What is ‘due diligence’?
‘Due diligence’ is a much-used and sometimes misunderstood term in investment, so what does it mean when it comes to investing in a property? Essentially, ‘due diligence’ is an investigation you should perform to evaluate an investment property before you buy it. This process is invaluable as it will give you an idea of the venture’s success, as well as any risks involved.
Adequate research is a crucial component to ‘due diligence’, for example marketing material or a brochure would not be enough. You should look deeper. A great starting point would be to focus your investigation around 4 areas:
- Your Plan: Make sure the investment is right for you, and in-line with your goals. Is it a managed property? Is it a HMO? Are you going to maintain the property yourself? Does it fit with your portfolio? Is it a refurbishment?
- The Local Area: How are the schools performing? Does the area attract businesses? What investments have been made in the area? Is the postcode area desirable?
- Market: Is there rental demand? How high are rental yields? What are the average house prices and monthly rents in the area?
- The Developers: Do they have a track record? How have their previous developments performed?
It’s also vital to remember not to overdo your research, as this carries risks in the same way that not doing enough ‘due diligence’ does. Whereas, a lack of ‘due diligence’ can result in expensive mistakes caused by an absence of fully considering every aspect of your property investment; too much detective work could lead to overthinking an investment and you deciding not to go through with it.
Of course, only you can decide when your ‘due diligence’ is complete, and to be able to do so you will have to trust your own judgement. Reflect on the findings of your research, but keep in mind that if concerns are minor, they can always be fixed.
The importance of carrying out thorough ‘due diligence’ cannot be overstated. It allows you to understand the property’s commercial value, to form a clear vision of how your investment fits in with your plans, and the potential it holds. ‘Due diligence’ is the key to making your property investment a success.