Investors

Buying a residential income property can be a very rewarding experience but it is fraught with many pitfalls. One invaluable piece of advice for both the experienced and inexperienced a like: before you buy do your due diligence. This is easier said than done. Here is a short list to initiate doing your due diligence on an income property:

1. Is the property occupancy use legal? Example a legal two unit property currently used as a three unit; typically a basement or attic apartment. This issue is not found with just residential one to four unit properties. It could be a legal six unit chopped up into twelve small apartments with twelve kitchens. The legal use needs to be clear and your offer to purchase based only on the legal use of the property. 
2. Does the property currently have a legal occupancy permit?
3. If the property has been used as a rental in the past, what is the rent history? In another section I will discuss tenants to be delivered with the property. Histories of rents are: the unit(s) typical occupancy level, terms (TAW, section 8 or market lease) and stability (vacancy rate).  
4. Historic operating expenses direct and indirect.
5. Capital improvements made past five years – these are replacement of systems, updating electrical service, replacement of major items: roof, windows, siding etc.
6. Are there any open and or closed building permits? Always go to the building department and look through the entire property file.
7. Environmental issues: two of the common issues in MA are lead paint and asbestos.   Asbestos insulation on heating systems or around pipes in the basement is very common and can be remediated. Lead paint can also be remediated for a lead free or lead certified apartments. Knowing about these two common issues and the cost of curing should be part of your due diligence.
8. Research the neighborhood; get crime reports on the area. Visit the neighborhood observe different times during the weekdays, weekends and nights to get a feel of activity as well as local behavior. 
9. Financing the property. Before you make an offer, know the type of financing the property qualifies and if you have the ability be approved. The reason this is so important is when you are crystal clear on the mortgage debt and repayment cost, only then can you effectively calculate cash flow and return on investment.
10. Exit strategy. This is part of your due diligence because you need to know the worst case scenario on buying the property. Basically you may have a long term hold strategy but it would be good to know if the property was converted to condominiums you could exit the property at a profit. Try to look at the property with its highest and best use in mind. If the current use is highest and best, then you know to sell the property, it must appreciate in value to get out without a loss. If there is a possibility of converting it to a better use, then you have an ideal exit strategy you can employ when you need to sell.

These are some ideas of how you can approach and do your due diligence prior to buying a residential income property.  Look to Team Erickson to assist you in buying and financing your next investment property and we will perform this due diligence with your best interest in mind.