A four-level due diligence framework for any investment: macro forces like interest rates and policy, micro factors like population and employment in a specific area, niche attributes unique to the asset itself, and the numbers like cash flow and yields. Warren Buffett's punch-card analogy shows why careful selection matters when opportunities are limited.
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. I want you to think about this like a funnel. We start out really wide with the macro. We move a little bit closer in with the micro. We then come into the actual deal-specific 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 is 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 grand? 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? Some of the incredible developers that I've had the privilege to work with over the last 20-odd years, they are masterful at these and they create these apartments and these apartment buildings, which are a lifestyle where you almost do not have to leave, pure and simple. So in these, they have things like residents-only wine bars and hot and cold plunge pools and magnesium pools and coworking spaces and a concierge that can take care of literally anything you want. And they have really got into the psychology of their local demographic and given them exactly what they need. And you know what? They've got a 9-month waiting list to get tenants in there. They routinely get rental yields 1% to 1.5% higher than the average marketplace. And their property values just outperform day in and day out, day in and day out. And these are the things which make those properties which have their own economy. 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. Macro, micro, niche, analysis. These are the 4 different levels of due diligence that when you deploy them in any of your investing purposes, whether it be property or in the world of blockchain or in the world of shares or in the world of business investments, you are truly choosing a property or an element or an asset which is going to have the potential to outperform the marketplace and deserves a place in your portfolio. Warren Buffett is famous for saying that when it comes to your investing, imagine you've got a punch card with only 20 investment decisions. What if you deployed that in your own portfolio? If you only ever had 20 investment decisions that you could make literally in your entire life, wouldn't you be more careful with it? Wouldn't you actually take the time to do effective due diligence to go, yes, this asset serves a piece of purpose in my portfolio. It deserves the real estate that it's going to take up. It deserves one of those punches in the marketplace. And I'm comfortable and happy with it being in there, knowing that you've ticked all the boxes, you've asked all the questions, you've got all the answers, and you're truly making an effective decision because success in investing is all about successful decision-making. So you've got to become a better quality financial decision-maker within your portfolio because doing that is going to help you actually accelerate your portfolio at a rate of knots.
