What tasks comprise your due diligence?

I was hoping people on this forum might advise some of the issues they assess when considering the purchase of an IP. I see the word "due diligence" mentioned a lot, but I guess that means different things to different people.

What issues do you concentrate on?

For example, how many of you get a profile of the postcode to determine various demographics like type of employment, family unit size, number of cars, pets, renting/buying etc?

How do you rate issues like proximity to transport and shopping?

Do any of you throw in a "gut feeling" factor because the streetscape is nice, or a cul-de-sac has a feeling of community, or whatever?

There a commonplace adage about IP which says "just because you wouldn't live in it doesn't make it a bad investment". I see this as a double-edged sword. Should an investor's appraisal of the property as "desirable" or not play a big part in the due diligence process?

I like Steve Navra's nice easy rule-of-thumb which says don't buy if < (approx) 30% land value. Hmmm. Pretty much kills off buying _any_ apartment in a multi-storey building doesn't it?
Hi Kev

Any investing is a game of risk versus reward. Horse-betting is a form of investing and punters use a form-guide to do the best due diligence they can to determine if the odds about a particular runner are a true reflection of their winning chances. If the punter determines that a horse has a very good chance of winning but that horse's odds indicate it doesn't then the punter has concluded that the majority of other punters are wrong. In that case the punter will perceive that there is value in investing some money on that horse.

As property investors we are also looking to maximise our return by first determining all the risks associated with a particular purchase and then estimating whether a listed sale price is considered fair value against those risks. If not, we either pass it up or try and negotiate the price down.

Over the years, "buying new or old" has been a recurring issue because there are risk issues like the condition of the property which is of more concern in an old property than in a new property. However, new properties haven't tested the market and so price and quality of construction are important issues. Other issues for new-builds are type of dwelling and whether there will be a resale market or rental market for the new-build at this location. If you have two identical dwelling types for sale next to each other in the same street, one is 15 years old and the other is new, how would you determine which property to buy as an investment? Generally, the new property would be more expensive, but that would be offset by loads of tax deductions, usually a higher rent and little or no maintenance costs in the first few years. So how do you determine which property is the better investment?

To complicate matters further, how would you determine the best investment from a selection of different property types in different locations? Here is a 'best buy' list for home buyers in south-east Queensland I found on a RE agent website. The list was done in Feb 2001.

freehold riverfront and beachfront properties;

freehold Moreton Bay-front land;

hilltop real estate with city or water views;

houses on large homesites in the inner suburbs;

character houses;

well-located units/townhouses in well-designed and maintained buildings with river or city views;

residential redevelopment land in the inner suburbs; and

acreage property close to the city.

As a home buyer or investor, what due diligence would need to be performed to choose between properties that had vastly different characteristics?

If you were desparate to buy now then your budget and current borrowing capacity might be a major consideration and therefore the purchase price could limit your options. But what if your budget and borrowing capacity allowed for a range of price options? Would you buy one expensive property or two at half the cost? If you buy one property in an expensive area you may be able to attract good quality tenants. On the other hand, if you decide to buy two at half price each in a cheaper area you may have tenant troubles in the future. If you were in no hurry to buy then you could afford the time to be picky about what you bought. Perhaps you have the time to attend many auctions before finally securing something. So time is another factor to consider.

There are many other factors to consider but at the end of the day, as an investor, you are seeking to buy an investment which you can hold long term, if necessary, and will be able to sleep comfortably knowing that it has good tenants in, is professionally managed, is insured, has low maintenance, has good long term growth prospects and has wide resale appeal. Careful due diligence should give you that happy scenario. Extreme due diligence which involves actually studying a market in a specific geographical area as well as, if not better, than the local RE agent, should assist in getting a bargain just like the punter I spoke of earlier. But how much time have you got to become an expert in a specific area? If you don't become an expert then you can still buy good investments but it is doubtful you will buy them at bargain prices because the expert will have recognised the bargain earlier and already bought it.

Regards, Mike
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Agree wholeheartedly with Mike, however would add that due diligence is different to different people. I may think that because average house size has continually increased for the last 150 years that 6 bedroom/3 bath is the way to go. Others may feel that ageing population/smaller family size indicates 2 bedroom/1 bath apartment is the way of the future.

Both arguments are correct, however it is the mindset within ourselves that will lead us to what is the correct decision for us. We place more emphasis on whatever we wont to and we always have the reasons to back our judgements (purchases).

Personally, after making a decision to buy I still strive for the best possible bargain (ie cheaper for the same size/quality/age property) in the target location.

Enough rambling.