Due Diligence

Due diligence = research

That is, studying your potential purchase to know exactly what you're buying into, or whether you should be buying it or not.

Hi Karlm

These links should get you started – http://passgo.com.au/property-data-websites

In addition to Jamie's websites and what's been mentioned above, you could look at sqmresearch.com.au to look for vacancy rates and myrp.com.au for other details.

Now the rest of this might be akin to teaching you to how to suck eggs, however I find Google (in particular, GoogleMaps) and the Melways to be extremely useful. It allows me to see exactly where my potential purchase is with respect to everything else (ie. transport, schools, shops, industrial zones, proximity to parks and the water). GoogleMaps is not entirely up to date however so this is where the most recent copy of the Melways comes in. And you could even compare the most recent Melways with the Melways of old to see where things appear to be going, or whether anything has even changed in the area within the last 2-3 years.

If you ask questions here about where the next hotspot is, you're not going to get any answers because nobody is going to want added competition. I think at least in this regard, the Melways and GoogleMaps MAY have helped me shortlist a few potential 'hotspots' (some of which have even been mentioned in the papers of late, and prices shot even before I managed to save to buy something there) which I can specifically target and investigate.

Realestate.com.au also has a little section where local residents rate their own suburb. It might be full of rubbish sometimes, but if you take care to read it carefully, there are sometimes detailed opinions about specific streets that are good or bad, or what amenities are in the area.

A visit to the local council to look at zoning, ask questions about the property itself (eg. any proposed developments in the area, building permits etc as Jenny mentioned) and collect a copy of the local newspaper. What sort of articles do you see in the paper? Does it reflect an area that has a degree of crime which the council is trying to stamp out? What about sports, culture and festivities?

Use the information at forums like this. What's the general sentiment of the market at the moment? Is it a frenzied market (in which case you might decide not to buy at all since things are 'overvalued') or is it a flat, cooling or even a buyer's market (where you could probably look to secure good deals and buy before things get hot again)?

Of course, ultimately you need to do the good 'ol legwork. Drive or walk around the area where your potential purchase is. Is the area full of well-maintained, quaint period housing or is there evidence of brand spanking-new luxury housing being built? Is the area about to welcome a luxury village-style or golf-links residential area, or low-rise luxury apartments (which could cause a rise in property values nearby)? Or perhaps all you're seeing are ill-maintained, disintegrating weatherboard houses, one overgrown lawn after another, and old rusting cars (or a tarted up wannabe sports car) parked on the lawns? Can you hear your neighbours in a fight or having a domestic dispute next door?

One of the common things I've read about investing in property is not to get emotional about your purchases but instead let the numbers do the talking. Is the property positively geared? Is it going to give you passive positive cashflow from the rent even after all the expenses have been paid?

I have wavered significantly from this 'rule' by getting very emotionally attached to what I buy. That's because I'm not looking to own over a dozen properties and be super rich. I'd be happy with just one family house in the suburbs and a beach-side shack for retirement (and with both the loans paid off). However I believe in buying a house that I would personally like to live in. If you buy something like that, you will attract tenants and potential buyers who are like-minded, people who are just like you. Look at it another way: would you prefer to deal with people who are just like you, or people who are radically different?

Because I have done this, the properties are negatively geared. This is NOT what I set out to do, and I did NOT buy these properties just to reduce tax…this is a VERY bad idea. To me, the negative gearing is just icing on the cake. My intention was merely to set foot in the property market and make sure I have a house ready once I move away from my parents' place and ready to start a family.

Everybody's intentions with property investment is different and that determines in some way the kinds of property they buy. What are your intentions?

Due Dilligence is working out where how and who you are buying the property for. I've seen all forms of stupid when it comes to investing, and very clever forms of smart as well. You can ride with the standard bunch of questions presented in the investment books, but i'd even go further.

WHY – are you investing? Are you planning to sit on this property and hope and pray that you have made a righteous pick?
DOES – the property meet your specifications for what YOU are looking for? Write them out before you go looking for any property.
GEARING – Are you investing at a level to best take advantage of the property? Two out of every three investors dont, its not a stupid question.
TIMING – how is the property clock turning in this area? is the area valued well, over valued or yet to happen? Will inflation or interest rates affect my purchase?
AFFECT – can I change the idea of what my property is, to anyone who will be wanting it?
finally
ME – is this a deal that works for me in the near future?? will it affect my well being (stress) or bottom line (money)

You should be asking each and every one of these questions. These questions extend beyond the position, price and presentation of the property and should be the essence of why you invest.

Those 20 questions that Lomas came up with, were simply research questions regarding the target area. To put is simply, ask those questions before you purchase a top performing IP. If you have not asked enough relevant questions as she prescribed you might end up buying a lemon.

Hope that is clear enough.

Good luck Karl!

A journey of a thousand miles begins with a single step.

Property networking evenings in your city are a wonderful place to network and gain some knowledge, the type of groups that provide education without trying to direct sell you something, so education instead of marketing, difficult to tell the difference sometimes when you are just starting out.