FAQ 49 What is due diligence? Is there a checklist?
Due Dilligence is very much a personalized activity. It is about GATHERING facts and numbers about a property in order to make an assessment of that property. That assessment would then determine what the property could potentially deliver to you by way of either EQUITY or INCOME. This would then be matched against the investors’ plan to see if it delivered that which the plan specified.
Assessment can be undertaken using the EVAL YOUR DEAL Excel spreadsheet located under the DOWNLOADS section of the member website.
/eval-your-deal/
It is about checking all costs and performance to ensure that the property will actually deliver the numbers that have been worked with. It is about making sure that the investor will not be forced into a selling if wishing to hold or selling at considerably less than planned for by having multi exit strategies. With so many variables each property has to be treated on its own merit.
We have produced a starter checklist which you can access by clicking on the link below.
Due diligence is all about assessing whether the property ,that is about to be purchased , will deliver what is intended it to deliver. It should inform about all of the costs involved and the performance of the property from all aspects. If considering development then it will inform about the development potential.
Basically answer these questions for the checklist
1) what do I want to achieve from buying the property( from your written investment plan)
2) What will I actually achieve from buying the property.( from the assessment)
3) What will it cost me to buy the property. ( from the assessment)
4) what is the potential of the property.( from due diligence)
5) what does the area offer to drive the value higher. ( from due diligence)
6) is the growth sustainable. ( from due diligence)
7) can I afford to hold the property after say interest rate rises or higher vacancy rates. ( from the assessment)
Have a listen to this Dymphna podcast #81 on DUE DILIGENCE:
https://itunes.apple.com/au/podcast/i-love-real-estate/id487471333?mt=2&i=339583121
In addition for commercial property:
1) If buying as a going concern get a copy of the current lease and read it thoroughly to understand how long it is contracted for and the remaining portion of the lease. Understand the terms and conditions of the lease including provisions for increasing the rent.
2) The Capitalisation Rate ( CAP rate) for the property. This together with the current rent will establish the value of the property.
3) If not buying as a going concern then make an extra allowance for payment of GST. This can be reclaimed through your BAS at the next BAS return.
IN ORDER TO DO DUE DILIGENCE FIRST HAVE AN IDEA OF WHAT YOU ARE REQUIRING TO ACHIEVE FROM THIS NEXT PURCHASE.
For example – you are requiring to achieve cash flow then carefully look at the cash flow aspect. If the property does not deliver this then move on.
Failure to complete this will cause ‘Window Shopping’ for property.
In much the same way that a house cannot be built by starting at the roof – Start at the foundation level.
This article was published by Your Investment Property magazine in conjunction with HotSpotcentral
Your Investment Property Article
Michael & Sara
Ultimate Coaches
The information supplied is general only and not intended to replace professional advice.
