I was asked the question the other day by one of my newest portfolio clients about what was meant by the investment property term ‘due diligence'.
He knew in general terms, but he wanted to know specifically what it meant. Now my immediate thoughts were to put on my salesperson hat and tell him it was all the research we do to prove a property investment is worthwhile but I soon realized that due diligence in the eyes of most property investment companies was purely a sales term and in a lot of cases what constituted a good deal was how big the discount they received.
Little thought was given to things like actual market rent, potential for growth, possible void periods, type of tenant or possible resales.
So this begs the question. The most important thing to understand is that some aspects of it are always the same and others are very different with each opportunity. To be honest, this thing called diligence is a massive part of the property.
If we take our two rules for buying property which are buying below value and buy something tenantable we will always make money in property but let's consider how we might make certain or at least enhance our chances of a return.
I break my due diligence into four areas; macroeconomic, microeconomic, development specific then the final relates to portfolio specific. It's the last one that l have found to be unique but let's look at each it turns.
Macroeconomic – these are things on a significant scale. Airports, roads, regeneration, government incentives, major industry investment, market forces or the property cycle, and supply & demand at a national level.
Microeconomic – these are things on a more local level. Schools, transport, shops, community facilities, local government, surrounding environment, local neighbourhood, tenant demand and resale potential.
Development Specific – this includes build specification, size, design, includes such as parking, flooring, chattels, the builder, workmanship or previous workmanship, location, selling points
Portfolio Specific – this is specifically how the investment relates to an individual's portfolio. In other words how does all of the above relate to your overall portfolio. Some might say that this is sales rather than diligence but l include it here to demonstrate that it is important to linked your portfolio with the individual plot and property.
Due diligence for me is not a separate thing you do as a one size fits all, it's a personalised process to each investor. Sure in the initial stages you are not personalising it but as the process progresses, it must take into account the individual needs of each investor. To truly achieve this you need to have an understanding of each person's portfolio and circumstances rather than just flog them property because you need to sell.
If you check out my website, you will find my simplified checklist for conducting investment research and due diligence.
Live with passion,
Brett Wood
