Real estate due diligence – protecting your asset investments
Due diligence is an imperative part of any investment process, in order to ensure peace of mind and reduce risk. The importance of due diligence has increased since the global financial crisis and investor confidence has decreased.
For commercial real estate, value is determined in an inverse proportion to the degree of risk inherent to the continuance and stability of the income stream from the property.
Due diligence helps investors to understand the investment so they can ensure that the strategy is suitable to their investment needs and personal investment goals. Investors should feel comfortable with the investment and the party offering the opportunity.
What to include in your due diligence?
Each investment requires the investor to follow a certain procedure. It is therefore essential for the investor to understand the entire purchase procedure from start to finish, including exactly what funds are required, at what stage of the purchase, allowing for accurate cash flow analysis and maximum financial leverage
Return on Investment v Risk Level
Many investments represent a level of risk that is often directly proportional to the potential returns. For example, high potential returns may represent the higher risk categories and vice versa. Investors should always take time to identify the potential risks and returns before assessing if they are acceptably balanced.
Suitability of investment
Careful consideration should be given as to whether the approach and terms of the investment are appropriate for the investor’s personal financial situation and investment targets. One consideration should be the amount of time any capital is likely to be tied up in the investment and whether access to these funds is likely to be required during the investment period. Additionally, for many investors cash flow may be an issue. The investor may determine that an investment that produces positive cash flow may be important as opposed to a back-end profit payout.
This is a major factor with any property investment. The location of an investment is directly linked to the ROI an investor can expect from both capital growth and rental yields. We recommend that investors look at comparable property and rental prices in the direct and surrounding competitive areas of any proposed investment to obtain firsthand knowledge of pricing and, where and when possible, personally visit the property.
Typically, early entry into emerging markets can offer the highest return on investment. However, in many circumstances, this is associated with the highest levels of risk. Whilst distance and accessibility can be key barriers to researching first hand foreign markets, key assumptions can be made by looking at basic market drivers for the area.
Also keep in mind that different jurisdictions have differing laws of property ownership. The location of the property investment is an important factor that should be discussed for both legal jurisdictional issues as well as tax consequences.
If a market is expected to offer continued growth, it is important that as an investor you understand what the “market drivers” are for this growth.
Contact a member of our team to discuss your requirements