1. Know the demographics for the area. Is the area in general decline or it is marked for growth? County offices provide information regarding permits that developers have pulled indicating market expansion for both commercial and residential projects. New permits indicate growth.
2. Other investors can present a pro-forma indicating annual income and expenses. While this may be close to accurate it’s really only a generalization. You need real numbers and rely on your own estimates as well as reviewing the seller’s detailed reports. If the property is professionally managed, you can obtain the property’s maintenance history by request. Monthly rents are relatively easy to verify and your bank can provide monthly financing costs, taxes and insurance payments.
3. Have your attorney or title insurance company order a preliminary title report. This will indicate any current liens that may not have been satisfied and will need to be before the property can be transferred. Existing mortgages will have to be settled but there may also be property taxes, delinquent income taxes, mechanic’s liens and past due child support payments.
4. In addition to liens on title, look for any easements. Easements allow access to your property by third parties. Most easements include the right of the utility company to access your property to make repairs or maintenance issues but can also give the right of adjoining neighbors to traverse your property in order to get to theirs.
5. Review past utility costs such as electrical, water and sewer. If you’re paying these charges and not your tenant, this can have significant impact on cash flow.
6. If the property is a foreclosure, you may not be able to physically inspect the unit from the inside until after you’ve bought it at an auction. This isn’t advisable unless you’re experienced real estate investor who regularly buys and sells real estate at foreclosure auctions.
7. After you’ve received an accepted offer, immediately order a property inspection. The seller is required to provide a Seller’s Disclosure Statement identifying any known issues with the property such as defective equipment, appliances or leaky pipes. The property inspection will identify any and all matters that need attention. Don’t do this yourself unless you’re a licensed inspector.
8. Review the potential purchase with your team getting input for all major facets of the transaction. Your real estate agent will confirm valuation, your attorney or title agent can provide preliminary legal work and opinion. Your lender can prepare a spreadsheet regarding closing costs, rates and monthly payments.
9. The appraisal should arrive within 5-10 days after your lender has placed the appraisal order. Pay close attention to the appraiser’s notes regarding the market. Are property values rising? Declining? Also look for any “deferred maintenance” found by the appraiser. Deferred maintenance on an appraisal means something needs to be fixed and will most often delay a closing as well as not being able to obtain financing.
10. Any potential major issues require closer inspection. For example, if the property shows signs of potential foundation problems, a property inspector isn’t enough. You need to find a structural engineer who will “sight” the house to find out if the home has settled and needs repair.

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Flips

1. Is the property in stable neighborhood? You might find a prospective purchase that is so cheap it’s too hard to pass up. But maybe it’s so cheap because nobody wants to live in the area. Low prices don’t always mean you’ve found a good deal. It needs to be in an area with current or imminent demand.
2. Are your funds ready to go? When you flip, you don’t have time to shop around for financing. The longer you hold onto the property the more it will cost you.
3. Get the absolute lowest price you can and compare that with what your agent says it will sell for once in a marketable condition and how many days it will take to sell.
4. Walk through the property with your contractor to identify what needs fixing then determine how much it will cost. Order an independent property inspection to look for potential issues you may not notice at your first review.
5. Will you have a ready buyer? Don’t wait until the property is completed before looking for buyers. You should have a good idea who will buy the property with names in your database.

Holds

6. As with a flip, make sure the property is in an area where rental demand is high, your financing is in place and you’ve inspected the unit thoroughly.
7. Determine market rents for the area then compare those with what you can expect to get. You can research basic rental info online but enlist the services of your agent for more detailed research. If you’re still not sure, contact your property appraiser to perform a market rent analysis.
8. What are your finance and maintenance costs? Your finance costs include your principal and interest as well as a monthly amount for property taxes and insurance. Don’t discount maintenance costs as well and set aside at least 10 percent of monthly rent for maintenance. Get copies of recent repair and maintenance expenses from the seller. The difference between your gross rental income and holding costs is your monthly cash flow. If it’s a negative number, it’s best to walk. Look the property up on our Investment Calculator for some quick numbers.
9. Is the property in good shape? If not, how much will it cost to make necessary repairs? A property with multiple maintenance issues can indicate further problems down the road. A properly cared for unit will have fewer issues in the future.
10. Will you manage the property or hire a property manager? If you need a property manager, that will add to your holding costs, reducing cash flow. After all costs are considered and your income exceeds that amount, you’ve likely found your next investment.