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Due diligence isn’t an option

due diligence Feb 25, 2021

Buying a property requires you to make informed decisions - that means you need data to work with.  And here lies the challenge for most investors.  They get excited about refurbs, increasing the value and finding tenants, but doing the research prior to purchase can be hard graft.

In a perfect world you should know:

  • The market value - what other similar properties in that road or nearby area sell for.
  • The rental potential - what’s the going rental for similar properties? 
  • Whether the rental will cover your outgoings and leave you with a good profit.  Don’t forget to factor in cleaning and maintenance as well as your mortgage payments.
  • How long it will take to get your investment out of the property - including all the costs of purchase and any refurb that needs doing.

If you haven’t done your sums how do you know if the deal is profitable?  It only takes your calculations (guesses) being a few pounds out to turn a profitable property into a white elephant.

Compare like with like

If you’re looking at similar properties you’ll need to know that they are:

  • The same size - either by square footage or checking that they don’t have extensions or substantial changes such as an extra bathroom.
  • In a similar state of repair - a property in need of redecorating or a lick of paint on the exterior walls or woodwork, won’t get as good a price as one that looks fresh and well-looked-after.
  • Have a well-tended garden that’s tidy and attractive.  It doesn’t have to be eligible for a Homes & Gardens feature, just to look as though it’s been well-kept.

For instance: it’s not a good comparison to match a house that has been converted to an HMO with a family home - even if they’re identical buildings from the outside.  If a property is a licensed HMO its value could be very different to a normal 4 or 5 bed property.

Buy to let or buy to sell?

Due diligence is just as important if you’re operating a flip strategy, buying below market value and selling at a higher figure.  If your estimates are a bit out, you could end up being out-of-pocket if you can’t achieve the price you want.

Of course, no investor goes into a deal expecting to make a loss - or even to only break even.  It’s a business and the aim is always to make a profit.  Estimates or guesstimates are not good news.  Always do your homework.  Due diligence isn’t an option; it’s essential.

You can learn more here:

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