The importance of due diligence in property investment
Due diligence is about research. It’s about finding out those critical facts regarding a property before you decide to invest.
Why is due diligence in property investment so important? Because unless you ask yourself the following questions, you could end up making a costly mistake.
Are you paying the right price?
Buying a property is a significant investment, and you want to ensure you’re getting value for money.
Ideally, you would like to buy at below market value, but there could be compelling reasons to pay that bit extra. Your first port of call when it comes to price is to check on the sale prices of comparable properties.
Estate agents will put their value on a property, but you should also do your research on Rightmove and Zoopla to look at current and recent prices in that area.
Do you know enough about the location?
Essentially, to know if you’re paying the right price you need to have an understanding of the local area. Is the property commercially viable as a buy-to-let? Is there a demand for rental property in the region?
Next, ask if the location is close to decent transport links, and are there plenty of flourishing businesses nearby? Is your property the right size, condition and style to attract the type of people who’ll be looking to rent in this location?
Your due diligence needs to tell you whether you’re going to be able to make a profit on your investment, especially if you’re going to incur additional expenditure by refurbishing the property.
Can you estimate your rental yield?
To estimate your rental yield, take your potential annual rental income for the property and divide this by the property value. Then multiply the figure by 100 to get the percentage.
For example, if you expect your annual rental income to be £12,000, and the property is valued at £200,000, the rental yield will be 6%.
Have you thought about capital appreciation?
Although rental yield is a key factor in establishing whether a property is a good prospect for a buy-to-let investor, there are other things to consider.
In the long-term, you’ll want to think about capital appreciation. Is the property likely to increase in value? This is difficult to predict, but most investors still consider property to be a safe bet.
Many buy-to-let property investors take the pragmatic view of settling for a steady rental yield and slow but sure capital appreciation rather than a quick profit.
Is your due diligence thorough?
Whatever your investment – buy-to-let, HMO, land assembly, etc. you should take every step necessary to ensure your investment is the right one.
Fundamentally, due diligence is a series of questions that must be answered by undertaking the appropriate research. Only once you have the answers to all your questions should you proceed with your property investment.
Think of due diligence as a rigorous process that’s vital to the running of a successful property investment business.
Would you like to learn more about property investment?
Register for our course: An Introduction to Property Investing
Our Property Investing Masterclass will help you to understand the different property investment strategies that you can use in today’s property market.
Dates: 26th and 27th April 2019
Venue: Renaissance Hotel, Heathrow
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