After more than a decade helping thousands of investors buy out-of-state rental properties, I have seen many people get burned with financial penalties they weren’t expecting because they failed to perform effective due diligence. Due diligence is especially important when you’re investing in properties outside your state as I discussed in detail in a two-part podcast on how to do due diligence on rental properties. This article shares several important items to check to reduce the chance of unexpected expenses that will cut into your return on investment.
Check With the Local County Assessor
The county assessor can tell you the tax values of properties you’re considering and surrounding properties. Bear in mind, though, that this isn’t going to be an exact figure. Some communities have acts that limit property assessments from going up by more than a few percentage points a year, and often taxes aren’t re-assessed on a property unless it sells. But this is still a good way to get a feel for the value of the neighborhood.
Double Check the Pro Forma Numbers
Always verify the numbers you’re being told with regard to insurance, rental values, and taxes. It’s common, whether intentional or not, for rental values to be overstated while insurance and tax numbers are understated.
It’s especially key to check the insurance numbers if the property is in a disaster-prone area. If the area is prone to floods or hurricanes, 1,000 feet closer or farther from the coastline could make a huge difference. You also want to verify early on whether flood insurance is a requirement or not. And as for tax assessment numbers, make sure you’re looking at an estimate done since the property was finished and not at an assessment for an originally vacant lot.
Ask Renovators About the Scope of Their Work
You need to know the scope of the work done by the renovators, and for that to make sense, you also need to know where the property started out. In some cases, the property will have been a complete disaster, and the scope of the work was enormous. In other cases, it will have just taken a few cosmetic adjustments to get it ready to sell. To know if the price you’re looking at is fair, you need a detailed description of everything that was done.
There’s no standardization to this system, but don’t be satisfied with a simple answer like “renovated house,” because knowing the scope is about more than just evaluating the price: it also protects you if there’s a maintenance or repair problem a couple of months down the line that was clearly included in the scope of the work.
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Use Internet Sites Wisely
Zillow has its uses and can give you more information and show you properties that aren’t listed on the MLS, but stay aware of the limitations. Zillow can have a lot of trash listings. These may be fake listings, old listings that were never taken down, or misleading or even completely inaccurate pictures. Use Zillow, but be careful, use your common sense and reasoning skills, and keep a healthy suspicion.
While being careful, however, use Zillow (and similar sites, like Craigslist) to your advantage. You can get a good idea of what’s selling in the neighborhood with these sites and compared what was available for out-of-state investors a few years ago; you have a lot more information to work with these days.
Zillow can also help you get a handle on whether the estimated rental income on a property is accurate. Use Zillow, along with the MLS and other online sources, to look just at for-rent properties in the area. These sites have their problems, but they allow you to get a good general idea of the average rental income per square foot in the area so you can properly estimate the rental income you can expect.
Take Advantage of Google
Google Street View is a great untapped resource when it comes to doing due diligence on rental properties. Google Earth, Google Satellite, and Google Street View all allow you to get a feel for the neighborhood in a way that even the best home inspection can’t. Your home inspector can only tell you about the condition of the property you’re looking to buy. The inspector won’t be telling you if the property next door is falling apart or has a yard full of vehicles up on blocks.
Use Google Street View to go up and down the street. Use Google Earth to take a look at the property from above to see what’s going on around it. Are there railroad tracks or a freeway nearby that could cause noise issues? Is there an unwanted site nearby, like an industrial plant, landfill, or prison? It only takes a few minutes to make this assessment, and it’s perfectly free and easy to do.
Check Prices of Nearby Homes
As a smart investor, you’re mainly looking at renovated properties. Always bear in mind that your property might appear to be the most expensive one on the block, but if it’s the only one with a new paint job, a new roof, and newly renovated plumbing, there’s a reason for that. Nearby properties may all be a bit cheaper, but you still need to be sure you’re comparing with properties in the same general ballpark as you evaluate your deal.
Look for Conflicts of Interest
Always talk to multiple property managers in an area where you’re considering an investment property to get a feel for the marketplace. Ask them what rent they think they could get for your property, ask about fees, and compare notes. But always be aware of potential conflicts of interest.
Many property managers also own real estate companies or work as realtors. Their main motivation could be talking you out of your current deal to sell you another one. Be aware of these conflicts so you can sort out of the truth from the fiction and get the information you want while staying alert to your own best interests.
Going too fast when you make investment decisions can be destructive, yet you can’t be so afraid of making a decision that you never make one or allow a key opportunity to pass you by. You can stay in the sweet spot–not too fast and not too slow–when you know how to perform your due diligence and take care of business while not getting burned.
Jason Hartman has helped thousands of investors acquire rental properties through his Platinum Properties Investor Network, which helps investors navigate through the process of out of state nationwide property investment. If you are interested in learning more about investing in a rental property, you can set up a free consultation with a JasonHartman.com investment counselor who can answer all your questions and help you find properties that may be a good fit for your investment goals. You can also browse currently available properties nationwide with detailed proformas at www.JasonHartman.com/Properties.