7 Things to Do Before Buying an Investment Property

Structuring a purchase offer for an investment property is quite a bit different than structuring a purchase offer for a house you’re going to live in. 

Remember: Purchasing real estate for investment purposes is a business transaction, not an emotional transaction. 

Because it’s an investment and not your dream home, it needs to be very pragmatic and very analytical. You need to take a cold, calculating attitude toward this purchase. 

This property is very different than your first house where you’re going to raise your family or that retirement home on the beach that you want to make perfect for how you want to live out your Golden Years. Therefore, we need to look at this with a cold, clear eye and remember this is business.

There are many steps to consider before you’re prepared to make your best offer, all of which will help you determine whether it’s a sound investment in the first place. After all, while you might be willing to pay more for your dream home, you should always think with your business brain and focus on what will yield the best long-term profit – and where your money is best spent. 

Here are seven factors I encourage our owner-investors to consider before making an offer on a property. Because sometimes, a good deal might not be a good deal after you take a closer look and weigh the pros and cons. 

1. Don’t Underestimate the Costs

The most common mistake we see people make when they purchase investment properties is underestimating the cost of putting a property back into service. 

A couple of years ago, during the pandemic, there was a rash of people from all over the country – but the majority seemed to come from California – who would source properties online. 

Maybe this was because they had too much time on their hands during the pandemic, but they would find these properties in places like Dayton, Ohio where the houses were extremely cheap. 

The thought process of these buyers was, “How could I buy that and not make money?”

So, they would find local agents who were happy to write contracts on these properties and pocket a 3% commission. These agents were comfortable writing these contracts and closing on properties remotely all day long. After all, they were getting paid.

I am not faulting the agents for this. If you’ve got somebody in California who appears to have unlimited funds and is telling you they plan to buy up everything under say $50,000 in the area, a motivated agent is going to do exactly what they are asked to do.

The buyers of course expected to close on the property, hire a local property manager, and get the property rented in just a few days. This did not happen because the reason for the “too good to be true” price was that the property had been vacant for months – if not years.

We get calls all the time from new buyers asking us to lease and manage their new property. When we go out and inspect the property as part of our due diligence, we often find the property boarded up.

FYI – The reality of what we find is not always reflected in the MLS description.

We have to report back to the new buyer that we can’t turn on the gas without a gas line inspection, that the water bill is thousands of dollars in arrears because it hasn’t been paid for years, the electric meter has been stolen, or that there are code enforcement orders on the property. 

All buyers, but especially out-of-state buyers buying properties sight unseen, have to be serious about their due diligence. They have to educate themselves. Be serious. Do the work. If you can afford to buy investment property you can afford to buy a plane ticket and take a fact-finding trip.

Do your homework. If something seems too good to be true, it probably is.

2. Get an Honest Real Estate Agent

You want an agent who’s going to be honest with you, especially if you’re buying sight unseen.

If you are going to invest in real estate – especially if you don’t live in the area – you need a partner who understands that neighborhood. This person should be able to tell you exactly what houses are truly renting for in that neighborhood and what houses are transacting for in that neighborhood. 

Oftentimes, the reality is different than what you’re going to find on Zillow or Trulia. So, you’ve got to know what is really happening. You’ve got to know what the rents are, exactly what needs to be done to the property to put it back in service, and how much everything is going to cost.

An honest real estate agent – again, someone who is invested in you and your continued success – is going to want the best for you. When they’re comfortable and confident in the sale, operating from a place where they know you’re getting a good deal, and able to give you all the vital information you need, you’ve got the best advantage heading in to make an offer. 

A local agent with expertise in that area is going to know the ins and outs better than agents who are just motivated to sell anything. 

3. Spring for a Home Inspection

This is especially important if you’re trying to purchase a property remotely, but I encourage everyone to think long and hard about home inspections. While some might hesitate, my advice is to go ahead and pay the $500 to get an inspection done. 

In Ohio, property inspectors have to be licensed by the state, so they have a set of guidelines that they have to follow, a set of rules, canon of ethics that they have to follow.

Go ahead and spring for the 500 bucks. Don’t rely on your agent, don’t rely on a contractor, but go ahead and have a licensed property inspector go through the property. In my opinion, you should pay the money and let them show you every little horrible thing that’s wrong. It’s better to know than not to know. 

The inspections that you get may result in 150 items on that inspector’s list. The problem is that some of those items are really important and others are less so. 

For example, one item might be a missing light switch cover that you can easily replace. Another more crucial item would be a five-foot-long crack in the foundation on the east-southwest side of the building. That’s going to be a bigger issue than a simple missing light switch cover. 

Your agent should be able to help you go through the inspection list, figure out what matters most, what everything is going to cost, what issues are more cosmetic, and what repairs make the most sense financially.

You should not be going through the inspection process because you expect to buy a perfect property, or because you expect the seller to fix anything. 

Many times, you’re buying a property from another investor. In this case, your goal should be to make the sale as easy and drama-free as you possibly can for the seller. That’s what you would hope for if you were on the other side of the transaction, isn’t it?

Remember, you can always walk away from the deal if the numbers don’t add up after your inspection is complete.

At the end of the day, getting a property inspection done is so you know what you’re buying – and you know what it’s going to cost to fix it. Now, if you offer $100,000 for the property contingent on an inspection, with an estimated after-repair value of $130,000, and the inspection comes back with an estimated $30,000 in repairs that need to be done to put it back in service, then it may be time to renegotiate. 

4. Be Prepared to Renegotiate the Price

Depending on what you discover from the inspection, you may want to ask the seller to make repairs or, you may choose to renegotiate the price as is your right. In extreme instances, you may elect to do both but you will likely not get far in today’s market.

Do not, however, expect the seller to be receptive to your counteroffer. Their price may be firm and you may not want to risk killing the deal with an insulting proposal when they have multiple offers to choose from. Again, the seller likely won’t want to do anything – and you have to prepare yourself for that possibility. 

Whatever you do, don’t argue about the inspection. The inspection is part of your due diligence – not the seller’s. Re-negotiating post-inspection should not be seen as an opportunity to get something over on somebody. You want this to be a win-win. You want to buy a property so it makes money for you and, ideally, you want to be able to give the seller what they deserve.

If you leave the deal on good terms, maybe you’ll do it again someday. 

5. Get to Know the Property

An inspection gives you information, the seller may provide information, and your real estate agent should absolutely help you gather information about the property as well. 

You want to know everything about this property from every angle before you purchase it. Why? You don’t want to make a mistake. When you have all the information, from what needs to be fixed, to what repairs and maintenance will cost, to information about the neighborhood and potential tenants and rent prices, you’ve got all your bases covered. 

As an investor, you can have the peace of mind that you’ve done your due diligence – and your investment will likely pay off. You can’t cut corners. You can’t skip out on something vital like a home inspection just because it costs money upfront; it will save you money on the back end, in most cases. 

I want you to buy as-is – but I want you to buy informed. You may have a property inspector come through, and maybe you also have a contractor come through after to be safe, but again, you’re buying as-is. Stay informed, hang onto realism and pragmatism, keep the emotions out of your deal, and you’ll be on the right track to acquiring a property that’s a great fit for your investing goals. 

I would also say that if you are purchasing a property with somebody (another realtor who is not your property manager or on your property manager’s team), at minimum, you should ask your property manager to walk through the property with whatever information you have before you buy it. 

Get a second opinion as to what the true condition of that property is from your property manager. Even if you’re working with two different firms – or two different people – you want to make sure everyone is on the same page. 

Your property manager is looking for problems that are going to cause him to disappoint you, or cause disappointment down the road – and they’re not going to want to do that. So, there’s some healthy pushback there. Or, maybe your property manager is going to say, “Man, this is better than anything we’ve seen in a long time. Move forward. I’m excited to help you with this property.” 

Regardless, your property manager’s perspective and motivation are going to be very different from your realtor’s perspective because they have different motivations. Even so, get everybody’s perspective before making a deal. 

Again, I want you to make this transaction as simple, painless, and quick as possible for the seller. So, once you’re armed with all the necessary information and confident in your choice, make the offer and finish the process. 

6. Do a Comparative Market Analysis

Sometimes, as buyers or buyer’s agents, we have to educate a seller. 

When you’re going out to make a property an investment property, you should use a comparative market analysis to value said property based on what other properties in a similar condition have sold for in the neighborhood. 

Another analysis – a financial analysis using a local cap rate – can come up with a very different number. 

A property is typically based on sales of other houses in the neighborhood. Let’s say the one you’re looking at is estimated at around $200,000. But, when you go through and figure out that you need to make 7% on this property in year one, based on local rents, you might discover that you can’t pay $200,000 for that house. That’s okay. Not every neighborhood lends itself to being a rental property neighborhood.

In some situations, it may be beneficial to pay extra for the house anyway because you want the appreciation. However, you must remember that the financial analysis using the local cap rate and the local rent as defining factors can often yield a lower number for a purchase price than what a comparative market analysis will. 

Again, this comes back down to math and some basic investment skills knowledge. That’s why I strongly encourage investors to work with a realtor who understands those distinctions and can not only coach you through it but coach the agent on the other side through it. Sometimes, we have to help them work with their seller, too. 

7. Verify Zoning Laws and Opportunities for Short-Term Rentals

When structuring a purchase offer, another thing you want to keep is verifying the zoning and the land use. You don’t want to get into a situation where somebody happens to be renting a property, but the zoning doesn’t lend itself to rentals. 

There are some areas where I love mixed-use properties. I love the idea that I can do a little bit of commercial, but I’m always going to be okay because I have some residential rentals in that space, too. The office that we have in Springfield, Ohio is a mixed-use property, and it’s glorious. We have two rental units and we have the office space, so we get the best of all worlds there. 

Check your zoning, and check your land use because if something’s being rented out today, it doesn’t mean that that’s truly what the local land use is for that property. 

Another area to consider is a big deal these days. If you’re buying something, say on the Space Coast of Florida – where we work – and you want to be able to rent that property out via Airbnb or Vrbo as a short-term rental, make sure it’s allowed in the neighborhood. 

Don’t simply accept or believe that any property that you look at will be able to be a short-term rental. There are many neighborhoods and homeowner associations out there these days that are doing everything they can to restrict short-term rentals. 

If your numbers depend on short-term rentals – or what you want to do with that property depends on short-term rentals – double check to verify whether or not you can operate it as such in that neighborhood or community. Your title company can help, and your agent certainly should be able to help check the deed restrictions, check the HOA, and so forth. 

Don’t get yourself into a situation where you wake up one morning and discover that you’re not allowed to operate your Airbnb – or your hopes of running a property as one – are dashed due to zoning laws. 

From a personal perspective, we bought a house in Florida that is about 10 minutes from the beach, so it’s inland. We can go down there between two and four times a year for three to four weeks at a time; we rent that property out via Airbnb when we’re not there. It’s been wonderful because, since we’ve done that, it’s paid for itself – and our visits have been free. 

When we bought the property, we checked the bylaws, the restrictions, and so forth, and there was no restriction whatsoever on any sort of rental. However, a year or so after we started renting the property out, we got a letter from the Homeowner Association saying that we had to stop. They decided to change the rules and didn’t want us to do what we were doing. 

To make a long story short, we had a good attorney. We reminded them that we were grandfathered in; there’s some conflicting Florida state law and so forth. We’re okay on that property, but the second house I bought in that neighborhood will never be able to operate as a short-term rental. That’s going to be a traditional rental, and that’s fine. 

Whatever you do, be careful, do your homework, and ensure you’ve got your ducks in a row if you’re looking to buy something to be a short-term rental versus a traditionally rented investment property. 

Final Thoughts

The best investors know that buying a property is more than just getting a good deal. The goal is to buy a property that wins and wins and wins. We want that mailbox money for the long haul. We want a steady, reliable income from these investments – and we want our efforts to pay off. Doing your due diligence, springing for inspections, and staying on top of your ongoing education about the real estate industry takes time, but it’s worth doing. 

After all, you only get one chance to do it right. Why risk making costly mistakes when you could give yourself peace of mind – and a solid investment – instead?