If you’ve been here a while, you’ll have probably seen us talk about Due Diligence a lot! We even did a blog post on how to carry out Desktop Due Diligence if you are investing out of area. You can find it here. When investing in property, Due Diligence is incredibly important for things such as understanding the market, analysing whether a deal is viable and a worthwhile addition to your portfolio, understanding the potential risks attached to the investment, and making sure the people that you choose to work with are who they say they are.
It can help you avoid making costly mistakes and it will also help you make informed decisions. Here are our top tips on why Due Diligence is so important and how to carry it out effectively.
The Current Market
Make sure you really understand the property local market dynamics. When carrying out your due diligence you should really be looking to understand the following:
Current prices
Any obvious trends
The local demographic – Students, professionals, tourists etc.
Property types – Do they provide appropriate accommodation for your desired strategy?
Demand
You can only really assess whether the area and the property align with your investment goals once you’d established these points.
Finances
Arguably the most important – we’re here to make money, right? This should involve delving into the property's financial records, such as the purchase price, refurbishment costs, ongoing maintenance costs. It is also crucial to assess the property's cash flow potential and its ability to generate income. Depending on your strategy, don’t forget to consider things like any major refurbishment costs, planning costs, cost of money, management costs and any potential void periods.
Power Team
Believe us, it takes a lot of combined and complementary knowledge to create a successful property investment strategy and portfolio. We’re incredibly lucky to have an amazing team here at Brentor, including solicitors, build team, brokers, managing agents and property sourcers. But we did have to kiss a few frogs to find them!! It’s important to find advisers who have personally successful track records in property investment and ones that have a holistic approach and are part of a great team. It also pays to be aware of people who are not necessarily looking after your best interests…
Risk
Yeah, it kind of comes with the territory when investing in property but due diligence is the first line of defence. By identifying and assessing risks early on, due diligence can help to reduce the risk of financial losses or legal problems. Consider the condition of the property, any legal issues that might come back to bite you, any “money pits” that could impact the viability of the project. Make sure you really understand your risk profile to enable you to evaluate just how much risk your willing or able to take on. Just remember, if you’re taking advice from an external party, free or seemingly ‘cheap’ advice can be very expensive in the long run, so don’t be afraid to pay for a sound, honest assessment of your position.
Comments