It has been said several times that ‘ideas rule
the world’ and this holds true in real estate investing as well. We want to
examine a time-tested idea that guarantees quick turnaround time and good
returns on investment in most real estate markets. We’ll be examining
guidelines for making a good return in rehabilitating and selling properties.
First, you need to find a property that is in
need of repairs or renovation but is located in a good area.
These are the
diamonds in rough terrains. Someone once said that ‘discovery consists of
seeing what everybody else is seeing but thinking what nobody else is
thinking.’ Many people by-pass golden opportunities because they lack
imaginative minds and eyes that truly see. As far as I am concerned, it is only
creative minds that have eyes that truly see.
Several years ago, a couple decided to invest in
real estate and gave the instruction to search for an ideal property to a smart
real estate agent. They had a budget of N5m. After several inspections, the
agent recommended that they seriously consider a well located and upcoming
government estate in Lagos State, Nigeria, where they could get a plot of land
for about that amount. Unfortunately, the couple overruled the agent. Today,
the same parcel of land within 10 years is worth at least N50m. The agent saw
the opportunity but those couple did not. This often happens.
There are old and sometimes dilapidated
properties in very good locations that everyone seems to be overlooking when
thinking of property to purchase. It takes a creative eye to see what could be
done with such properties. If you have been following what we have been
discussing in this column, you should have realised that one of the key value
determinants in real estate is location. If a property is in a good location
but it is not in a good state, it gives you the opportunity to buy it at a
discount if you know how to negotiate and what to do with the property.
Secondly, our ideal property should be in such a
state that it makes good sense to rehabilitate it. That means it should be
structurally sound and if it is not, then the price should justify your
demolishing it after purchase. This also means that your team should involve a
good architect and a good quantity surveyor. These professionals and others
that would be involved in your project should be able to give you a near
accurate analysis of the cost of rehabilitating the property. You want to
minimise the incidence of surprise when it comes to cost as much as possible.
It is important to note that when you handle a
property properly, you will reap much greater returns than what you put in. For
instance, by spending money on painting a building properly and giving it a
facelift, you may be able to charge a premium in certain neighbourhoods. The
key is to find the few significant changes that will accentuate the beauty of
the property so that it will be in consonance with modern building or design
trend.
For instance, most older buildings may have fewer
toilets and bathrooms but often have more space that a good architect could
play with. You might be able to put in place individual bathrooms in each room.
The aesthetics such as light fittings and kitchen fittings could significantly
change the look and feel of the property.
There is no need to overdo these things since you
have to be conscious of the cost implication especially if it is an investment
property. You are an investor and you cannot afford to have sentimental
attachment to any property. You should avoid going for the very top range of
fittings.
Quality comes in various degrees but when it comes to investment
properties what counts the most is functionality. Your personal taste of what
you would have installed in your own house should not come in. Do what has to
be done to make the property beautiful and functional without overspending. You
need to realise that your job is to sell the property but it is the buyer’s job
to customise the property to their own taste.
Thirdly, sell the property at a profit. You don’t
have to do this but if you are interested in the model we are discussing, you
need to sell the rehabilitated property and move on to the next property or
project. When selling, you need to consider the replacement cost of the land
especially if you are focusing your investment in a particular area. During the
period you are repairing the property, the value of properties in that area
might have increased. You need to factor this into your sale price.
Some investors use their capital and profit to
buy larger properties and do bigger deals. They also use it to build a good
track record that gives them credence when dealing with financiers. You also
gain experience in various aspects of building. These experiences will often
stand you in good stead later. And the good thing about this model is that it
has a faster turnaround time since you are not building from the scratch. You
gain time and it is possible to start and conclude this project in less than
twelve months.
by Abiodun Doherty
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