The word “Investment” simply means the act of investing or committing money or capital to an endeavor with the expectation of obtaining an additional income or profit to distribute money in the expectation of some benefit in the future. There are various types of investment which includes but are not limited to investment in shares and stocks, investment in business and investment in real estate. However for the purpose of this discourse, we shall focus on investment in real estate. It is common knowledge that real estate is an imperishable asset, ever increasing in value and yields much interest.
There are various methods of investment in real estate some of which includes flipping, buying and holding, buying rental properties. It is pertinent to note that each method has its own pros and cons which shall be considered in the course of the article.
METHODS OF INVESTING IN REAL ESTATE
This is one of the most prominent methods of real estate investment. In this form of investment, a person buys a house at a cheaper rate, guts the interior, makes any necessary repairs, refurbishes it where necessary, and sell the house again at a higher price. This is a lucrative method of investment as the profit yielded is worth more than the cost of purchase and repairs.
It is important to state that old homes and foreclosed homes are commonly used for house flipping as they are relatively cheap thus increasing the potential profit. Furthermore, flipping is not only limited to houses, there is also a concept known as land flipping. Land flipping simply means buying of land and reselling quickly for a profit. It involves money and an in-depth knowledge of land ownership.
Advantages of Flipping
- Potential to make quick profit: This type of investment yields profit timorously if it is carried out properly. For instance, Mr. Ahmad purchases an old and dilapidated 2 Bedroom Flat at Ikoyi, Lagos state at the sum of 1 Million Naira in the month of January with the intention of renovating the property and selling same by the end of the year. He spent the sum of 2 Million Naira to renovate the said house in the month of September and puts same out in the market for sale. He sold the Two Bedroom Flat in the month of November for 7 Million Naira and made profit to cover both the purchase sum and the cost of repairs.
- It increases network and helps in gaining experience: while undertaking a flip, a person is exposed to different professionals in the industry including legal practitioners, realtors, engineers, architects, insurance brokers and other investors who could further assist him in future transactions. Furthermore, he gets to understand the nittygrittes of construction, real estate, payment of taxes, how the local market operates and so on. This knowledge would assist in making a budget for future projects.
- It creates a sense of fulfillment as you get to renovate an old home into something nice and give people the opportunity to enjoy your ideas and innovations thereby making memories for them.
- It helps in understanding the risks involved in land investments.
- It also serves as security to funds because as you renovate a house, every one Naira you put in by purchasing of building materials is an investment that would yield profit as the prices of these material keep rising by days.
Disadvantages of Flipping.
- Stress: This method of investment is relatively stressful as it involves finding the right property, the right location, the right team inclusive of engineers, architects, building contractors, agents that would market the house and even finding the right purchaser.
- Difficulty in selling: most often than not, expect a purchaser is already on the standby, it is always difficult to sell the renovated house. To this end, a person might lose money while maintaining the house and this would eat into the profit expected. Furthermore, fluctuations in the real estate market cam make you sell at a lower price.
- It is time and money consuming: Asides the fact that you have to be present to supervise the construction, flipping is very expensive as it requires cash at hand to sort out certain expenses.
- Unanticipated expenses: This will always arise even with careful foresight and planning and major issues like cracked foundation, need for plumbing, need for changing the roof and so on.
2. Buying and Holding
Buy and hold real estate is a long term investment strategy where an investor purchases a property and holds on to it for an extended period. Unlike flipping, where the intention is to buy and sell off immediately, this method is to buy property and hold for a long time with hope that the property appreciates with time. In Nigeria, it is very common to buy land in a location that is not developed and sell same when the location becomes developed. It is important to bear in mind the location of the land and the rate of development in the location before buying and holding land.
Furthermore, an individual may decide to buy and hold a building with the intention to sell same after a certain period. He could also decide to rent out part of the building while he sells the remaining part. This is good investment because the profit yielded when the land appreciates may be way higher than the purchase price.
Advantages of Buying and Holding
- It serves as a form of income stream: The profit yielded in this method of investment is often mouth watering especially if the land is by the roadside or at a location where there is development.
- It is affordable: This is because you purchase land at a cheaper rate in places where there is no development. Furthermore, it is easy to maintain as there are no improvement on the land.
- It is easier to control as the investor may decide to erect a building on the land, use it for farming purposes, leave it bare and so on.
- It is less stressful since the investment returns are expected over a long period of time.
Disadvantages of buying and holding
- The tendency of buying from the wrong person is high especially where the land is a family land and the necessary consents were not obtained.
- Sometimes the property itself can have issues. For instance a land located in a swampy area tends to yield less profit than expected as it requires lot of resources to develop it.
- The land may be acquired by the government to erect structures for public consumption especially when it is located by the road side.
- It might be difficult to sell in the long run if development is not attainable at the location he land is situated.
3. Buying Rental Properties
This is another method of investment in real estate. This simply involves purchasing a property at an agreed price and renting it out to tenants in other to make profit by collecting rents.
Advantages of buying rental property
- Constant stream of income: This provides a constant stream of income as the renters pays their rent.
- The decision making right is enjoyed by the owner hence he can choose who he wants to rent to, how much he will collect as rents, the restriction he has on the usage of the property and so on.
- Most properties have a strong tendency to appreciate in value with the passage of time. The level of appreciation depends largely on general inflation, location, market e.t.c.
- It is a good retirement plan and inheritance for one’s children.
Disadvantages of buying rental property
- Where a tenant causes damages to the property before vacating same, the owner would need to effect repairs on the property so that the property will not reduce in value.
- The cost of maintenance is high especially where there are no tenants occupying the property.
- Tenants are never a guarantee to pay their rent as at when due. Furthermore, some tenants are stubborn and deliberately damage properties. To this end, the service of a legal practitioner is required to eject them and such services are not so cheap.
- payment of property taxes and rates such as land use, tenement rate, ground rent and so on
We in Property Advisory Network advises that the most lucrative investment known to mankind is in real estate. To this end, it is advisable to invest in real estate taking the above into consideration. Furthermore, the need to consult professionals before investment is made cannot be over emphasized. For instance, if you are interested in buying a land and holding same for a certain period of time, you will need the services of a legal practitioner to advise you accordingly on the best location and to carry out due diligence in order to ascertain that the land is free from encumbrances.
Finally, the cities of Lagos, Abuja, Kano, Kaduna ,Port Harcourt, Enugu, Owerri, Benin City, Asaba, Warri, Ibadan, Abeokuta, Aba etc are very good market for real estate investment. This is because the cities are the commercial hub of Nigeria and the population is high. Investments in these areas are always good. We must mention here that investments in these cities are also on two categories. There are areas of these cities that are well developed and there are developing areas. An investor must study the investments in these two categories as both are lucrative but each of them comes with its challenges as would be seen in our subsequent article on Investments in Urban Developed areas v Investments in Developing areas.