Buying a first rental property involves more than estimating rent and comparing the purchase price with a mortgage payment. Due diligence tests the property's legal, physical and financial condition before the buyer is committed.

Verify the income assumptions

Compare the proposed rent with several current, genuinely comparable listings. Review leases, payment history, deposits and concessions when the property is occupied. Do not treat projected rent as guaranteed income.

Review physical condition

Order an independent inspection and pay attention to structure, roof, drainage, moisture, HVAC, plumbing, electrical systems and safety equipment. Obtain specialist inspections when the general inspection identifies a material concern.

Check legal and local requirements

  • Zoning and permitted use
  • Rental licenses and inspection requirements
  • Lead, smoke and carbon monoxide safety rules
  • Rent control or notice requirements
  • Association rules and pending assessments

Model the full budget

Include taxes, insurance, vacancy, repairs, management, utilities, reserves, financing fees and closing costs. Test the result with higher insurance, lower rent and a period without a tenant. A deal that only works with optimistic assumptions is not a conservative deal.

Review documents and professionals

Read the title report, survey, leases, insurance history, tax records and inspection reports. Use qualified legal, tax and lending professionals for questions that depend on the property location or ownership structure.

Make the decision

Write down the conditions that must be satisfied before closing and the risks you are accepting. Due diligence is successful when it helps you renegotiate, budget accurately or walk away before an avoidable problem becomes expensive.

Sources and further reading

Rules and tax treatment can change and may vary by state. Check the current official guidance for the property location before relying on this information.