The 4 Essential Due Diligence Steps Before Buying Investment Property

A Smarter Way to Reduce Risk Before You Buy

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While most properties around the country have seen substantial price growth over the past 18 months, savvy investors know that you still need to do your due diligence before buying any property.

There are several steps that investors need to take before they make any purchase to ensure they’re buying the right property that is going to help them achieve their financial goals.

Property due diligence checklist for buying investment property in Australia, showing key steps to assess the right price and reduce risk before purchase

Step 1: Start With the Right Investment Strategy

The first step in the due diligence process is to ask yourself whether or not the property that you’re purchasing is in fitting with your overall plan and strategy.

If you don’t have a plan or strategy in place, then that’s the most important thing you need to work on before even starting the hunt for a property.

Whenever you invest in a property, you need to make sure that it is aligned with your long term financial goals. Your plan should outline how you’re going to accumulate a portfolio of properties over a period of time, and to do that, each property will need to take into consideration factors like its capital growth potential, whether or not it will provide cash flow and how it will impact your serviceability so you can continue to expand.

It’s also critical that the property you buy is going to be within your overall budget. You’ve got an adequate buffer to account for unforeseen costs or things like interest rate rises. Our portfolio strategy and sequencing guide covers portfolio-level due diligence, assessing how an acquisition affects your overall risk exposure, borrowing capacity and sequencing logic.

It’s critical to speak to a range of professionals such as mortgage brokers, accountants, financial planners and strategists when you develop your plan and begin the search for a property, you are very clear on what needs to happen to reach your goals.

Step 2: Research the Right Location Using Fundamentals

Once you understand what you’re trying to achieve and the type of property that fits your overall criteria you can hone in on the right location.

As we all know, the right location and any subsequent capital growth are important factors that will ultimately dictate how large you can grow your property portfolio.

Determining the right location is about looking at supply and demand factors as well as factoring in other drivers such as future population growth on the back of new infrastructure or job creation.
It’s also vital to remember that it is ultimately owner-occupier demand that drives house prices and you need to ensure you’re buying a property in an area that owner-occupiers want to live in.

Our property market research framework applies the five-criteria evaluation system to market-level due diligence: vacancy rates, supply constraints, and demand drivers.

Step 3: Select the Right Property Type for Your Stage

When you’ve identified the location, you can get into more specifics about the property you want to buy.

Again, you need to look at this through the lens of an owner-occupier. Imagine you’re a young family and you’re trying to buy a property in a certain area. What are the must-have features that this type of buyer would want?

Focus on properties that people won’t want to avoid, such as ones that aren’t near powerlines or on busy main roads. It’s also essential that the property is structurally sound without maintenance issues. Our building and pest inspection guide covers exactly what a thorough physical inspection involves, including what defects are acceptable, which are red flags, and what typical report findings mean for your acquisition decision.

Each area will appeal to a slightly different demographic of buyers, and your job is to identify what buyers in that area want and then target the appropriate properties. Our investment property buyers agent service includes rigorous due diligence across all five layers as part of the acquisition process, each shortlisted property is assessed before any offer is made.

Step 4: Confirm You Are Paying the Right Price

Once you’ve done all of the upfront research and analysis, it’s time to make an offer on the property.

Your ability to negotiate and get a reasonable price will depend on various factors. Your job is to be as analytical as possible and not fall in love with the property, as that will lead you to make emotional decisions that are not likely going to be all that good.

Study comparable sales in the same suburb for similar properties to get an idea of what they are selling for. Gauge how much interest there has been, how long the properties are taking to sell and from how many offers.

From there, you can work out what a fair price might look like and develop a negotiating strategy around that figure. Also, understand that you are looking for a win-win with the vendor, and you can negotiate around terms as well to achieve the best outcome possible. Our guide to avoiding overpaying for properties covers the valuation methodology in depth, including the three approaches used in Australia and how to interpret comparable sales evidence.

As we can see, buying a property involves a lot more than just browsing the real estate portals and attending a few open homes. If you want to use property to achieve financial freedom, then you’re going to have to start treating the process like you would a business and start with the end in mind before working through the various due diligence steps. Our property due diligence checklist gives you every step in a printable format, useful to work through alongside this guide.

Next steps: Should you want to learn how the author built his $5m balanced portfolio in 7 years and aspire to own something similar, feel free to get in touch via email at rasti@getrare.com.au or book an appointment here.

Disclaimer: This article is general in nature and does not take into account your situation. You should consider whether the information is appropriate to your needs, and where applicable, seek professional advice from a financial adviser.