OUT OF SIGHT? OUT OF MIND

Out of Pocket!Offsite Due Diligence Checklist for Rental Property Investors

The 20 Most Overlooked, Costly, and Irreparable Elements of Investment Property Due Diligence

While property inspection checklists are fairly commonplace, few go beyond the structure or borders of the property. Oddly enough, the physical property is the one thing a new owner can do most about changing. What about the host of crucial aspects of a rental property evaluation that originate off the premises? Most of these cant be fixed by a new owner. Thus an offsite due diligence checklist is arguably more important than your property inspection, since you may be stuck with irreparable items on this list for much longer with little ability to mitigate their impact on your investment.

Why Offsite Due Diligence?

1 Crime

One of the most obvious but also most overlooked is crime level. Examine not just census tract of subject but surrounding tracts and area as a whole. Distinguish between property and violent crime. Note that crime statistics are readily available to consumers now, so they can and will research this data even if you dont.

2 Schools

Key when your property serves the demographic that includes school-age children. (e.g., if you have a 2 bed / 1 bath this may not be a factor). Good schools promote longer tenancies, as tenants dont like to change schools, particularly if within walking distance. Schools are also correlated to economic development, stability, and property appreciation.

3 Zoning and Housing Mix

Examine not just the site and neighboring parcels, but the entire census tract. Diversity of zoning is a red flag to pull zoning records. Greater zoning and housing diversity is not your friend: homogeneity is best. Having a nice 3/2 in an area of townhouses and apartments wont bode well, or vice versa. Presence or proximity of commercial to your residential unit is also unfavorable.

4 Tenant Demographics

Understand the density and demographics of tenants in the neighborhood and focus on the attractiveness to your prospective tenants of the demographic in the area. What type of tenant you plan to seek for your property? How will you market to them? Examining demographics can also lead to more effective marketing strategies.

5 Tenant Mobility

How frequently do tenants in this area move? Examine the alignment between mobility and the demographic (e.g., students and/or military). Mobility reflects stability of neighborhood and will impact your bottom line.

6 Competition

How many other units are available for rent in the neighborhood?Review comparables (in person or online): how does subject compare in desirability to competition? Do you have the best or worst presentation this will dramatically affect vacancy duration and should be part of your rent pricing strategy.

7 Local Regulatory Matters

Is the state, county, or city landlord or tenant friendly? What is the eviction process, timing and cost? What are the recoverable costs of eviction? Local regulations, licensing of rentals? Rent control? Security deposits: amount, interest bearing, segregated, mandatory timing of refunds? All of these things impact the value and profitability of a rental unit.

8 Appreciation Rates

Historic appreciation rate is generally an unreliable metric. Understand the 1, 5, 10-year appreciation, but look more for deviation from the norm for area and timeframe. Also be cognizant of where things are in the real local estate cycle.

9Property Management Availability/Matching

Once you are comfortable with the availability of good property managers, examine the alignment of tenant base and management style. Consider the philosophy between manager and owner (e.g. more inspections lowers tenancy duration), knowledge and experience of a manager makes him/her less swayed by owners input. Certain management tactics are required at lower economic tier, less so at higher tiers.

10 Property Taxes

In addition to learning the tax and how it may change upon sale, seek an understanding of the components thereof: county, city, schools, community development, etc. Know which are ad-valorem vs. non ad-valorem. Also what are the limitations of annual increases? What is the value challenge procedure and history (how aggressively has the jurisdiction increased values?).

11 HOA Regulations

More and more, HOAs have enacted anti-rental provisions. Even without that specific prohibition, consider how restrictions on age, children, cars, fences, home businesses, etc. can impact rentability. Consider screening local court cases to determine how litigious a given HOA might be?

12 Insurability

Insurance is often postponed until just before closing, but costs or even the ability to insure should be examined early on. Characteristics like physical structure, age, elevation, wind resistance, flood Plains/Maps, bodies of water, etc. all impact both value and profitability. Property loss history, which may require permission from current owner, is also an important but often ignored data point.

13 Distance to Economic Center

Is there a single common economic center, or multiple ones? How long are typical commute times for workers in this neighborhood. This single metric has one of the biggest impacts on total cost of tenancy, a little-understood concept by many investors and landlords.

14 Access and Boundary Issues

Sometimes these are obvious, but many times they are not. These include access rights, shared driveways, fences, even the exact location of lot lines. A survey referenced in your title policy is a good, inexpensive way to avoid problems in this area.

15 Condominiums

Condos bring their own unique set of issues, in particular their bylaws and covenants, which may be decades old and not reflect current needs. Secondly, maintenance issues often surprise new owners. Strive to find out what you own? What are you responsible for? What fees are passed on to you? What is the financial state of the association? Are sufficient reserves in place to cover any upcoming significant capital improvement projects such as roofing, roads, HVAC, etc.?

16 Utilities

Another data sector often creating post-closing surprises is utilities. Such information as availability of utilities and who provides them, sewer vs. septic, city water vs. well, cable vs. fiber, etc. When researching utilities, consider reputation/competition, options, connections, costs, turn-on or reconnect fees, procedures (inspections?).

17 Public Transportation

In lower and middle income areas, bus stops/routes, train stations, even distance to and/or ease of access to freeways can impact desirability and thus rents. Separately but related, airport access can also be a consideration for some.

18 Weather/Natural Hazards

Especially for out of area investors, understanding local weather threats should be part of the due diligence review. Events like tornados, sinkholes, earthquakes, and hail can be a normal occurrence but create problems for unsuspecting or unfamiliar owners (e.g., freezing of pipes, heating fuel costs, etc.).

19 Distance to Amenities

Often this is most critical to tenants, but overlooked in the transaction by the investor. Distance/ease of access to shopping (principally grocery), retail centers (clothing, gifts, etc.) and recreational areas should be evaluated.

20 Noise

Have you considered the site at all times of the day and night? What about distance to airports, train tracks, schools, fire stations, freeways, etc.? These can affect daily noise levels, while sporting/concert venues, other infrequent noise-generating activities could be of lesser concern.

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