dothesums blog

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On the day after General Motors has filed for bankruptcy, it is self evident that the recession is having a weeding out effect upon the business world.

Although it is hard to accept if you are personally involved, most of the businesses going to the wall have been trading at or below, a break-even point, some for a very long time.
As the pruning process continues, the survivors, those that adapt, will very likely become stronger, because of the reduced competition.
This is Darwinian 'survival of the fittest', at work.

Buying a house for residential, or investment purposes, is much like starting a business, in fact in the case of rental properties, it is actually starting a business.

How can the residential home buyer adapt to the changed economic conditions?

In much the same way as small businesses. That is, when purchasing a major asset due diligence should be carried out to ascertain the potential of that asset.
Due diligence is a process undertaken by a potential investor to analyse and assess the desirability, value and potential of an investment. It serves to confirm all material facts prior to a purchase.
Due diligence should be carried out alongside the physical surveys, valuation and legal searches and before any exchange of contract. Not to do so, risks later problems with value and resale. It is too late to avoid mistakes, once the property has been purchased.

For most residential properties a minimum of two activities should be carried out.
Firstly, a cash forecast, ideally for three years and secondly a forecast of values, also for three years, so that a return on investment can be calculated. We use the Internal Rate of Return of a series of cash flows as our principal measure. (This tool by the way is available in Microsoft Excel under fx, if no specialist software is available to you.)

A more business-like approach to buying the principal assets in our lives, will enable us to survive the more rigorous economic conditions we are likely to encounter in the future.