Due Diligence Checklist for Smart Investors

As you know, due diligence is vital for your property investing success, however in our busy day to day lives some things can slip through the cracks.

 

This checklist can help you keep track of your due diligence progress to make sure that you’ve done everything you can before buying your next investment property.

 

Market Drivers

Understanding the market is vital to your career as a property investor.

Ask yourself the following questions, marking them off as you answer them.

• Infrastructure: Infrastructure spending is a good sign that the economy in a marketplace is on the move.
  • What does the media say about government and industry in the region?
  • Are there lots of public works in process?
  • Has the money been apportioned to completion of the projects, or is it still “on the drawing board”?

 

• Yield variation: A clear indicator of growth, if yields are high, capital growth is typically not far behind.  As market forces push rents and property values up, yields are driven upward as well.
• Determine if the suburb yield is at least one to two per cent above the previous five-year average.
• Don’t rely on this factor by itself - it needs to be present in conjunction with other market drivers.

 

• Supply and Demand: Capital growth is driven by supply and demand.
  • How long are properties on the market and how many are for sale?
  • What are the auction clearance rates?
  • How many building approvals?
• A growing population is an indicator of an increase in the needs of a populace - including the need for properties. However, be wary of investment opportunities located in a region with an ample supply of land. A simple increase in population is not enough - it needs to go hand in hand with a limited supply of property.
  • Is the population growing?
  • Does the government have a tight hold on supply?
  • Are land releases and building permits being given out like cheap candy?
• High wages generally mean unemployment is low and individuals have more discretionary income at their disposal. Property values commonly follow income growth so expect to find increasing business activity. Avoid areas with high unemployment!
• Demographics involves understanding the consumer habits of individuals in a certain area. Consider, for example, that the needs (and spending habits) of a young family with children will be much different than that of professionals in the prime of their careers or individuals facing retirement. Therefore each individual’s personal preferences for location and style will vary depending upon their needs and preferences.

 

Market synergism

• Drill down into the demographics of a marketplace and you’ll begin to get a good glimpse of the synergism of that particular area. Take a good look at the people, places and consumer habits that create the unique qualities of the area and you will begin to see what kind of property investment will deliver the best returns for your capital.
• For example, consider an area where the majority of people are families with young children. Ask yourself whether purchasing a one-bedroom unit makes sense or whether a three-bedroom house would rent faster.

 

Initial Questions To Qualify Property

• What is the property address? (if not listed in advertisement)
• What is the price/price range? (if not listed in advertisement)
• What is the size of the block?
• What is the size of the property?
• Where are the easements located? Are there any encroachments?
• How old is the house? (to estimate depreciation)
• What is the current rent? Is this market rent? If not, what is the market rent?
• What improvements would bring it up to market rent?
• What are the council rates?
• What are the water rates?

Time Saving Tips

1.    Create a Process

 Put together a process which you can easily follow to quickly knock off properties that don’t fit with your goals and/or your strategy.

 

For example, let’s say you need high capital growth property, therefore you decide to look at blue chip locations only. Or perhaps renovation is in your plans, then you’ll look at other types of opportunities.

 

To quickly eliminate those properties which don’t fit either your budget and/or your plans, use the following calculations.:

 

Quick Calculations

 

Gross yield:

 

Annual rent/purchase price

e.g. $10,000 (rent) divided by $100,000 = 10% gross yield

 

The yields need to be about 10% to be positive cash flow.

 

Net yield:

 

Annual rent - property expenses (excluding interest)/purchase price

Eg. $10,400 (rent) minus $2,690 divided by $100,000 = 7.7% net yield

 

The net yield has to be greater than the interest rate on your mortgage if the property is to have positive cash flow. This is why you need to use a realistic interest rate when you calculate the yield.

 

The fees (e.g. property management fees, stamp duty, etc.) you include in your calculations need to be as accurate as possible too.

 

2.    Match property type to market

 Not every type of property will appeal to an area demographic. Study the market to see what kind of properties the majority of individuals are seeking.

 

Families, for example, often look for homes with a good backyard for the kids to play in, while professionals might look for low maintenance and/or furnished apartments.

 

3.    Organise your records and your search process

 You’ll quickly realise that if you’re trying to buy at a discount (which you should absolutely be doing) success is often a numbers game. The more offers you send out the better your opportunity to snag a good deal.

 

That’s why it’s important to organise your records and your process so that you can quickly find what you need on each property you’re looking at.

 

Do yourself a favour and keep a list of those properties you’ve rejected. After looking at a lot of properties - especially in a big market - you might be surprised at how easily you can forget what you’ve already looked at.

 

Make a habit of checking your rejected list with each new property you come across.

For more tips and strategies, come along to our next Property Investor Night. These FREE events are packed with information you need to succeed in today’s real estate market.

Seats fill up fast, so book yours now!