Why Is Due Diligence So Important?

Building your property portfolio isn’t about spending hours every week viewing properties – not at all. It’s about understanding your numbers before you spend the time and energy taking the potential opportunities to the next stage. So how do you do that? 

Hi, this is Tom Soane and welcome to another episode of The Anonymous Landlord. Today I’m going to talk to you about due diligence. And what due diligence do you need to do before going to view a property? 

And then when you’re at the property, what due diligence do you need to do while you’re there and also around that whole time? There are other bits of due diligence that you need to do. 

So I wanted to talk through all of that to make sure that you’re picking up the right deals, finding the right properties, and not taking unnecessary risks. But also saving your time and energy and effort, because you could do the right volume in the right way and not waste your time and effort and energy, cause there’s no point in spending all your day’s going around viewing properties and getting there and realizing: “Augh, This is crap one, not going to bother with this.” I can save you, I reckon at least half of the energy and effort and time that you’re putting into finding property investment deals. I know an investor whose very local to me actually that has a full-time job, but literally goes on views twenty properties a week. Twenty a week! 

That’s madness! And he very rarely buys one a week. He just goes around viewings and gets into loads of properties, but they’re just not going anywhere. So, 

I do it slightly differently and I want to share that with you, because first of all I do a very set amount of due diligence. I have a very set checklist that I follow before I’ll even book a viewing, before I’ll even contact an agent or go and see a property. So once I’ve filled out or checked off my little checklist, then I will go and view the property if it ticks all my boxes. 

Or if I’ve gone through that checklist and there’s a couple of items that I haven’t fulfilled or haven’t been able to check, then I may go and see the property, but I certainly don’t go and see any more than about five or six properties a week.

Which is much better for me. Infact, sometimes it’s not even that, sometimes it’s three. Sometimes I don’t even go to view a property. You know what, there’s no point going and viewing a property in the hope that your due diligence might be wrong, because that’s kind of defeats the point of doing the due diligence. So I want to share that due diligence with you in what I do, the basics of what I do. 

Now, I do go into quite a lot of detail, so I’ll try and give you just the basics and then if you wanna to have a chat about any specific properties I do offer a loads of one-to-one calling sessions, one-to-one phone calls. If you’re local to me, then we can have a one-to-one coffee, where we can talk about property and strategy and any deals that you’ve got coming along at the moment that you want some help with. 

And that’s what I do. You know, I’ve started doing that, I’ve really enjoying helping people on a one-to-one basis, It’s great fun. So first of all due diligence. Now, I’m just going to say that we found a two-bedroom property that we think has potential. 

When I say we I’m talking about you and me. So let’s say you and me have found a property that. Yeah, we think it’s got good potential. So we go through our due diligence. 

Now the first thing, the first thing that I check is the true value of that property, the second thing I check is the value of that property in two years’ time. I know I’ve forecast what that property is going to be worth in two years. Why? Well because in two years, I’m probably going to refinance that property. So if I refinance it I need to know how much I’m going to be able to pull out or it is an estimate. It’s an educated guess, but you can look at the history of growth in areas very accurately. 

So I just apply that same calculation to guess the value of that property in two years time, right. So following that, I check the demand of the property. And again, you can do that very easily. Now, I’ve done big videos and podcasts about the science behind that if you like, but you need to check the demand and quite simply its properties that are on the market against the number of properties that are sold in the area of that category. So now you’ve got the demand, now you need to work out your yield straight away. 

Before you do your yield by the way, I forgot you need to calculate a rough refurbishment. Now most properties will have pictures throughout and you can get so much from these pictures. You can work out whether you need walls, flooring, heating, windows, kitchen, bathroom. Sometimes the agent will include it in the description and other times they’ll you can just see. You know, you can see if the bathroom needs replacing, but I will say that you might not need to do everything. So have a check, does the bathroom look okay In the pictures? if it does, it might just need a lick of paint and a couple of tiles here and there, so remember that. 

Also the kitchen, check the layout of the kitchen, if the kitchen looks like you could really improve the layout you might want to consider just replacing the cupboard doors. Because there’s no point ripping a kitchen out and then putting a whole new kitchen in the same layout. It just doesn’t make sense? Especially if the existing kitchen carcass is okay and unusable. 

I’m checking out the refurbishment and then I’m going to check out my yield. Now my yield will consist of first of all, I need to calculate my total purchase cost, which is what sort of figure I think I can pick it up for, what sort of the stamp duty, the legal costs, the refurbishment costs, my contingency, any buying fees that are attached to it, and so on and so of. If I’m buying it with a mortgage or a bridging loan, I need to work out what the cost of that purchase is going to be. So what I’m doing is I’m calculating my purchase cost. How much is it going to cost me in my actual money to own that property? Now once I’ve got that figure, I know what cash I need up front cause you need your 25 percent deposit, you need your refurbishment cost, you need other fees and whatever. 

So how much cash do I need? So that’s what I work out. This all sounded very complex. I’ve got a monstrosity of a spreadsheet, which does this all for me now, which I’m not inclined to share, because I put a lot of effort and a lot of time into building that spreadsheet and it’s got some mahoosive formulas throughout it that calculate things so. You know, I’m not going to share it but I’m happy to tell you if your property is good or not. 

Anyway, so once I’ve worked out my purchase cost and the cash requirement, I then work out what the property will return to me as a yield over the next two years. Right, two years is the key for me, that’s my personal preference. I like all debts paid back to me in two years, if there’s no debt to be repaid back to me. I like to know, what profit I can make in the first two years. So there we go. 

So now I’ve worked out the purchase cost, the cash requirement, and now I’m working out the yield as a buy-to-let property. How much equity am I leaving in the property? Because remember that is my investment now as soon as I own it the mortgage company owns 75% of it, I own 25% of it and at any time I could sell that property and get that 25% as cash, but I’m not, I’m leaving that in there now. So therefore that’s my investment. Now, there’s more to that, if I have used more of my own cash and not been able to refinance it back out, but I’m leaving say another £10,000 in there that I need to build into the cost over the next two years to return my £10,000 back to me, right. So you take that out of your net profits. So I’m working out what equity is left in there, what data is needed to be paid back to me. Then I’m working out what the rent income is, minus the mortgage payments, minus any management maintenance. 

I normally allow 20% for management and maintenance things like repairs, gas safety certificates, EPCS, electrical installations, and all that sort of stuff. Just allow 20%. Now, if you don’t use that 20% hey great, but I allow 20% for that.

So, now I know my net profit then I deduct my loan repayment. So if I need to give myself back £10,000 over the next two years, I turn that into monthly payments of can’t think what it is now, but turn that into monthly payments and take that out too. 

Now sometimes if it’s a particularly good property, you might want to extend that loan period back to yourself. But you get the idea. So, I work out the yield and if that ticks my boxes, I go and view the property. 

So I only go and view it if there’s demand, if the value is correct, if the yield is there, if I think that the refurbishment will add enough value, if I can pull my money out, how quickly can I pull my money out, because that’s the key. The first question you need to ask yourself as an investor is “When can I get my money out?” That is the first question you need to ask “When can I get my money back out?” So yeah, I’ve done that due diligence and I’ll go and view the property, right. Now bear in mind, I was searching through the photos online and I’ve been doing a bit of a tick box, a bit of a listing exercise of what I think needs to be done. What sort of costs I think you’re attached to that. Then I go to the property and just check those things off. 

Now, if I find more things, like the in the photo there wasn’t a big picture of that giant leak in the corner of the room. I might need to add £500 to £1000 on for that replaster that wall, maybe it might need a little work on the roof, check that out, so on and so on. 

So, you’re just adding to your picture. Let’s say you’ve made yourself a list of things that you think need doing, but there’s loads more. Don’t be put off by it, just recalculate your offer. Simple as that. It should be an ever-evolving figure until you make the offer. Your offer might start at the beginning, if you calculate on what you’ve seen the online pictures and it looks like it’s going to cost you £10,000, so you’re going to make an offer of a £100,000, and then you get to the property, and then you realize: “Oh, it’s got to be £20,000” Make an offer of £90,000 and so on. It just keeps evolving and evolving. So, now you’ve got to the property, you’ve carried out your viewing due diligence, and now you’re ready to make an offer or not. 

But I would always make an offer. Always. Even if you think it’s a silly offer as long as you’re not just being greedy. If I’m doing a flip for an example. I know the profit margin I want to make. Now, yeah if I’m going to buy a property. Say for example, it’s on the market for £100,000, and I know that once I’ve spent £10,000 and I’m going to sell it for £150,000 that’s a nice profit margin. Really good, profit margin to aim for. I’m not going to go in and offer them £75,000 for a number of reasons. First of all, you will become known as a stupid offerer. 

You’ll becomeknown as a greedy buyer, or someone who an agent doesn’t want to work with and that’s fair. If you just go around making stupid offers, then you’re just going to get labeled as that, and they’re just not going to want to work with you. So I don’t make greedy offers, I make realistic offers, I make calculated offers, and you should do the same. So in that instance, I would share with the agent: “I would like to buy this for a £100,000. I’d like to spend £10,000 plus all my fees blah blah blah blah. I’d like to be all in for £120,000, and then I’m going to sell it for £150,000” You know, you’re an investor, you’ve got to make profit, you are entitled to make profit, believe It or not. 

Then the agent will then be able to help you out. So that due diligence gives you the calculated mathematical and logical offer that you need to make. Now any wiggle room on that, if the seller starts negotiating then of course, you can go up a little bit, it comes out of your profit, remember that but you can go up a little bit. But also remember that if you go up in your offer by £10,000 that’s not £10,000 out of your pocket, because the mortgage company is funding 75% So really if you increase your offer by £10,000, it’s only £2,500 coming at your pocket, right. Just remember that. But what I will say is you’ve done your due diligence, don’t waste it. 

Don’t waste all that due diligence by going and viewing the property anyway. Don’t waste your due diligence by then making an offer, which isn’t calculated and logical. So, due diligence is vital. Now, it doesn’t even take that long now. Now, I can do that due diligence in about 10 minutes. And in fact, here’s the key right. You all know, I’m the anonymous landlord. Sounds really cheesy to say it but it is a way of life for me now. I now immediately think, “Who can do this for me?” “Who could do this for me, so that I can concentrate on growing my own business and increasing my own business” Right. Who can do that stuff for me? 

So look, I’m lucky enough to own an estate agent and a letting agent. Now, they all know my due diligence requirements. So this is what I can tell you to do. If you get to know and agent and speak to that agent: “Say, look this is the due diligence that I’d like to do. So if you find a property deal that you think might be good for me. Could you give me these five points of information or four points of information or whatever” Because if you do that, then they’re doing the job for you. And hey, guess what, if they’re thinking they’re going to get a deal. Then they might actually do this for free. I know mind blowing. So, originally I think I started this little episode about due diligence. I think I’ll throw in an extra few little bits in there, but what I guess I’m getting to is, do your due diligence before the viewing. Don’t even go to the viewing if it doesn’t tick your boxes, please.

And then just to confirm your due diligence once you’re at the viewing. And then make your offer without being greedy, don’t be labeled as a greedy investor, because you won’t get business, I promise you. The greediest of investors are generally overlooked by agents. So hope that helps and do you know what, I do offer one-to-one sessions. We do a lot of Zoom one-to-ones at the moment, because of the current situation. But I do offer a lot of calls one-to-one calls, where we can talk property, we can talk about deals that you found, we can talk about how helping you raise finance and so on, we can talk about general property investment strategies. 

So I do quite often, not for everybody, I don’t do this for everybody, It’s only certain people but, I do some I guess you could just call it a strategy session. Where we sit down we talk about, what you’ve got, what you want to achieve, what your financial freedom figure is, your life freedom, and we work out a strategy together to get to that. So I’m happy to do those. I really enjoy doing those as well, they’re great fun. Because you really get the excitement at people can see how they can achieve. 

Because to me I’ve been doing this for so long, I can see the ease of a strategy, it’s easy and if you stick to it, then it’s easy. So, you know, I love sharing that. So, if you want some help with that, let me know. If you don’t just keep following my podcast. I’ll give you load of information and load of help as much as I can. So I hope that helps. Don’t forget to do your due diligence and I will speak to you all soon on the next episode of The Anonymous Landlord.