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Investment Market Drivers
Investment Due Diligence
Property investment due diligence
Research is an important part of any potential investment. As part of any investment strategy it is essential that a thorough and comprehensive due diligence process is carried out on the entire product and process prior to committing any funds.
What is due diligence?
The process of researching, evaluating and investigating an investment, investment vehicle or investment company in detail before committing funds. Investors need to take steps to research the investment vehicle, company, the project and any other parties involved as well as looking at all the facts of the investment and ensuring that they are fully understood.
Why carry out due diligence prior to investment?
To highlight risks and expose potential threats to your capital investment. It helps investors to make an informed and educated investment decision by laying out the facts and becoming aware of the risks involved.
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 company offering the opportunity.
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.
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 firsthand 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. Some common "market drivers" are listed below:
Ascertain whether the product you are buying should be regulated by the relevant body in the country where the product is being sold and whether the company involved is sufficiently regulated. If they are not this needn’t necessarily be an issue provided the company in question can provide you with a full explanation of why not.
It should be relatively easy to find out key information about the history, background and track record of the company in question. At the very least, searching the internet should reveal any negative postings and make you aware of potential issues.
Establish whether the company has a physical presence in the form of offices you can visit and individuals with whom you can speak on a one-to-one basis; do not simply take the presence of a website as proof that a company is what it purports to be.
If you are unsure about any investment, seek professional advice from your financial or legal advisor.
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*This page is provided for information purposes only and should not be construed as offering advice. IPIN is not licensed to give financial advice and all information provided by IPIN regarding real estate should never be treated as specific advice or regulations. This is standard practice with property investment companies as the purchase of property as an investment is not regulated by the UK or other Financial Services Authorities.