The Complete Guide to Real Estate Investment Due Diligence
Learn the essential steps to thoroughly evaluate a property before making an investment commitment.
Thorough due diligence is critical to avoiding costly mistakes in real estate investing. Follow this comprehensive checklist:
Financial Analysis: - Verify actual rent roll and lease terms - Review 2-3 years of operating expenses - Analyze property tax history and potential increases - Calculate actual NOI, cap rate, cash-on-cash return, DSCR - Stress test for higher vacancy, lower rents, increased expenses
Physical Inspection: - Professional property inspection - Roof condition and remaining life - HVAC, plumbing, electrical systems - Foundation and structural integrity - Environmental concerns (mold, asbestos, lead paint) - Deferred maintenance items
Legal Review: - Title search and title insurance - Zoning compliance and restrictions - Existing violations or code issues - Review all leases and contracts - HOA documents (if applicable) - Survey and boundary verification
Market Research: - Comparable property analysis - Neighborhood trends and demographics - Employment and economic indicators - New development or competition - School ratings (if relevant) - Crime statistics
Tenant Evaluation: - Tenant screening and payment history - Lease terms and expiration dates - Security deposits held - Tenant complaints or issues - Turnover history
Red flags to watch for: - Seller unwilling to provide documentation - Recent unusual transactions or transfers - Excessive deferred maintenance - Declining neighborhood indicators - Unrealistic pro forma projections
Never skip due diligence to speed up a transaction. The time and cost invested in thorough investigation are minimal compared to the risk of a bad investment.