A Common Misconception About Funding

Just because a Lender has agreed to fund your “buy and hold” deal does not necessarily mean it is a good deal. Do your due diligence!

Lenders will make sure title is in order, that you have sufficient funds to pay for the property, and that the house or multi-family property will meet certain minimum standards for safety and habitability. If it is a rental property the Lender will make sure your numbers are accurate concerning cashflow.

That leaves a lot of questions for you as a prospective owner. A lot of your due diligence can be done by phone and computer. Check the area police website and pull up crime statistics. Is the property in a crime-infested area? Is it an area where there are young families, or is this an area that families avoid if at all possible? If the area is full of crime and this is reducing the number of stable, family-oriented working people to rent from you then you might want to think twice about buying this property.

Ask the current owner or their agent for the last 12 months of financial statements and the current plus the last two months of rent roll if it is a multi-family property. These documents should verify what the current net operating income is, give a good breakdown of expenses, and verify the current occupants and their rents. You should be able to determine from the rent rolls whether occupancy is going down, staying consistent, or improving. You should see whether tenants are paying rents on time, are carrying balances, or have gotten some concessions.

It is always best if you can personally inspect the property before the inspection contingency on the property expires. Have your preferred contractor meet you at the property to get a detailed, independent estimate of repair costs and current property value if they have knowledge of the area.

Even if you have received the appropriate financials for a whole year, and several months of rent roll, you will want to verify all the information by looking at copies of actual leases, pulling credit on some of the tenants, and just verifying that they are legitimate. We have heard horror stories of owners so desperate to sell that they’ve put bogus tenants in just to show full occupancy. When the property has been sold, those people stop paying the rent and suddenly the new owner has a big problem.

Look around the neighborhood. Do you see schools, playgrounds and neighbors out of the street and in their yards? Do you see evidence of gang activity and property that is not kept up all up and down the street? When you talk with the neighbors, what do they say about the neighborhood? If you see and hear a lot of positives, then this may be an area for a buy and hold property, if not, either pass on the deal, or use it as a quick flip wholesale deal.

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