Some investors will say that your time should be spent finding and managing properties, not painting or hammering nails. Otherwise you’ve bought yourself a job, they will tell you, rather than an investment. Although I tend to agree with that idea, nothing is that simple and definite. You can make money flipping real estate either way, and there are reasons for both approaches.

Doing It Yourself

A question: Do you make more money or less money when you do your own work? It depends on how you look at the matter. You might make more money on a given project. If, for example, it costs $3,000 in labor for roofing, and you do it yourself, you can make $3,000 more profit – if you work as fast as the professionals would have (there are holding costs to pay if you’re slow). But if you do a lot of the work yourself, you might flip just a couple houses a year, rather than the dozen you could do if you paid others to do the work.

What you do get working on your own, is a bigger margin of safety. At least you CAN get a bigger margin of safety, but those of us that aren’t as skilled in the building trades might screw things up and have to hire a professional afterwards. On a house with a projected $20,000 profit after paying for labor, you might save $8,000 by doing much of the work on your own. More profit perhaps, but it also means that if there are unexpected expenses or you guess wrong on what the house will sell for, you’re less likely to have a loss.

You might also consider your cash situation. If you don’t want to bring in other investors, can’t borrow enough money, and don’t have much capital, you can get by with less by doing a lot of the work. You could even live in the home while you fix it up. It’s easier to get financing, and if you stay there two years before selling, you don’t have to pay taxes on the capital gain.

Flipping Real Estate As A Business

As a business, there is no doubt that you have the opportunity to make more money paying for help. An investor I know flipped fourteen houses one year, something he never could have done if he had been painting the homes or laying linoleum. He never got dirty, and he made it clear that he thought his time was better spent finding the next deal, while his crew finished the houses that he was flipping.
Your Choice

What’s the best approach? Well, there is more money to be made finding deals than hammering nails, but what if you need a safe small deal to get going? What if you’re short on cash and can’t borrow much? Finally, what if you enjoy the process of fixing up houses?

They are all good reasons to do the work yourself, or at least some parts. The bottom line is that there is no absolute right way to make money flipping real estate.Changing ways is natural too. After all, investors can investors learn a lot by getting involved with the renovation work. That kind of experience might mean that you save money and make better decisions later, when you are just finding deals and letting others do the work. In any case, the choice is yours.

1. Know Your Numbers

How much will the house sell for when it is ready? A clear idea of the ARV (after repair value) is necessary to safely make an offer on a property. Don’t just guess that you’ll sell the home for $20,000 more than what you put into it. You don’t decide what a home is worth – the market does, so get advice if necessary. Then subtract from the ARV all possible costs you will have, including price, buying costs, repair costs, holding costs, and the costs of selling. Now subtract the profit you want, and you have the highest price you should pay. Start with an offer lower than this, of course.

2. Schedule Properly

More than a few house-flipping projects have gone wrong due to falling behind schedule. For example, you think you can get the plumber in and out of the house in the first week, but it takes a month, so you can’t close the walls up, and everything else gets behind schedule. Meanwhile your spending $2,000 per month on holding costs like loan payments, utilities, property taxes and insurance. So check before you finalize the offer, to see how long things like windows, plumbing and dry-walling will take. Also, make completion dates a part of any contracts you sign with contractors.

3. First Things First

On one of those “flip a house” programs on television the other night, a young couple was running $10,000 over budget on their first fixer-upper investment (and six weeks behind schedule). They ran out of money and put the house on the market with a crappy-looking yard and stains visible on the front wall. Of course buyers would see these things first, making a bad impression. Avoid this by starting with changes that are most important. Then if you run out of money or time, you’ve already done the things that will make the home sell.

4. Figure The ROI Of Improvements

The ROI or return-on-investment for each possible improvement should determine what you do to the home. You’ll be guessing at times, but the principle is that you do only those things which increase the value of the home substantially more than what they cost. Such high-ROI improvements vary by area and by type of home, but they typically include painting, carpeting, landscaping, and finishing unfinished space. With a small house, you might get new flowers and bushes, fresh paint, and all new carpeting for less than $7,000, and possibly raise the market value of the home by $14,000.

5. Know Your Buyers

A single level ranch in a neighborhood full of retired couples, won’t sell well to young “yuppies.” Know what kinds of buyers are likely to want the home (and neighborhood) before you start. Then, after improving it with those buyers in mind, market it appropriately. You or your agent should identify and advertise the benefits that matter to your buyers, whether this includes “close to stores” or “country living.”

6. Price It Right

Selling fast means you save those holding costs. You may also have other projects waiting for that money. To sell fast, price it slightly below market value – and let buyers know it’s a deal. It may seem that if you sell for $3,000 under market, you’re losing $3,000, but you are possibly saving a couple thousand in the holding costs you’ll pay if it takes an extra six weeks to sell at a higher price. Also, if you are a serious investor, flipping a house fast means getting the money into the next project fast. Buy right, and use the other tips here, and there should be plenty of profit left in any case.

It is easier to start investing in single family homes than apartment buildings. If you have done so, however, you have noticed how difficult it is getting to get positive cash flow from houses. Even if you do squeeze a little out of each, it can take a lot of them to have a decent income.

Like in a Monopoly game, at some point you may want to trade in your little green houses for a big red apartment building. One apartment building may provide as much cash flow as twenty little houses. And once you have management in place it may be a lot less work.

How To Buy An Apartment Building

Rule number one? Buy properties that will have positive cash flow from the start, based on the current income and all of your projected expenses including management. If the current owner doesn’t have management, that is his problem. You are an investor, not a manager, and a good income property should pay for management and still produce positive cash flow.

Do your due diligence? Here’s a simple definition of the term: “Investigation and verification of the details of a particular investment.” You can start this process before you make an offer, but you should also have clauses in the offer that allow you to have inspections done, and reviews of the books and certain documents.

Look at the files, to verify income. There should be rental agreements signed by tenants, and rental histories showing if there are any problem tenants or late payments. Look for rental deposit documents also, to see amounts and where the deposits are kept.

Ask to see service contracts and agreements. Do they transfer, or are you free to seek better deals? These can include property management agreements, landscaping, snow plowing, pool cleaning service, and cooling system maintenance agreements.

Get the last 24 months income and expense statements, and look for anything unusual, like expenses that are too low or income that seems too high. Review the rent roll, and find out if the rents are over or under the market rates for the area. If there are employees, look at the payroll records for any surprises, like accrued vacation time that you’ll have to pay.

Do an interior inspection to learn about the place, the tenants, and any problems that you will have to fix in the coming months or years. Look for pests, water and fire damage, as well as obvious “problem tenants.” Are there any empty apartments that are listed as occupied? Use professional inspectors as needed for pest inspections and safety inspections. The local Fire Marshall may do a free inspection to verify that the building meets current codes.

For the exterior inspection, you will want to first walk around and take notes. Watch for anything that looks unusual or in need of repair. Then you can get professional inspections, if necessary. You want to verify that the electrical and plumbing systems are up to date and meet current codes. You also want to get an estimate on how many years of use the roofing has left. You’ll look at driveways, landscaping, and exterior paint condition.

Call local authorities and check for any permit problems or zoning or encroachment problems. If there have been fire code violations, were they corrected?

Get the help of an accountant to decipher the books. Have a lawyer review your offer and any documents. Ask what other things you should be doing.

Take notes, and list problems, and estimated costs to correct them. You can use these notes during subsequent negotiations. The problems investors run into when buying income properties are usually not unforeseeable. They can be avoided or resolved if you just do your due diligence. Use a checklist so you won’t forget anything.

Prices are based on income. When buying apartment buildings, many investors will look at the “cap rate” of a property to determine if it is a good investment at a given price. Not sure how to figure capitalization rates? Just be sure that there is more income coming in than the total money you’ll be paying out each year. Then make sure that this cash flow is enough to justify the cash you invest.

This tends to be glossed over by many who promote zero-down ways to buy real estate. If you are buying a home for yourself, so what if you get in with nothing down. You also want to be sure that it makes more sense than the alternatives (renting, waiting, lease-option, etc.). If you are investing in real estate, you want a property that will have cash flow or can be sold for a profit. With those criteria in mind, here are a few ways to do it without your own money.

No Money Down – Starting With Land

One of the easiest types of real estate to buy with nothing down is land or small lots. In many areas of the country it is common for sellers to sell these properties with a small down payment or none at all. Of course, one of the reasons they do this is because it is an easy way to get more for the land. I once bought a piece of land for cash and resold it in weeks for 30% more, because a lot of buyers could afford my terms: $250 down and $100 per month. So be sure that you are not paying too much.

“Too much” doesn’t necessarily mean paying a lot over “market value” however. It is determined by what you will do with the property. For example, if you have no other way to buy a small lot, and as a result of the easy terms offered by the seller you pay $12,000 for a lot worth just $9,000, is that too much? Not if you will later put a modular on it and make a $21,000 profit selling the package.

Now you might notice that many of the lots and parcels of land for sale are not offered with no down payment. Most sellers will at least want something at closing, even if it is only $1,000 down on an $8,000 lot. So how do these become “nothing down” deals? By borrowing for the down payment. In the above example, where you eventually make $21,000, what if you borrowed the down payment on a credit card at 18% interest, and it took a year to do the deal? Then you would make $210 less ($30 cash advance fee and $180 interest), or just $20,790 profit.

Land is also a way to get into a home with no money down. When you buy real estate this way, you can pay for the lot over a few years, and then use it as the equity necessary to get a home loan. many banks will loan you the money for a modular or stick-built home if you already own the land free and clear.

100% Financing

If you have a good credit score, you might still be able to get a 100% mortgage loan. They are getting less common now (late 2007), but I still see an occasional advertisement for them. Alternately, you might find a lender who will loan 90% and still let the seller finance the other 10% on a second mortgage, meaning none of your cash is necessary.

If you are investing in real estate, you might get 100% financing from a “hard money” lender. These lenders charge high fees and high interest, but the idea is that you use them for high -profit deals that make it worth it. Other investors may put up the money for the down payment and repair costs on a fixer upper project, if you find the right deals. This can be at a high interest rate, or for a share of the profits.

Buy Real Estate From Motivated Sellers

If you stick to properties that have highly motivated sellers, there is usually a way to buy with no money down. For example, a seller might sell his $90,000 house to you with only $3,000 down if you offer him $95,000 and a good interest rate. You can borrow the $3,000 of course (or even a little more to cover closing costs, if you want nothing at all into the deal).

Sellers have been known to take cars or other pieces of property as a down payment. They may let you buy with two mortgage notes, one for 20% and the other for 80%, one of which they’ll immediately sell to get the cash they want. To buy real estate with no money down, just look for a way to get the seller (and the lender, if necessary) what he needs – without using your cash.

Houses may be a losing proposition as rentals in your area. They are in many areas now. However, if you find the right kind of home, you may be able to convert it into a duplex and turn that cash flow situation around. Let’s look at an example.

Make A Duplex Investment

First you go to the county or city to find out what residential areas are zoned for both single family homes and duplexes. Take a map and mark it well, so you won’t waste your time looking at houses that you’ll never be able to convert. You don’t want to try to get properties rezoned for small projects like this – it just isn’t worth the trouble and probably won’t succeed.

Suppose you find a 3-bedroom, 2-bath house in one of these areas. The seller is asking $102,000. This is less than the surrounding homes, but it is because the home is in rough shape. You don’t want to tie up more than $20,000 in any one project, so you quickly realize that positive cash flow would be difficult to obtain, since the usual rent for houses like this is around $775 per month. You look at the home anyhow, with the idea of making a duplex out of it.

The repairs necessary are mostly cosmetic. The bathrooms are on opposite sides of the house. There is an office that can be made into a bedroom. There is a natural place to divide the house that will leave a dining room on one side – which will become a living room – and a living room on the other side. One end of this living room will be used to make a small kitchen.

You will end up with two 2-bedroom units, which rent for about $630 in this area. The vacancy rate for the area is 5%, so you project an annual gross income of about $14,360. Taxes, insurance and repairs will be about $4,660, leaving a net income before debt service of $9,700.

You have already checked, and know that you can borrow 90% of the value of a duplex, at about 8% interest on a 30-year loan. You figure (roughly – all of these numbers will need to be firmed up before closing) that you want cash flow of at least $1,800 per year. Subtracting this from the $9,700 leaves $7,900 for debt service. Dividing this by 12, you see that you can have a payment of up to $658 per month.

Now you pull out your amortization book, and turn to the page that says 8% interest. Working your way down the monthly payments column under “30 years” you see that you can borrow up to $90,000 and still make your plan work. Since you don’t want to put more than $20,000 of your own money into the deal, this means the whole project has to be done for $110,000 or less.

Roughly estimating the construction costs, clean-up costs, holding costs, closing costs, loan costs, refinance costs (once the project is done) and other expenses, you figure your total costs will be around $23,000. When you make your offer, you will have an inspection contingency that allows you to cancel the contract if there are problems that put the likely cost beyond this.

Subtracting $23,000 from $110,000, you arrive at a figure of $87,000. You know this won’t thrill the seller, but this is the price you need to make the deal work for you. You offer $83,000, and he counter-offers at $93,000. You offer $85,000 and drop the clause that had him paying $2,000 of the closing costs – you had only put it in there as a negotiating tactic anyhow.

Eventually, when he realizes that you really will walk away from the deal, he agrees to $88,000. You decide that this is close enough. Your inspections and quotes come in and you are satisfied, so you close. You borrow only 80% of the value to avoid mortgage insurance and points. You intend to refinance when you have the place ready anyhow.

You find some cheaper ways to get the job done, and the total costs up to the day you rent the units is just $20,500. This means you have total of $108,500 into the duplex. You shop around and find a new loan at 7.5% interest. You also decide to finance 90% and have less cash flow. You like the idea of having only $11,000 or so of your cash invested.

You borrow $97,650, making your payment $682 per month, or about $8150 per year. This leaves $1,550 per year cash flow – close to what you wanted. Your cash-on-cash return is around 14%, and if rents are rising in the area, it will soon be higher. This is why you might want to create your own duplex investment.

There are usually some easy-to-spot factors that determine these things. In a town like Lone Pine, California, for example, there are huge tracts of national forest land or other government land on either side of town. Since nobody can build on this land, they are left with a narrow strip of real estate alongside the highway. As the area grew, it was no real surprise that vacant lots at the edge of town went up in value.

Of course, highways in general determine the direction of growth in many towns. It is certainly cheaper to build along an existing road than to install new roads to access other land. Stores want to be where the traffic is, of course, which is another reason that real estate fronting highways gets developed before other land.

Sometimes geography determines where the growth will occur. Certainly a town is more likely to grow away from an ocean than into it. Valleys with steep hillsides will fill up the flat lands first. Towns will generally grow where it is easiest to grow. Therefore, real estate in those areas will tend to go up in value more quickly than in other areas.

Real Estate Investing In The Path Of Growth

Of course, you could just buy real estate where things are already happening. That might not be a bad investment. But to really ratchet up your profits, you should be buying ahead of growth. Determine where the buildings and development are heading, and get out in front of it. Real estate that is in the path of the growth will sometimes double in value in just a year or two.

Years ago I lived in a town where real estate in general was appreciating at about 6% to 7% per year. Along one highway, however, the land values went up at almost 25% annually for several years. This means they doubled in value in about three years (and some parcels doubled again as quickly).

You can start by just looking around to see what is happening. But do your home work too. Has the population been growing consistently? Is there good job-growth in the area? Are there other reasons why people and businesses will be moving into the area. What are the most likely directions the growth will take?

At this point, the basic real estate investing formula is to buy in the path of growth and wait. The most difficult part of this plan, though, is not to see where to invest, but to get the timing right. The real estate might be worth ten times as much in ten years, but what if it doesn’t appreciate much in the next three? You might be paying finance charges and have other costs for a long time.

One way to minimize this risk is to buy property that will produce some income – preferably enough to cover these costs. If there is an old house on the property that you can rent out, for example, you might have a free-ride while you wait for a new mall developer to make you an offer. If it takes a few years, you’re still okay.

Just buying in the path of growth and holding on for big gains is pure speculation. it’s true that with enough homework, this can mean big profits. But investing in income-producing real estate lets you wait for your big gains, while limiting your risk.

FSBO, pronounced “fizbo” means “for sale by owner.” Owners try to sell on their own primarily to save the cost of a real estate broker’s commission. This is often a mistake, for many reasons we won’t get into. The bottom line is that these houses statistically sell for less on average than those sold through an agent, negating any savings.

One reason this is true is that buyers know the seller is saving the commission, and are inclined to offer less as a result. Sellers are open to this because they think something like, “If the commission would have been $8,000 and I sell for $4,000 less, I still save $4,000.” For this reason, and because owners often don’t know how to properly price a house, many new real estate investors think that they are going to get some great deals with FSBOs.

The opportunities to simply buy cheap FSBOs and resell them for profit are just plain rare. It’s true that FSBO homes often do sell for less, especially after sellers get frustrated with their poor marketing skills and tired of waiting month after month for a buyer. But even if you buy a house for 15% under market value, the transaction costs of buying and selling it can run 10% of the final sale’s price, and holding onto the property while waiting to sell can eat up the other 5%.

So where is the potential for flipping FSBO homes? It is in fixer-uppers. A 10% discount from market value may leave you breaking even on a straight flip, but with a fixer-upper it just means that much more profit. Let’s look at an example.

Flipping Fixer-Upper FSBO Homes

Suppose you are looking at a fixer-upper. The ARV, or “after repair value” will be around $180,000, after about $25,000 in expenses for buying it, repairing it, holding it and selling it. Of course no one deals with a problem house for fun, so the market for such a house is mostly investors, who expect to make $20,000 for the risk and work involved. That puts the market value at about $135,000 ($180,000 minus the costs and profit expected).

This might be a typical fixer-upper in your area. But if the house happens to be for sale by the owner, you might do even better. Let’s start with the assumption that the home is ugly, is already priced at $135,000, and due to the owners poor sale’s skills (common), it has been on the market for six months. The seller is frustrated, and when you talk to him, he mentions that he is considering listing the property with a real estate agent.

You point out that if he gets $133,000 – close to his asking price – a 6% commission will cost him about $8,000. Furthermore, buyers might ask that he pay $2,000 of their closing costs, and in three months he’ll spend another $2,000 holding onto the property. He’ll clear $121,000 – or he can sell to you now for $122,000, close in a week, and avoid the trouble.

Suppose he eventually agrees to $125,000. The other numbers didn’t change. The house will still sell for $180,000 when ready. In other words, you just made yourself an extra $10,000 on what was already a potentially profitable fixer upper. This is how flipping FSBO homes can be made to work.

One of the reasons you still find good deals on HUD homes – even though they are supposed to sell at market value – is that they are sold “as is.” These are houses that have been foreclosed on and repossessed, so the previous owner may not have had the means nor the motivation to properly care for the home. They often have enough problems to scare away most home buyers.

What does this mean? It means that due to the condition, the market value may be low compared to properly-maintained homes. This can mean an opportunity for an investor who is willing to fix a few things. For example, to the general public, a “problem house” can be worth $40,000 less than surrounding homes, while it may take only $10,000 make it look good again.

Buying HUD Homes

What is a HUD home? It is a house that has a HUD-insured mortgage loan on it. When the owner doesn’t make the payments, HUD pays the lender what is owed, and then takes ownership of the home. They try sell it quickly, and at market value. Virtually anyone who can pay cash or get a loan is eligible to buy these houses. (HUD employees and relatives of HUD employees are eligible, but must receive written approval from the Director of HUD’s Office of Single Family Asset Management in order to purchase a HUD-owned single family property.)

HUD homes are found in all sorts of neighborhoods, although most are meant to be affordable to low-income and moderate-income families. These are homes that generally sell for the same as surrounding homes (except when they need work). To find HUD homes in the price range you want, then, you simply look for neighborhoods with homes in that price range.

If A HUD house need fixing up the asking price will reflect that. HUD may offer special incentives such as an allowance to upgrade the property, a moving expense allowance, or a bonus for closing the sale early. The houses are sold “as is,” but HUD will allow you to get professional inspections prior to making an offer. The cost of these will be yours, however, whether or not you make an offer or buy the home.

On most sales, you can request that HUD pays all or a portion of your financing and closing costs. Essentially you just make an offer as you would on any property, except that HUD homes are typically sold in an “Offer Period,” at the end of which all offers are opened and the highest reasonable bid is accepted. If not sold in the initial Offer Period, you can submit a bid any day of the week, including weekends and holidays, until the home is sold. If your bid is accepted, your real estate agent will usually be notified within 48 hours.

HUD doesn’t loan on these homes, although they do offer mortgage insurance programs that can help you get a loan. Contact a HUD approved lender for more information.

Investing In HUD Homes

HUD gives priority to owner-occupants purchasers. However, if there are no acceptable bids during the priority period, unsold properties are then available to all buyers, including investors. Your real estate agent should have the necessary details.

There are a couple ways to find out what HUD homes are available in your area. You can visit the HUD web site online and see the listings there. A better way is to find a participating real estate agent. He or she will know what is for sale, but also may know what HUD homes will soon be for sale. In any case, your real estate agent must submit your bid for you – HUD generally doesn’t accept offers directly from buyers.

When you make an offer, your real estate agent should help you with any paperwork. The settlement date (if your offer is accepted), will normally be within 30-60 days. You need to arrange financing and close the sale within this time, or forfeit your earnest money deposit (or you may be able to pay for an extension of your sales contract). The selling agent’s commission will be paid by HUD but only if you make this a condition of your offer.

Of course, when buying HUD homes, you have to analyze them like any other investment. If it will be a rental, you have to do the math to see if you’ll have positive cash flow. If you plan to fix it up and sell it, be sure there is a profit after all expected and some unexpected costs. Just because it is a HUD home doesn’t men it’s a great deal.

Normally, if you are buying a property that is listed with a real estate broker, they will have a purchase agreement ready to have the blanks filled in. If you have a buyer’s agent that you work with, he or she will have the necessary forms. There are the routine parts which are necessary, but not easily forgotten or done wrong. These include the following.

The Date – Names of Buyer(s) and Seller(s) – Address Of Property – Legal Description Of Property – Purchase Price And Terms – List Of Anything Included With Property – Date The Deal Should Close By – Closing Process – Disclosure Statement – Signature With Date For Buyer And Seller – Addresses and Phone Numbers Of Buyer And Seller.

These may be routine items, but be sure that you look all of this over carefully. If the disclosure statement clearly states that there is a foundation problem, for example, you can’t later get out of the deal when those cracks in the basement make you nervous. With the following items, be especially careful.

Real Estate Purchase Agreement – The Crucial Items

Good Faith Deposit or Earnest Money – Real estate agents will try to convince you that your deposit should be as much as possible. There is no “normal” amount, and while it’s true that a seller might take an offer more seriously with a bigger deposit, this is up to you. Real estate is regularly bought with $500 deposits. An alternative is to include a deposit of $200, and the line, “to be increased to $2,000 when all contingencies are satisfied.” That way if the inspection shows nasty surprises your money isn’t tied up while the seller argues that there isn’t a problem.

Designation Of Who Pays What – Make sure the agreement clearly states who will pay for what. Are you splitting the cost of the fee paid to the closing company? Who is paying each of the other closing costs. If it doesn’t state in the purchase agreement that the seller is paying, expect that you are.

Financing Contingency – Unless you are paying cash, you will probably have to get a loan. A Pre-approval from the bank doesn’t guarantee much, so be sure that you make the agreement contingent on getting that loan, and specify the terms. For example, it might read, “This offer is contingent on buyer obtaining a mortgage loan within seven days, at 7.5% annual interest or less.”

Inspection Contingency – You may not need an inspection if you are buying land, but with residential real estate an inspection is a good idea. Generally, the clause for this will allow you about a week or ten days to get it done. It might read something like this: “This offer is contingent on an inspection of the property at buyer’s expense, and buyer’s approval of the results of that inspection within seven days.”

Other Terms, Conditions or Contingencies – There are sometimes other issues, and you have to address them in the real estate purchase agreement. For example, if the back yard is full of junk cars, you better add a clause like, “All cars and junk to be removed at seller’s expense before closing.” If you are shopping alone but your wife needs to approve the home, you could also add a clause like, “Offer is subject to a approval by spouse within two days.” Then your wife can look at the house later and say yes or no to the deal. As you can imagine, sellers may not like that one.

If you are not working with an agent, you can buy an agreement (sometimes called an “offer to purchase” or “buy-sell agreement”) online or in some office supply stores. Having a lawyer review all the paperwork is best. Remember that a real estate purchase agreement is a binding contract the moment you and the other party sign it.

Due Diligence

Due diligence should always include a look at the books. Review the last 24 month’s income and expense statements, and watch for anything unusual, like expenses that are too low or income that seems higher than usual. Look at the rent roll, and investigate whether rents are over or under the market rates for the area you are in. Check the payroll records if there are employees, and watch for surprises, like accrued vacation time that you’ll have to pay as the new owner.

Always verify income. You want to see rental agreements signed by the tenants, as well as rental histories, which might show if there are any problem tenants or late payments still due. Documents for rental deposits should show amounts and where the deposits are (which bank).

Look at the service contracts and agreements. Ask if they transfer, or if you are free to change to better (possibly cheaper) services. Among others, you’re looking for property management, landscaping, snow plowing, pool cleaning service, and heating and cooling system maintenance agreements.

Do your initial exterior inspection. Walk around with pen and paper, and note anything unusual or in need of repair. Arrange for professional inspections where needed. Be sure that the electrical and plumbing systems are up to date and meet current codes. Estimate of how many years of use the roofing has left, and look at driveways, landscaping, and the condition of exterior paint.

Your due diligence should include an interior inspection. Meet some of the tenants if you can. Look for any problems you’ll have to fix in the coming years. Watch for water damage or fire damage, pest problems, and obvious “problem tenants,” or “problem apartments.” Are there empty units that are listed as occupied? Get the necessary pest inspections and safety inspections. Some Fire Marshalls will do a free inspection to verify that the building meets current codes.

Call local authorities. Ask about any zoning or encroachment issues, or permit problems. Have there been any fire code violations, and were they fixed?

It is usually best to use professional help when doing your due diligence. Your accountant can decipher the books better than you, and notice anything that doesn’t add up. A lawyer can review your offer and other documents. She can also tell you what other things you should be doing.

Take notes. Do something about serious issues (have them fixed or adjust your offer). Most problems you’ll run into when buying income properties are not entirely unforeseeable. They can be avoided or resolved if you use your due diligence checklist diligently.