Todd Polke outlines a four-step system to avoid bad property deals: macro-level analysis of interest rates and policy, micro-level study of supply and demand in a specific area, niche-level evaluation of why one comparable property appreciates more than another, and financial projections for cash flow and returns. Start with your strategy, then pick markets and properties that fit it.
You know, most bad property deals could have been avoided by having the right due diligence system. You don't want to be relying on sales brochures or someone else's numbers or any other opinion about whether you should do the deal or not. You have to take responsibility and you've got to do your very own checks. Now, whenever I work with any of my investors on due diligence, there are 4 key aspects of due diligence that you have to be thinking about. I want to talk through these with you bit by bit because this is truly going to change the game in how you choose the deals that are going to make the difference in your portfolio. What I'm talking about is the deals that make more profit, that make more cash flow, that accelerate your journey towards financial freedom. So let's get into aspect number 1 of your due diligence system. This is your macro level of due diligence. So when we're talking about your macro level of due diligence, these are kind of like the big overarching trends which affect everybody. It affects the entire marketplace. These are things like, it could be interest rates, for example, it could be government policy, it could be natural disasters. It could be big international events which impact the whole market. A good example of that has been the Trump factor which has come in, which has impacted retail shopping, for example. So I want you to think about the big overarching trends which are having an impact on us all in our day-to-day lives. When we start to think about that, we want to start, well, what is actually happening in the marketplace which is impacting everybody, impacting everyone's psychology and how they choose to live life, and how do I invest To align with the trends associated to that and not be actually pushing shit uphill. Secondly, we then drill down into what I call the micro level due diligence. Now, the micro level due diligence is that in the world of property, for example, is where we start to focus on an individual area. And what are the things that make this individual area go up, down, or sideways? This is where we start thinking about those market drivers. These could be things, look at the supply and demand factors in the market. It could be about population growth. It could be about the infrastructure. We always think about the PIE principle, right? Population growth, infrastructure, employment nose is 3 of the key drivers behind markets. Now, obviously there's a heck of a lot more and most markets are fundamentally driven by supply and demand. So what we're starting to ask the question about is in this area, what are the factors? What are the forces that are operating in this area, which is making this market go up, down or sideways? And is that a market that I want to be involved in based on my current strategy? Because when we're choosing the market, we don't choose the market and try and force the strategy into the market. We always start with strategy first, and then we choose the market which has the right forces, the dynamics behind it, which is going to serve the purpose of our strategy. Super critical difference between gambling in the market versus being an investor. Once we move through the micro area due diligence, we start to understand, well, this is an area that we want to invest in, and these are the reasons And we've got fundamental data and reasons why. We then move into the next level of due diligence where we start to talk about the niche level of due diligence. Now, the niche level of due diligence from a property standpoint was, well, hang on a moment. Why does this 4-bedroom house, which is next to this other 4-bedroom house over here, why does this one go up by $200,000 while this one does nothing for years? Why does this 2-bedroom apartment in this high-rise building, Next door to this 2-bedroom apartment in another high-rise building where all intents and purposes on paper, they may look the same. Well, why does this one go up by $150,000 where this one drops by $100,000? This is what I mean when I talk about this niche level of due diligence. These are the things which makes the individual property more desirable. I always like to think about when I talk to my investors about every time we choose a deal, we want to choose a deal that creates its own economy. We want to choose a property which is going to be so in demand by the local demographic that is so desirable that no matter where the market is going up, down, or sideways, there's still going to be demand for this type of real estate. So you want to get really, really nerdy about the fact of asking the question, who are the people that live here? What do they truly desire? What do they truly love? What's going to make this a home where they never want to leave and more and more people want to get in the areas? Once we get past that niche level and we've identified that type of real estate, which is going to be so desirable to local demographic, we now come into the analysis part of your due diligence. This is where we look at the numbers. This is where we look at our cash flow. This is where we look at our vacancy rates and we do the numbers, we do the sums to make sure that we can handle this and it's going to be serving the purpose that we need it to in the portfolio. Now, if you want to understand why the default life and just following the script that we're given in life is the very thing which is keeping you broke right now and you want to understand how to escape it, then you need to make sure you watch this next video about all about how the default life is keeping you broke right now and importantly, what you need to do about it.
