Many people are convinced about the soundness of real estate investment as a wealth-building vehicle but most are not clear as to the path to follow and the pitfalls to avoid. More recently, I have had reason to clarify to aspiring real estate investors that real estate investment is not a get-rich-quick system. It is a system that requires knowledge, dedication and focus. We shall examine a few mistakes to avoid if you desire to effectively utilise this wealth building vehicle.
One of the basic errors new real estate investors make is to buy properties blindly on the assumption that all real estate investments automatically go up. This common assumption is not true in its entirety. For instance, if you decide to buy a property in an odd part of town without considering basic infrastructures or basic advantages, and then you go ahead and develop the property, you may experience a high vacancy ratio (this means, it takes an unduly long time to rent the property to tenants) or it may not be easily sold when you put it in the market. Properties do appreciate but not at the same rate and sometimes there are downturns in the market. During periods of downturns properties that have certain locational or structural disadvantages lose value the most.
Furthermore, when starting out in real estate investment, focus on cash flow instead of net worth. What you should measure is not just the value of the property you are buying but the amount of money it puts in your pocket monthly or annually. The big house you live in is not the true symbol of wealth but how much income generating assets you control. True investors plan their life in such a way that even when they are literally not working their assets are generating income that could take care of their standard of living. I recollect an astute real estate investor who built about ten detached houses in an area whose rental income was not less than N1m per annum. He explained to me that his intention was to use the properties as his retirement vehicle. In his calculation, the properties would generate over N12m per annum which translates into a N1m income monthly, which more than takes care of his basic standard of living. Take a cue from this. Calculate what the investment puts or is capable of putting into your pocket regularly.
On the other hand, as a starter, you need to avoid buying upscale or luxurious properties. In life, you need to crawl before you walk and walk before you run. Life is in stages. You should start your real estate investment by buying or building rental properties in low to middle class areas. The properties that are for these classes normally rent faster. And generally, if you build or buy in an average area you will easily rent it out. However, upscale neighbourhoods and luxurious apartments usually stay longer in the market and are often the hardest hit in downturns. They normally attract unstable renters and when times are tough most people who desire to scale down their standard of living will move out from such areas. A visit to many high brow areas in Nigeria at this time, will confirm this assertion. You’ll definitely see a lot of buildings with to let or lease signs. If you are an experienced investor with other income-generating assets you will not feel it if your upscale property could not be rented for twelve months. But if that is your only property, you may not find the situation tolerable.
In this connection, may I also warn that you should not buy a property for the sole reason that it is cheap. It may be cheap on purchase price but expensive and costly when viewed from another angle. This reminds me of an individual who actually had the resources to buy a land in good neighbourhoods but had the mentality of buying cheap land and erecting big structures on it irrespective of the neighbourhood. He is widely travelled and when he wanted to build his residential house he bought cheap land in a high risk neighbourhood and built a mansion on it. The last time I heard of him, he had to pack out of his property after a few visits from armed gangs in the neighbourhood. He rented a bungalow in a more secure neighbourhood.
Finally, don’t try to do everything yourself. Surround yourself with professionals who are knowledgeable in this area and be mentored by more experienced real estate investors.
- ABIODUN DOHERTY
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