Real Estate Investments: 10 tips to investing in real estate
“Land is the only asset you can invest in, where its value will almost always appreciate,” Indeed, real estate investments have proved to be an avenue for creating wealth. Whether it is building your retirement home or buying plots as a group, many of us have dreamt of investing in property at a certain point in our lives.
“Earth is the best investment on earth.”
However, sometimes real estate investments can be intimidating for beginners due to fear of the unknown.
These reservations are legitimate as we have seen people lose millions of shillings and go bankrupt overnight in real estate deals gone awry.
For smart investors who consult widely and seek guidance from professionals, the industry sure is lucrative, as we have facilitated deals in which people have made millions of shillings overnight.
Tip for Real Estate Investments
Below are ten tips that will help you get started in real estate investments and turn investing in property into a lifelong pursuit to secure your financial future.
START SMALL, START NOW
A common truism in property circles is that, with real estate, you don’t wait to buy, you buy and wait.
“Many people lose out on making a fortune because they think the money they have is too insignificant to get them into the real estate business.
They don’t know that there are real estate investments packages and opportunities they can exploit if they seek guidance from a professional real estate agent.
To drive the point home, we give the scenario of two individuals with Sh100,000 each, and who both want to own a home in 10 years.
While individual A might think it is better to save until he can raise the capital required to build a house, individual B, who gets into a joint land-buying venture with his Sh100,000, will be better off as his stake in the venture will have risen over the years since the value of land always appreciates.
There are many financing options available to people with interest in the real estate, ranging from bank loans to mortgages and micro finance savings packages. Just make sure the income or appreciation value of your property surpasses the interest on the loan to avoid burning your fingers.
You don’t need to buy an apartment complex right out of the gate. It is okay to start small, even if it is with REITs or partnerships. Just start.
REAL ESTATE IS NOT A GET-RICH-QUICK SCHEME
Most people find the allure of buying property today and selling it after a short time hard to resist. However, professionals caution against getting into real estate with such an attitude because, like any other investment, there is always an element of risk involved.
“One virtue that will prove very vital in this business is patience, which goes hand in hand with the principle of delayed gratification.
A person seeking to make a fortune in the real estate sector should be prepared to work hard and learn over a long time to understand how the market works.
DO NOT QUIT YOUR REGULAR JOB JUST YET
If you are looking to getting started in the property sector, leaving your regular job might not be a very sound move, especially if it is the job that provided the initial capital for your real estate investments.
People who quit their jobs to concentrate on real estate are oblivious to the fact that they can get professionals to handle the management part of their investments.
“Property agents and land economists have obviously been in the industry much longer, and thus more experienced incompetently managing your investments,” we advise.
Relying on professionals saves you time as it only requires you to play a supervisory role.
DO NOT UNDERSTATE THE IMPORTANCE OF DUE DILIGENCE
The average Kenyan looking to get into real estate is always paranoid. This paranoia is because cases of people buying land whose title deeds later get revoked are rampant in many parts of the country.
We have had people asking us to do a title deed verification when their investments have already gone up in smoke.
By then it is too late, and there is little we can do. To avoid being sucked into such unscrupulous deals, we advise land buyers to consult professionals, who will carry out due diligence to verify the legitimacy of the property in question.
Even when buying a property from a family member, a friend or a person you think you know very well, resist the temptation to skip carrying out due diligence as unforeseen circumstances could later lead to life-long scarring.
We know of people who spend the rest of their lives servicing loans for properties that turned out to be phony.
Given the kind of emotions, land issues raise, it is certainly better to be safe than sorry.
SURROUND YOURSELF WITH THE RIGHT TEAM
When getting started, it is advisable to build a team of professionals you can quickly consult before making any move, especially one that involves high financial expenditure.
A property valuer, a conveyancer, a certified contractor and a loan adviser are a few of the professionals whose advice you cannot afford to shrug off.
While adding the professionals to your payroll might seem costly at a glance, a closer look will reveal that it saves you money.
We had a case of a client who wanted to buy a house in Nairobi valued at Sh10 million, a week before the interview but before he could seal the deal, however, the prospective buyer, on our advice, decided to call the valuation firm for an opinion.
“Our team visited the property and advised the client not to pay a cent more than Sh7 million for the property. He later sealed the deal for Sh6.5 million. While he was only charged him 0.25 percent of the property price for the services, he ended up saving an enormous sum.
BUY THE WORST HOUSE IN THE BEST NEIGHBOURHOOD
The importance of location in any real estate investment cannot be overemphasized.
This emphasis is because property in prime locations is measured not so much by the cost of construction, but by the value and high appreciation rate of the land on which the property sits.
Investing in a simple establishment in a high-end neighborhood always pays handsomely.
However, the reverse can be the worst mistake an investor could ever make. Buying the best house in the worst neighborhood, he warns, will always turn out to be disastrous as the value of the land underneath hardly appreciates, and future buyers will most likely shun the property because of the neighborhood.
BEAR IN MIND THE 1 PERCENT RULE
When putting up commercial or residential property to let, seek advice from your agent and do your calculation in such a way that, when the property is finally ready for occupation, the money collected as monthly rent is always more than 1 percent of the total investment cost. As a rule of thumb is what we refer to as the 1 percent rule.
“Say you put up rental apartments at the cost of Sh1 million. The total monthly rent collected from an apartment should always be at least Sh10, 000.
This monthly rent will enable you to recoup your investment in about ten years.
However, the 1 percent rule is not cast in stone.
“Some investors recoup the capital investment in a shorter time, even four to six years. But those whose buildings on prime land in places such as in the CBD and Milimani take as long as 20 years.
These investors rest easy knowing that the land on which their buildings sit is gaining value at a much higher rate than the rents.
GOOD BOOK-KEEPING WILL SAVE YOU A FORTUNE
We point out that many small-scale constructors do not appreciate the value of accounting for every shilling spent while constructing.
They thus end up getting duped by unscrupulous foremen and contractors, so building a house end up feeling like pouring money into a bottomless pit.
We advise that investors get into the habit of keeping all the financial records of the construction.
This financial records, he explains, is useful in determining the amount of rent to be charged, or the price of the building was it to be put up for sale.
Keeping records can also save you money when the time comes to file your tax returns with the Kenya Revenue Authority (KRA). The financial records put you in a good position to enjoy tax exemptions.
DO NOT FALL IN LOVE WITH THE PROPERTY
When buying property for resale, you are better off checking your emotions at the door. “There are buildings put up for sale that is over-designed and over-decorated.
These buildings have great curb-appeal, that is, they look appealing at a glance. People tend to fall in love with such buildings and hence end up paying inflated prices, only for them to get shocked when they later cannot sell the building at a profit.
“We always advise our clients that real estate investments are not a sentimental business. One should always be on the lookout for profits and not let the visual appeal of a property cloud their judgment.
However, when buying your own home, you can go ahead and fork top dollar for a property with great kerb appeal.
AVOID THE PATH OF LEAST RESISTANCE
The temptation to cut corners to save some money will certainly arise at some point. The agents agree that taking shortcuts is rarely ever worth it; if anything, it usually results in the loss of entire investments, and sometimes even lives. Going by the book might seem expensive, but it saves you a lot of mental agonies and is cheaper no doubt about it.
“Hire only contractors accredited and licensed by the National Construction Authority,” we advise.
“Take note of the national construction regulations and county by-laws to avoid the possibility of your property being demolished in future.
Conduct surveys to avoid encroaching on public land, and use only genuine materials while constructing. I have seen entire buildings being marked as unfit just because the owners did not see the need to conduct the necessary inspections at the foundation stage.”
When it comes to contracting services such as borehole digging and hiring heavy machinery, deal only with reputable companies to avoid getting into trouble with the Kenya Revenue Authority.