We heard it growing up. We said it to our kids: “Did you do your homework?” Well, this question doesn’t stop as you get older. It becomes extremely important in business, financial, and investment matters in order to make a sensible decision that gives you good value for the money you are spending.
Buying real estate can be an expensive, complex, and risky purchase, so it’s only prudent for you to perform extensive due-diligence to help reduce your risk and make a smart decision. Sure. It’s time consuming and labor-intensive, and the majority of buyers fail to understand its importance and complete the process. To help make your life easier, here are important steps in buying income-producing property.
Put a Pencil To It. Put your investing rents, expenses, vacancy, financing costs, current leases, capital reserves and replacement costs down on paper. But don’t fudge. Be realistic and come up with your own figures. You’re the buyer and are in control of what you shell out. The seller’s figures could be overly optimistic. Check with your C.P.A. or financial advisor for advice.
Paying for It. Shop around to get qualified and secure the best financing for the property. Understanding the financing costs and terms in an agreement, and how those clauses could impact your investment returns and future financing options on a property is critical. Accepting any contract, loan or otherwise, without your and/or your attorney’s review will come back to haunt you.
Title To the Property. Although expensive, intricate title issues are rare, that doesn’t mean you shouldn’t do the needed review, possibly with an attorney, on every single purchase. A title insurance policy should be reviewed, plus an abstract of title that could list easements, restrictions on use, and a schedule of exclusions related to the title insurance. Big headaches happen when you discover an issue after you’ve closed escrow (especially when it could have been avoided).
Inspection and Renovation. A professional building inspector to inspect the property with a fine-tooth comb and prepare a comprehensive report of all the issues is an absolute must. Then get various bids from contractors for any renovation work required to put the property in rentable condition. You need to know if the cash flow is there before you sign on the dotted line.
Property Insurance. During the inspection period get some quotes for property insurance. Sometimes issues arise and you may not be able to obtain a policy on the property or the premiums may be too high, so make sure to get premium estimates early in the due diligence process.
Tax and Ownership Issues. There are a myriad of tax issues that need to be reviewed with a professional before your purchase. Are you buying with a group of partners, raising capital, know what legal entity to form? You need to set up the entity structure and tax items before you close escrow so all investors and partners are satisfied with the agreement.
You never go wrong by seeking wise counsel from your real estate broker, lawyer, C.P.A., escrow agent, title officer and others when making your purchase. Educating yourself well before the process begins and allowing sufficient time to do a good job in preparing your homework always pays off.
Until next time,