When you invest in property, the stakes are high. Inherent challenges come with almost any form of investment, but there is a unique set of risk factors that come along with investing in real estate—including fluctuations in prices and difficulties navigating legal regulations.
For property investors UK to mitigate these inherent risks, it’s essential to perform due diligence when purchasing any property investment—from family homes to large commercial structures.
In this blog post, we’ll look at what due diligence means in the context of real estate exchanges and offer some tips and best practices for performing proper due diligence on each potential purchase or sale.
What is due diligence for investment?
Due diligence is the process of researching and evaluating a potential investment to make sure it is suitable for you and your financial goals. It involves looking at the financials, legal documents, and other relevant information about the property or investment.
There are 3 essential types of due diligence:
- Legal due diligence evaluates the legal foundation of a deal and makes sure that everything is above board, with no hidden nasties.
- Financial due diligence verifies the financial information of the investment. What are the additional costs involved?
- Commercial due diligence considers market factors and whether it is viable to make money from your investment property.
Effective due diligence programs integrate all of these types of assessments, as they often have overlapping factors that contribute to a thorough understanding of the investment property.
Why is due diligence important for property investors?
When it comes to property investment, due diligence is especially important because there are so many variables involved. You’ll need to consider the location, condition of the property, zoning regulations, taxes, insurance costs, and more. It’s also important to research the local market conditions and look for any potential risks or opportunities that could affect your return on investment. Whether you want to give up your job, get your children onto the property ladder, travel the world in style or just have more time to spend however you want you need to ensure that your property investments are working hard for you. In order to generate income and build wealth you must do your research first. Conducting thorough due diligence ensures that you protect yourself from costly mistakes and attain maximum return on investment from your portfolio.
How is due diligence for property done?
When it comes to property investment, due diligence is especially important because there are so many variables involved. You’ll need to consider the location, condition of the property, zoning regulations, taxes, insurance costs, and more. It’s also important to research the local market conditions and look for any potential risks or opportunities that could affect your return on investment.
One of the most important aspects of due diligence is conducting a thorough inspection of the property. This includes evaluating its physical condition as well as any legal issues or restrictions that may be attached to it. A professional surveyor can help you identify any potential problems with the property that could impact its value or your ability to use it as intended.
Another key part of due diligence is researching comparable properties in the area. By comparing similar properties in terms of size, age, condition, and amenities you can get an idea of what kind of return on investment you can expect from your purchase. This will also help you determine if there are any hidden costs associated with owning a particular property such as maintenance fees or special assessments for improvements or repairs.
Finally, it’s important to review all documents related to the property including title deeds, mortgages and leases before making an offer on a property investment. This will ensure that you understand all legal obligations associated with ownership and avoid any surprises down the line.
Your real estate due diligence checklist
This due diligence checklist is based on a buy to let strategy.
On first impression, does the price seem reasonable?
- The condition of the property.
- Square footage.
- Outside space.
- Proximity to local amenities/shops/transport links.
- The quality of local schools and hospitals.
- How long has the property been on the market for? Has it been relisted? Has the price been dropped?
How healthy is the local housing market?
- Check house price data and capital growth statistics from reliable sources. Here are some of our favourites: The UK government’s Land Registry, Nationwide House Price Index, Rightmove House Price Index, Zoopla House Price Index and RICS data.
- Check house price forecasts from reliable sources such as Savills or JLL.
- Complete comparables. Use property sites such as Rightmove or Zoopla to find similar nearby, relevant and recent sales as reference points. You can also search property data by postcode.
- Confirm property boundaries and ownership through online research. You can do so through the Land Registry website.
Determine rental income by:
- Looking at local area statistics.
- Here are the places that we search:
- Shop around for financing through agreement in principle with a focus on soliciting a buy-to-let mortgage or specialist development or bridging finance.
- Budget accordingly for transaction costs such as surveyor fees, legal fees, stamp duty fees, and official search fees.
- Obtain a realistic construction cost estimate if planning on carrying out building works on the property.
Work out net yield. NET Yield = Income – costs.
- Make sure that you allow for additional costs such as ground rent, leasehold and property management fees if relevant. Also, don’t forget any mortgage/financing payments.
Do the numbers stack up?
- Check local planning policies and relevant constraints if additional construction work is needed, and consider consulting a planning consultant if the project is more complex.
It is important to note that there is not a one size fits all approach for property investment due diligence – different strategies will require additional considerations.
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