Tuesday, November 5, 2013

Having Professional Research and Due Diligence Done Before Real Estate Investing

Having professional research done before real estate investing is probably the most important stage to ensure you are purchasing a profitable property. Yet, many real estate investors underestimate or skip the due diligence process, only to suffer the consequences later down the road. From analyzing the actual property and its neighborhood and speaking to professionals or experts in the area to visiting the neighborhood and making in-person reviews of the property, professional research will help you avoid real estate investment mistakes. Indeed, when it comes to research in real estate investment, scrutinizing every facet of the potential property as well as your own investment goals so you get the highest possible return on investment.

Step 1: An Initial Review of the Property and Neighbourhood

Before you close a real estate deal, you obviously want some information about the property and the neighbourhood. Regardless of whether you are purchasing residential or commercial property, professional research at this stage provides a broad scope image of the potential property. You may have already found some properties of interest, and you want to learn the demographics and economic conditions of the city and neighbourhood. Much of the early due diligence in real estate investment is conducted through phone calls and online research and it will help you quickly weed out properties that don't fit your needs.

Step 2: Get Acquainted with Local Professionals/Experts

The second stage of due diligence that should be done before investing involves getting a more personal look at the neighbourhood and sub-markets where the property is located. Again, much of this research can be conducted from the home or office. This stage of due diligence provides an excellent opportunity to learn more details about the sub-markets and individuals where the property is located. This stage of due diligence should involve a detailed list of questions that will help give you a clearer image of your investment property.

Some questions you might want to ask include:

  • Does the area show signs of economic improvement?

  • Are the utilities and service you require already set up?

  • Does the neighbourhood offer the appropriate amenities (grocery shopping, schools, restaurants etc)?

  • What is the typical rent for the area?

  • Are there many vacant properties?

The second step of professional research and due diligence should provide more details of the property and location further allowing you to narrow your list of potential investment properties.

Step 3: Visit and Consultation

If you or a research professional have conducted the first 2 stages of due diligence and you still find the property favourable, it's time to tour the property and the surrounding location. This stage allows you to validate the research you or your experts have already done. Stage 3 of due diligence provides a more personal experience not just of the property, but of the sub-markets and surrounding amenities to ensure that you meet your investment needs. Speak personally to professionals and experts who live and work in the area for even more information about your investment.

Step 4: Validate your Investment

The final step of having professional research and due diligence done before investing in real estate involves careful analysis of the property and grounds. You want to know what kinds of deferred maintenance will need to be done, while also validating the financial aspects of the investment. This includes evaluating potential cash flow or rental income, the costs of maintenance, purchase price with regards to market value, the taxes involved, verifying the age and condition of the property (e.g. the age/condition of the roof, electrical, plumbing, and other cosmetic factors), and other legal details.

While this article provides only a brief overview the professional research and due diligence that should be done before real estate investment, it hopefully elucidates the necessity for due diligence as well as the exhaustive nature of the process. For many novice real estate investors, hiring a real estate expert to conduct this research and due diligence can help to ensure that nothing is overlooked so your investment is a profitable one.

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