Real Estate Due Diligence: The Calculation Checklist

Buying property is typically the largest financial transaction most people ever undertake. Unlike buying a stock, the purchase price is just the beginning: taxes, fees, financing costs, carrying costs, and eventual selling costs all combine to determine the true financial outcome. A systematic due-diligence checklist ensures that no significant cost or risk is overlooked before you commit.

The True Purchase Cost

The advertised price of a property is not the amount you will spend. A realistic purchase cost calculation must include:

• Purchase price: The agreed contract price
• Acquisition tax: In many jurisdictions, stamp duty or transfer tax applies; rates vary significantly by jurisdiction, property type, and buyer status
• Legal and title fees: Conveyancing, title search, title insurance
• Inspection fees: Building, pest, structural, electrical — essential, not optional
• Financing costs: Loan origination fees, appraisal, mortgage insurance (if down payment is below a threshold)
• Moving and immediate renovation: Often underestimated

Acquisition Tax Kr

A useful rule of thumb: budget 3–5% of the purchase price for transaction costs above the purchase price itself. For a $500,000 property, this means $15,000–$25,000 in costs before you have moved in.

The Debt-Service Coverage Ratio for Investment Properties

If you are buying an investment property, the most important single metric is whether the rental income covers your financing and operating costs. The Debt-Service Coverage Ratio (DSCR) measures this:

DSCR = Net Operating Income ÷ Annual Debt Service

Where Net Operating Income = Gross rental income − Vacancy allowance (typically 8–10%) − Operating expenses (maintenance, management, insurance, rates)

A DSCR above 1.25 means the property generates 25% more income than needed to cover debt payments — reasonable margin. Below 1.0 means the property is cash-flow negative (you are subsidising it monthly).

The Capitalisation Rate

The cap rate is the investment return assuming no financing — it measures the property's inherent income productivity:

Cap Rate = Net Operating Income ÷ Purchase Price

A property purchased for $400,000 generating $24,000 net operating income per year has a cap rate of 6%. Compare this to the prevailing mortgage rate: if your mortgage costs 7%, the property generates less than financing costs — you need capital appreciation to profit.

Cap rates vary dramatically by location and property type. Knowing the prevailing cap rate for comparable properties in the market tells you whether a specific property is priced at a discount, at market, or at a premium.

Assessing the Vendor's Claimed Figures

Investment property advertisements often contain optimistic figures. Apply these sanity checks:

Gross yield vs net yield: Vendors quote gross yield (annual rent ÷ price); net yield is significantly lower after expenses. A claimed 7% gross yield typically translates to 4.5–5% net.

Vacancy rate assumptions: Does the vendor assume 100% occupancy? Apply a realistic vacancy allowance for the local market.

Maintenance reserves: Older properties require higher reserves. Budget 1% of property value per year for maintenance as a starting estimate.

Management fees: If you will not self-manage, factor in property management fees of typically 7–10% of rent.

The Total Cost of Ownership Over Time

For a primary residence, calculate the true annual carrying cost:

• Mortgage interest (not principal repayment)
• Property tax / council rates
• Insurance
• Maintenance and repairs (1% of value per year is a conservative estimate)
• Body corporate fees (for apartments and townhouses)
• Utilities that cannot be passed to tenants

Sum these and divide by 12 to get the true monthly cost of ownership. Compare this to renting an equivalent property. In many markets, the true ownership cost exceeds comparable rental cost, meaning the financial case for ownership rests on expected capital appreciation — which is not guaranteed.

Realtor Fee Kr Capital Gains Tax Kr

Exit Cost Planning

A property purchase without exit-cost planning is incomplete. When you eventually sell, you will incur:

• Agent commission: Typically 1.5–3% of sale price
• Capital gains tax: Varies significantly by jurisdiction, holding period, and whether the property was your primary residence
• Fixing-up costs before sale: Repainting, landscaping, minor repairs
• Early mortgage discharge fees: If you sell before the loan term ends

Modelling exit costs upfront helps you understand the minimum holding period required to profit from a purchase, and whether the expected capital growth is sufficient to cover total transaction costs on both ends.

Capital Gains Tax Kr

Red Flags in the Numbers

Certain patterns in property financials warrant extra scrutiny:

• Yields significantly above the local market average (often explained by overestimated rent or underestimated vacancy)
• Asking prices substantially below recent comparable sales (ask why)
• Body corporate fees that have increased rapidly in recent years (signals deferred maintenance)
• Vendor financing or lease-back arrangements (add complexity and may mask a below-market cap rate)
• Renovation costs that substantially exceed the increase in value they generate

A conservative investor takes the vendor's best-case numbers, applies realistic haircuts (10% lower rent, 15% higher expenses), and checks whether the investment still makes sense. If it only works at optimistic assumptions, it probably does not work.