Before You Buy: How to Do Due Diligence on Investment Properties
Jun 14
3 min read
0
7
0
One of the most overlooked yet critical steps in real estate investing is due diligence. Whether you're buying a turnkey rental or a distressed fix-and-hold property, due diligence helps protect your capital, identify hidden issues, and determine if the deal aligns with your investment goals. In this comprehensive guide, we’ll walk through the entire process—from property analysis to legal and financial reviews—with links to expert resources you can actually use.
1. What Is Due Diligence in Real Estate?
Due diligence refers to the thorough investigation and analysis an investor conducts before purchasing a property. This process ensures you know exactly what you're buying—physically, legally, and financially.
Expert Insight: “Due diligence is where deals are made or broken. Skipping it can turn a great-looking property into an expensive mistake.”— Brandon Turner, real estate investor and author
2. Initial Property Analysis
Before diving deep, conduct a high-level screening:
Evaluate the Listing
Price vs. comps in the area
Square footage and layout
Year built and major upgrades
Analyze Neighborhood and Zip Code
Use tools like:
Look at crime rates, school ratings, and median income. Make sure the area aligns with your investment strategy (e.g., cash flow vs. appreciation).
Example: You’re looking at a $150,000 duplex in 73108 (Oklahoma City). Rent comps show $1,200/unit, but crime data shows high volatility—do the numbers still work if vacancies rise?
3. Financial Due Diligence
Understanding the numbers makes or breaks a deal.
Income and Expenses Review
Ask for:
Rent rolls
Lease agreements
Property tax history
Operating expenses (utilities, insurance, management, etc.)
Analyze Financial Metrics
Use tools like:
Check for Red Flags
Underpriced rent (may signal tenant issues or market misalignment)
Incomplete financials
High turnover or short leases
Pro Tip: According to Roofstock, properties with stable long-term tenants often have lower cap rates but offer stronger long-term value.
4. Physical Inspection and Rehab Assessment
Schedule a licensed inspector. You want to uncover major systems issues before closing.
Key Areas to Inspect:
Roof (age, wear, leaks)
Foundation and structural integrity
Plumbing and electrical
HVAC system
Mold, pests, and water damage
Code compliance
Example Rehab Estimates (According to HomeAdvisor):
Roof replacement: $6,000–$11,000
HVAC replacement: $5,000–$12,000
Full interior paint: $2–$6 per square foot
Expert Tip: “Always get multiple contractor quotes—even if the inspection looks clean. Surprises in rehab costs are the #1 budget killer.”— J. Scott, author of "The Book on Estimating Rehab Costs"
5. Legal and Title Review
Don’t skip the legal stuff—it protects your ownership.
Hire a Title Company or Real Estate Attorney
They’ll:
Pull a title report (to check for liens or unpaid taxes)
Ensure the seller has the right to sell
Draft the purchase agreement
Handle the closing documents
Use a reputable title company or attorney with experience in investment deals.
6. Zoning, Permits, and Land Use
Your property may seem ideal, but can you legally use it the way you intend?
Check With the City Planning Department
Zoning restrictions (e.g., single-family vs. multifamily use)
Short-term rental legality (especially for Airbnb)
Unpermitted additions or conversions
Use municipal planning portals or call directly. If you're investing out-of-state, ask your agent to assist.
7. HOA and Neighborhood Rules
If the property is in an HOA, review:
Rules and restrictions
Financial reserves
HOA meeting minutes
Litigation history
Some HOAs restrict renting, which can derail your strategy.
Helpful Read: HOA Rules and Regulations: What Homeowners Should Know
8. Environmental and Natural Hazards
Use FEMA and county resources to check:
Flood zones
Earthquake risks
Lead paint and radon exposure (common in homes built pre-1978)
9. Exit Strategy Considerations
Ask yourself:
What’s your backup plan if the market shifts?
Can the property be resold easily?
Is there enough margin for resale after rehab?
Always build in a buffer. Even the best-looking deals can turn sideways.
10. Final Walkthrough and Decision
Before closing:
Do a final walkthrough to confirm condition
Ensure all contingencies are met
Double-check financing details
If anything major has changed since your offer, renegotiate—or walk away.
Protect Your Investment by Doing the Homework
Conducting due diligence is a time-consuming but essential part of investing in real estate. The smartest investors don’t rely on instincts alone—they verify everything. With the right tools, experts, and attention to detail, you can uncover problems before they become costly mistakes—and seize opportunities others might miss.
If you want to maximize your financial opportunities, now is the time to invest wisely. Partner with us to navigate the changing market and achieve your financial goals with expert guidance and tailored investment solutions. Contact us today to get started.
