Epic Real Estate Investing - What is Due Diligence? | 1213

Episode Date: June 21, 2022

You’ve heard the term “due diligence,” but what does it mean? Once you make an offer on a property and it’s accepted, there’s typically a process lasting a few weeks before you send in your funds to finalize the purchase. Therefore, it’s crucial to understand the whole process. Matt will help you go through the topic, and give you step-by-step checklist to follow.                            BUT BEFORE THAT, Matt shares his thoughts on how to start investing in real estate. Stay tuned and find out five solid places to start investing in real estate.     Are you ready?   Let’s go! Learn more about your ad choices. Visit megaphone.fm/adchoices

This is Terio Media. How to start investing in real estate? That's what you want to know? I knew there was something I liked about you. You're ready? Let's go. Welcome to the all-new, epic real estate investing show. The longest running real estate investing podcast on the interwebs, your source for housing market updates, creative investing strategies,

and everything else you need to retire early. Some audio may be pulled from our weekly videos and may require visual support. To get the full premium experience, check out Epic Real Estate's YouTube channel, Epic rei.tv. If you want to make money in real estate, sit tight and stay tuned. If you want to go far, share this with a friend. If you want to go fast, go to reiase.com. Here's Matt. All right, so by the time we're done, you're going to have five solid places to start investing in real estate.

And I'll even give you access to my funds to pull off the fifth one and be able to do it by the end of the month even, guaranteed. And I'm going to be straight with you. If you've ever had a landlord, you probably don't dream of being one. You know, taking late night calls about overflowing toilets and oversized bugs doesn't seem like the most glamorous job. But done right, real estate investing can be very lucrative, if not flashy. It can also help diversify your existing investment portfolio and can produce additional income streams.

And many of the best real estate investments don't require showing up at a tenant's every beck and call either. You can get people for that. Real estate has created more wealth for more people than anything else, and more and more people are recognizing that. Yet the problem is that many new aspiring investors don't know how to start. So I came up with five places where anyone can get started, ranging from low maintenance to high, just in case you do dream of becoming a landlord. Number one, buy REITs. These are real estate investment trusts. So REITs, they allow you to invest in real estate without the physical part of real estate. Often compared to mutual funds, there are companies that own commercial real estate, such as office buildings and retail spaces, apartments, and hotels.

Now, these wreaths, they tend to pay high dividends, which makes them a common investment in retirement. And investors who don't need or want the regular income can automatically reinvest those dividends to grow their investments further. Now, new investors should generally stick to publicly traded reits, which you can purchase through a brokerage firm, just like you would a mutual fund. And you can get that done before the end of the day. Number two, use an online real estate investing platform. You know, if you're familiar with companies such as Prosper and Lending Club, which connect borrowers to investors willing to lend the money for various personal needs, such as a wedding or home renovation, you're going to understand online real estate investing.

These platforms, they connect real estate developers to investors who want to finance projects, either through debt or equity. Now, the investors, they hope to receive monthly or quarterly distributions in exchange for taking on a significant amount of risk and paying a fee to the platform. Like many real estate investments, these are speculative and illiquid. You can't easily unload them the way that you can trade a reet. The rub here is that you may need money to make money. Many of these platforms are open only to accredited investors. Now, there are alternatives for those who can't meet the accredited investor requirement. Those include companies like Fundrise and Realty Mogul. Number three, think about investing in rental properties. You know, my grandparents, they

intend to become real estate investors when they bought their first California home in their 20. And shortly after my grandpa's job transferred him to another state. And instead of selling their home, they rented it out. Now, it was a few years before they returned to California. And with the exception of a few hiccups with their tenant, it went pretty smoothly. So they bought another. And they do it again every year or so. And it wasn't long before the income from their properties replaced one of their salaries. And a few years later, they had replaced both of their salaries. both retiring in their late 40s. But it all started with that one accidental rental.

And you can start intentionally with a very small down payment by using your FHA loan. Now, you do have to initially live in the property as your primary residence, per the FHA rules, but you can still rent out a room or two to get on the income property track. And then in a year or so, maybe you can refinance and buy another property,

like my grandparents did, and then repeat the process like they did. Slow and steady wins the race. But as they experienced, their financial freedom came to them much faster than it would have had they stuck with their jobs and not invested in those rentals. Like they always said, real estate, it's not get rich quick, but it is getting rich a whole lot quicker than working a job. Number four, consider flipping properties. It's like this. You invest in an underpriced home in need of a little love.

You renovate it as inexpensively as possible and then resell it for a profit. As you probably know, this is called house flipping. The strategy, though, it's a wee bit harder. than how they make it look on TV. You see, what they don't show you on TV is the bigger element of risk. Because so much of the math behind flipping requires a very accurate estimate of how much repairs are going to cost and an honest contractor that can come in on time and on budget, which is not easy to do.

So if you do start here, I suggest finding an experienced partner for your first one or two. For example, maybe you bring the capital to the party and a contractor that you trust brings the labor. Lots of risk with fix and flipping, though. I mean, the longer it takes for you to feel, fix, the longer it takes for you to sell. And that can gobble up your profits because you're likely making payments to some sort of financing without the property generating any income. Now, some people, they will lower their risk by living in the house as they fix it up.

Now, this works as long as most of the updates are cosmetic and you don't mind a little bit of dust. Now, number five, consider flipping properties without fixing them up, meaning leave that to somebody else. You know, rather than you selling your flip to the homeowner types, you sell to the fix and flipper types. It works like this. You find an off-market deal that needs some fixing, you make an offer, and the seller signs your contract. You then market the opportunity, the property, to other investors that want to do the fixing to flip. And when you find a willing and able investor with cash in hand, you sell them the contract and let them close the deal. So you're not really flipping real estate, you're flipping real estate contracts. And the secret to doing this

and doing it well and doing it often is by buying low and selling low. So you can do this quickly. Speed is the name of the game here because your contract with the seller, it's got an expiration date on it. So you have to flip the contract before it expires while still allowing enough time for your investor buyer,

the fix and flipper, to close the deal. And if you like this idea, if you like how it sounds and you want to look a little bit deeper, I've got two options for you. The first place, join me for the Legends Challenge

where I'll work right alongside you and mentor you for the entire challenge to get a deal done in 10 days or less. That's the plan. Go to the Legendschallengell.com for the details. and we'll get it done together. Now, the second place, I'll give you access to my funds to do these one-day quick flips that my students are doing.

And you can take a look at how you can pull this off in your market right now at mats, freetraining.com. Like all investment decisions, the best real estate investments are the ones that best serve you, the investor. So think about how much time you have, how much capital you're willing to invest, and whether you want to be the one who deals with household issues when they inevitably come up. So if you don't have DIY skills, consider investing in real estate.

through a REIT or a crowdfunding platform rather than directly in a property. But if you want to get your hands a little bit dirty, join me for the Legends Challenge, or go to matsfree training.com. We'll be back with more right after this. Boarding for Flight 246 to Toronto is delayed 50 minutes. Ugh, what? Sounds like Ojo time. Play Ojo, great idea.

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Let's get back to work. What is due diligence in real estate? You know, when I first got involved in real estate, I routinely dismissed these words when I heard them as a tired phrase investor used to sound smart. Now I know it to be one of the more important aspects of making good real estate buys, especially if you like making money. By the time we're done, you'll know what due diligence is, a few of its most important aspects,

and I'll also give you a free checklist to make sure you don't miss the rest, so you can make good investments from this point moving forward. But it starts like this. Once you make an offer on a property and it's accepted, there's typically a process lasting a few weeks before you send in your funds to finalize the purchase. And during this period is when buyers are to conduct their due diligence before closing the transaction. So you've heard the term due diligence, but just what does it mean? Well, in the world of investment transaction, due diligence is a legal term for do your homework.

So you've entered into an agreement with the seller under a certain set of expectations about the property. Now, some states are more lenient than others with regard to what the seller must disclose to a buyer, but they must disclose everything that they know. So even if you believe everything a seller has disclosed, it's prudent of you as an investor to confirm what you know to be true about the property, as well as to discover what you don't know. Your only protection from buying a lemon is yourself. Ask me how I know that.

You know, due diligence is your protection from making a bad purchase. So think of due diligence as your last opportunity to kick the tires and turn on and off the lights and generally make sure you're okay with what you're buying. And then hang in with me until the end, and I'll just give you a complete due diligence checklist. But for now, your starting point is to hire a physical inspector to thoroughly inspect the property from top to bottom, from one end to the other, leaving no stone unturned.

In your physical inspection report, it's going to reveal everything the inspector noticed about the property, but they will be giving the greatest amount of attention to five key areas. And those would be the foundation, the roof, the plumbing, the electrical system, and the heating ventilation air conditioning system. So what happens if your report turns out of, up issues that you weren't prepared for. Well, this will almost always be the case, by the way.

So if you're going to be buying property, whether it's your primary residence or a number of investments, it's important to understand that all real properties, they've got flaws, even or sometimes especially a brand new house has things wrong with it, depending on how picky a person wants to be. Mostly, though, what you're going to find in a typical inspection report is going to be cosmetic, easily fixed stuff, or simply just stuff that's the result of wear and tear on the property. Now, in the event, a more serious issue is discovered.

It might make sense to hire a specialist for an expert assessment of that issue. And that could include experts in the fields of, I don't know, pest control, foundations, roofs, plumbing, ventilation, and electrical. And then if you have or your inspection report has raised additional concerns, it can make sense to hire additional experts to test for biotoxins, you know, like mold, radon, and asbestos. These hazards are typically not checked in detail by a home inspection. and can be very expensive to fix if not addressed. Now, under most circumstances, the seller has got no obligation to fix everything or anything your inspector finds. So if you discover during your due diligence that a property has defects that will need

to be fixed, and if you wrote up your contract correctly with the proper contingencies in place, you will have time to request repairs from the seller. Now, the seller may agree to fix the defects, or maybe they lower the home price or not. So if the seller refuses, you've got a decision to make. If the seller refuses to negotiate the repairs or the price or not negotiate to your satisfaction, you've got a decision to make. You can either, one, follow through with the purchase and fix the defects yourself, or two, walk away from the deal without forfeiting any deposit or earnest money that you may have put down.

It's the inspection contingency in your purchase agreement. That's your get-out-of-jail-free card. As long as you haven't removed your contingency or it hasn't expired, there's no risk for you to walk away. Due diligence is much more than a physical inspection, however. And I'll give you a complete checklist for free in just a minute. But before you take title and officially become the owner of your property, you'll also want to do a title search to make sure that you can indeed do that.

Because there may be additional baggage attached to the property that a physical inspection won't reveal, such as past due taxes or judgments or liens or loans. And mortgage lenders, they're going to require a title search as part of your due diligence because it protects them as well as you. For instance, what if the previous owner's long-loss brothers shows up, claiming he is a financial investor in the property and has a right to equity in it. Or a creditor has placed a financial lien on the home due to an unpaid liability. Or there are unresolved boundary disputes with a neighbor.

Such problems can be costly to address and due diligence in getting a title search will bring them to light so you can resolve these issues with the seller before you make a bad purchase. It's better to miss out on a good deal than it is to buy a bad one. And if you'd like to put the odds in your favor of making good buys, grab the checklist that I use in my own due diligence, the same one that I give to my students as well. You can get it for free at epicdoodiligence.com. Now, this checklist, it's pretty comprehensive, but an additional area that's worth drawing your attention to, one that gone unchecked can leave you with a considerable amount of regret is the homeowners association.

So if you're considering an investment in a condo or a property within a homeowners association, you'll want to make a thorough investigation of its declaration of covenants, conditions, and restrictions. referred to as CCNRs. Basically, this is the list of rules and regulations, as well as fines for infractions. And some can be quite strict, like reserving veto power over the color that you paint your property or the number or type of vehicles that you can have in front of your house, like RVs are sometimes banned as an example. Or if turning your property into a short-term rental, if that's the plan, you want to make sure that it's allowed. And if you're buying a condo, either as an investment or to live in, your financial diligence should also include researching

issues with the condo association. The condo association should have healthy financial statements, including a balance sheet with a good reserve fund. And if the condo association may be making special assessment soon, you'll want to discover that during due diligence, not after you take title. As you can probably tell, there's much to consider when purchasing such a sizable asset like real estate. It's buyer beware out there. So beware by conducting thorough due diligence with every single investment. And that wraps up the epic show. If you found this episode valuable, who else do you know that might too? There's a really good chance you know someone else who would.

And when their name comes to mind, please share it with them. And ask them to click the subscribe button when they get here and I'll take great care of them. God loves you and so do I. Health, peace, blessings, and success to you. I'm Matt Terrio. Living the dream. Yeah, yeah, we got the cash flow. You didn't know, home for us.

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