A frequently used term, in relation to the purchase of real estate, is Due Diligence. It can be defined as the process of investigating, through appropriate research, the likely implications and risks of purchasing a property for investment. By conducting such research and analysing the information found, we are better able to make an informed decision and thus mitigate risk. Each investor’s circumstances and motives vary, one investor’s process of due diligence may be quite different from another’s.
For the purposes of this article we are assuming that the investor is searching for a long term (seven years plus) residential property investment with the expectation of solid capital appreciation, as well as passive income in the future. This income could occur as a result of increased rents over time (which eventually exceed outgoing expenses) or through accessing the increased equity to convert into an income stream.
Knowing your strategy before you begin your search is essential, in that you have a plan and know the why, where, what, when and how. This may sound simplistic but is absolutely crucial in the wealth creation process. Financially overextending because the possibility of higher interest rates wasn’t taken into account, or being unable to afford expensive maintenance costs on an aging house are not healthy situations to be in. In some extreme situations, the investor may be left with little option but to sell for a possible loss.
What Is Due Diligence?
