Property Investment Due Diligence Checklist

How to use this checklist

The checklist above is the one-page version. This guide explains what each phase is really testing, which documents to demand, which inspections are worth the money, and how to rebuild a seller’s numbers so you pay for what the property will actually earn. The rule throughout: verify, do not accept. Every figure a seller or agent gives you should be traced to a lease, a bank deposit, a tax record or a quote.

Financial diligence: rent roll, estoppels, T12 and leases

Rent roll. Ask for a current rent roll listing each unit, tenant, monthly rent, deposit held, lease start and end dates, and any balance owed. Then check it against the source documents. A rent roll is the seller’s summary, not proof.

Leases. Read every lease and amendment. Look for rent concessions (a free month spread over the term), unusual renewal options, a promise to renovate, pets or parking included in rent, and who pays which utilities. Confirm expiration dates: several leases ending in the same month is a vacancy risk.

Estoppel certificates. Ask that the contract require a signed estoppel from each tenant before closing, confirming rent, deposit, lease dates, prepaid rent and any disputes. This is how you discover the tenant who prepaid six months or was promised a new kitchen.

T12 (trailing twelve months). Request a month-by-month profit and loss for the last 12 months, ideally 24. Tie the income to bank deposit statements and the expenses to bills. Watch for months where repairs were skipped to make the year look better, and for owner-paid utilities that the pro forma left out.

Security deposits. Deposits are owed back to tenants, so they should transfer to you at closing (usually as a credit). Confirm the amounts against the leases and estoppels, and check your state’s rules on holding deposits in the state legal guides.

Physical diligence: which inspections to order

A general home inspection is a visual survey; it tells you where to look harder. Order specialists based on the property’s age, construction and the inspector’s notes:

• Sewer scope: a camera run through the line from the house to the street. Older clay or cast-iron lines, large trees and slow drains are all reasons to order one. Replacing a collapsed lateral can run into five figures, and it is usually invisible otherwise.
• Roof: a roofer can estimate remaining life, flag soft decking and price a replacement. Ask the seller for the installation date and any warranty.
• HVAC: a service technician can check heat exchangers, refrigerant and age. Write down the manufacture dates of furnaces, air conditioners and water heaters so you can budget replacements.
• Structural: if the inspector notes foundation cracks, sloping floors, sticking doors or bowed walls, hire a licensed structural engineer for a written opinion and repair scope.
• Electrical and plumbing: note panel brand and capacity, wiring type and supply-pipe material. Some insurers decline or surcharge certain older systems, so confirm with your insurance agent.
• Pests and moisture: a wood-destroying insect inspection is often required by lenders in some areas; mold testing is worth it where there are signs of water.

For multi-unit properties, inspect every unit, not a sample. Price repairs with the rehab estimator and get contractor quotes for anything large before your contingency expires.

Legal and title diligence

• Title commitment and insurance: read the title commitment’s exceptions, not just the summary. An owner’s title insurance policy protects you against covered defects that existed before you bought; the lender’s policy only protects the lender.
• Liens and judgments: mortgages, mechanics’ liens, tax liens and HOA liens should be paid off at closing. Confirm the payoff letters cover all of them.
• Permits: compare the building department’s permit history with what you see. A basement unit, garage conversion or extra bathroom with no permit may have to be legalized or removed, and its rent may not be lawful to collect.
• Zoning: confirm the number of legal units and that the use you plan (long-term rental, short-term rental, adding a unit) is allowed.
• Rental registration: many cities require rentals to be registered, licensed or inspected. Ask whether the current owner is compliant and whether the license transfers.
• Rent control and rent caps: some states and cities limit increases. For example, California Civil Code § 1947.12 caps annual increases on many units at 5% plus the change in the cost of living, or 10%, whichever is lower, and Oregon ORS 90.323 limits increases and requires 90 days’ written notice. Both exempt newer buildings, and local ordinances can be stricter. If current rents are below market, a cap changes how quickly you can close the gap.

Environmental diligence

Lead-based paint (pre-1978). Under the federal Lead-Based Paint Disclosure Rule, sellers of most housing built before 1978 must give buyers the EPA pamphlet, disclose any known lead-based paint or hazards, provide available records, and include a Lead Warning Statement. Buyers get a 10-day opportunity to conduct a lead inspection or risk assessment unless both parties agree in writing to change or waive it. As the new landlord, you will owe the same disclosures to every tenant before they sign a lease, so ask for the records now.

Radon. The EPA recommends fixing a home at 4 pCi/L or above and considering a fix between 2 and 4 pCi/L. A short-term test during the inspection period is inexpensive; a mitigation system is a known, quotable cost.

Flood zone. Look up the property on the FEMA flood map. If it is in a Special Flood Hazard Area and your lender is federally regulated, flood insurance is mandatory for the life of the loan under 42 U.S.C. § 4012a. Ask the seller about past flood claims and look for water lines in the basement.

Other items: oil tanks (buried or abandoned), asbestos in older insulation or flooring, and nearby industrial or former gas-station sites can all carry cleanup costs.

Insurance quotes before you commit

Never use the seller’s premium in your numbers. Get at least two written landlord (dwelling) policy quotes during the contingency period, including liability limits, loss-of-rents coverage, wind or hail deductibles, and flood if relevant. Give the agent the roof age, electrical panel and plumbing details from the inspection, because those often drive whether a carrier will write the policy at all. If no one will quote at a workable price, that is a finding, not a formality. See the rental property insurance guide.

Worked example: re-underwriting a seller’s pro forma

Hypothetical example. A fourplex is listed at $800,000. The seller’s pro forma shows a 7.4% cap rate. Here is what due diligence finds.

Now add financing. A $600,000 loan (75% of price) at 7% for 30 years costs $47,902 a year. The seller’s NOI covers that 1.24 times; the re-underwritten NOI covers it only 0.79 times, meaning the property would lose about $10,000 a year before any surprise repairs. And if the seller’s own 7.44% cap rate is the right market yardstick, the verified NOI supports a price of about $37,814 ÷ 0.0744 = $508,000, not $800,000.

The decision is not automatically “walk away”. If the two $1,400 units can lawfully be raised to market at renewal, that is real upside; check any rent caps first. But you should negotiate from the verified numbers, and price the upside as yours, not the seller’s. (Property tax reassessment on sale varies by state; use your county’s actual rules and rate.) Run your version through the property analysis worksheet and the expense ratio calculator.

Closing checklist

• All contingency deadlines met or extended in writing; repair credits or price changes signed as amendments.
• Signed estoppels received and matched to the rent roll and leases.
• Title commitment exceptions resolved; payoff letters for every lien; owner’s title policy ordered.
• Landlord insurance (and flood, if required) bound and effective on the closing date, with the lender named.
• Closing statement checked: prorated rent, security deposit credit, property tax proration and any seller credits.
• Assignment of leases, deposits and service contracts; originals of all leases, keys, codes and appliance manuals.
• Lead disclosure records, permits and warranties transferred.
• Final walk-through within a day or two of closing to confirm condition and agreed repairs.
• Written notice to tenants with the new owner’s contact details, where to pay rent and who holds their deposit (check your state’s transfer-notice requirements).
• Utilities, rental registration and any HOA records moved to your name.

Common due diligence mistakes

• Trusting the pro forma: asking rents and the seller’s old tax bill are the two most common overstatements.
• Inspecting a sample of units: the unit you skip is the one with the leak.
• Skipping the sewer scope: one of the most expensive hidden defects, and one of the cheapest to check.
• Missing a deadline: once the contingency lapses, your deposit may be at risk if you back out.
• Ignoring permits and local rules: an illegal unit or an unregistered rental can wipe out projected income.
• No exit plan: know before you buy whether you would eventually sell or exchange. The keep-or-sell calculator shows how taxes on a future sale work.

General information, not legal, tax or inspection advice. Laws and local rules change and vary by city and state; have a licensed attorney review your contract and use licensed inspectors.