If you’ve read any of my books, seen me speak, or even just glanced at the odd newsletter article here and there, you’ll know that I harp on about due diligence quite a bit. There’s a very good reason for this: doing your due diligence (or failing to do it properly) can make all the difference between a profitable property investment, and a real estate journey that ends before it has begun.
Now more than ever, I think it’s absolutely crucial to get this right, as the current investing environment is ripe with opportunities for inexperienced investors to make the wrong decisions.
I say this for a myriad of reasons. First of all, stagnating house prices and record-low interest rates mean that property has never been more affordable. At present, variable rates are hovering around the mid-5% range and fixed rates are available below 5%, with scope for further decreases.
Lending policies are also really starting to loosen up, with some financiers willing to offer up to 95% and even 97% loans again. We haven’t seen these types of products from mainstream lenders for over half a decade, since before the Global Financial Crisis (GFC). As well as this consumer confidence, which has been in the doldrums, is slowly starting to improve.
So all in all, we have shrinking interest rates, low property prices, improving consumer confidence, and relaxed lending policies – a perfect environment for investors to dive back into the market.
However, I’ve noticed that investors are increasingly tempted to invest in certain areas or properties that may not offer the strongest growth potential – simply because there are so many “bargains” available.
“Helen, these prices are incredible!” I had one investor tell me excitedly about a neighbourhood he was looking to buy in. “I can buy a house for $80,000 less than I would have paid two years ago and with interest rates so low, it’ll be positively geared straight off the bat!”
That’s all well and good… but when I asked him what due diligence he had done, he stalled. Beyond crunching the numbers at a basic level, he didn’t further research on this location.
He didn’t know whether the population was growing, what demographics the suburb appealed to, or how many locals were renters.
He hadn’t tracked the suburb’s historical capital growth, or checked vacancy rates. He hadn’t spoken to a single property manager to check that the house he was looking at was even a property that local tenants wanted to live in.
In fact, he knew absolutely nothing about the area, except that prices were low and there were bargains to be had. There’s every possibility that after he conducted his due diligence, the location may have stacked up as a quality investment – but unfortunately, there are no short cuts towards creating wealth through real estate.
Unless you do the hard yards and work out the fundamental features and growth drivers of an area for yourself, you’re essentially gambling. And I don’t know about you, but when I’m investing hundreds of thousands of dollars, I want that gamble to pay off!
Until next time, happy investing!