Creating wealth is an art and craft that requires research and learning to find the most profitable avenues. The higher the returns, the higher the risks. Therefore, it is important that one fully understands the investment options and thus make informed decisions. Some of the investment vehicles available in the market include bank fixed deposit, stocks, government bonds and real estate, among others.
In this article we delve into investing in real estate, outlining what an investor should know before committing their capital. To begin with, buying and owning real estate is an investment that can be both satisfying and lucrative. It is generally capital intensive and illiquid, hence the need to be well informed before committing funds.
To begin with, there are three common ways through which one can invest in real estate among them: rental properties – an investor could prefer to build or buy property, and rent it out thus earn a rental income. The amount one can collect from rental property is dependent on the type of property, its location, proximity to amenities and availability of facilities among others.
Rental property offers the investor the benefit of a regular income, often monthly subject to having a tenant, and the property value can appreciate over time. On the flipside; it can be tedious managing tenants, there is potentially damage of property from tenants and reduced income from potential vacancies.
Secondly, flipping – flippers buy properties with the intention of holding them for a short period — often no more than three to four months — and quickly selling them for a profit.
The two primary approaches to flipping a property include; (i) repair and update, where one buys a property they think will increase in value with certain repairs and updates. Ideally, complete the work as quickly as possible and then sell at a price that exceeds the total investment (including the renovations), (ii) hold and resell, here the investor buys in a rapidly rising market, hold for a few months, and then sell at a profit.
With either type of flipping, the investor runs the risk that they won’t be able to unload the property at a price that will turn a profit.
The third way is through REITs – a real estate investment trust (REIT) is best for investors who want portfolio exposure to real estate without a traditional real estate transaction. A REIT is created when a corporation (or trust) uses investors’ money to purchase and operate income properties. REITs are bought and sold on the major exchanges, like any other stock.
REITs pay through annual dividends, and investors who don’t need or want the regular income can automatically reinvest those dividends to grow their investment further. Key to note, the Kenya REIT market has over the years performed poorly attributable to (i) insufficient institutional-grade real estate assets, (ii) lack of investor appetite in the instruments (iii) high minimum investment amounts set at Ksh5 million that is over 100 times the median income in Kenya and, (iv) low investor knowledge.
It’s important to get clued-up if you are looking to start or expand your property portfolio. For first-time investors, the real estate market can seem like somewhat complex, and it can often feel like property investment is a hard sector to navigate. But this doesn’t have to be if you take into account a variety of factors among them:
Market Research: It is important to undertake an in-depth research on the current real estate landscape to establish the current property trends, historical and current property performance in terms of returns, price appreciation, and rental yield. This equips you with essential information on the market gap and the existing investment opportunities.
Location: The location of property is as important as the property itself. The location determines the security, potential of property value growth, proximity to amenities and availability of utilities. It is advisable to aim for a prime location which increases the chances of good returns: somewhere in the middle of a development push, and somewhere that has a good track record when it comes to property value growth.
Type of Property: This could simply refer to making a choice between a commercial and residential property guided by the objective of the investment. The next choice is between rental versus buy to sell properties. Rental properties are for investors looking for long-term gains through rental income, while buy-to-sell approach offers the chance for higher returns in the short-term, but the strategy comes with much more added risk.
Market Segment: Finally, it is important to establish the type of market one intends to venture into, i.e. low end, mid end or high end market segments. These segments are determined by the value of property with the high-end market segments having the highest priced property in the market and are located in prime locations.
Spreading your money across multiple properties allows you to mitigate risk and increase the potential for returns.
Diversification: When investing in property it’s important to diversify your portfolio. Spreading your money across multiple properties allows you to mitigate risk and increase the potential for returns because since you will not be subject to the success or failure of just one piece of real estate. In the case where one property performs poorly, the others will balance it out, while another might prosper elsewhere,
Risk Analysis: Just like with all other investment avenues, investing in real estate is associated with several risks that could have mild to adverse effects on property returns. Therefore, it is important that a potential investor maps out all potential risks, evaluates their risk appetite and establishes a way of mitigating the risks.
In conclusion, real estate can be profitable when potential investors have the knowledge to make wise investment decisions. It can provide steady cash flow, substantial appreciation, tax advantages, and competitive risk-adjusted returns, making it a sound investment. It’s therefore important to weigh all the major factors that could determine the performance of a property, as mentioned above, and whether you opt for physical property, REITs, or something else.