deal breaker, use it to your advantage and negotiate with the seller. A problem could end up becoming an opportunity!
Where to start as an investor?
Whether this is your first property or another property in a larger portfolio, we encourage you to continue to learn about real estate. Regardless of your current phase, your due diligence will always be the most important task for every deal you pursue. This allows you to avoid mistakes when buying an investment property and helps you accelerate your path to financial freedom.
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