Merits, demerits of real estate investments

EDIDIONG IKPOTO investigates a popular claim by some property practitioners that the chances of losing money to an investment in real estate are slim to non-existent

One of the first things a would-be investor will usually learn before making the big bet to commit funds into any line of investment is the caveat surrounding that particular stake. At this point, certain salient questions will be posed, such as, what are the risks involved? When will I break even? How soon will I be able to recoup my investments? How much profit will I make over an extended period of time?

The answers to these questions are as variegated as the different forms of investment themselves. The only certainty that is given is that every form of investment is fraught with peculiar challenges and risks.

Today, it has almost become a creed in the investment world to say that the safest way to stash one’s money is to invest it into real estate. This has ostensibly been due to the dynamism which encapsulates not only the business or investment world but human existence by extension. The general rule of thumb here is that while the dynamic nature of human existence can quickly outmode existing systems, real estate is the one exception to this rule as it is not vulnerable to being outmoded, nor can it be phased out.

An investor who decides to invest his money into electronics, for instance, could be faced by the biting reality that such products might become obsolete and completely out of fashion in less than a decade. This is not to mention the risks associated with transporting large shipments of fragile products across sea lines.

A piece of land, on the other hand, is never obsolete, regardless of whichever era or dispensation of human existence.

There is a fundamentally universal belief that the monetary value of a landed property always cost less today. Hence, an investment in real estate almost certainly guarantees a good return on investment as time declines.

This is perhaps why real estate alone, out of all known forms of investment, has remained a permanent fixture across all epochs of human existence. Long before the existence of stock markets and cryptocurrencies, real estate had been a formidable player in the investment market, and despite the emergence of so many forms of investing money in the modern era, it continues to retain this hallowed position amidst fierce competition.

In Nigeria for instance, there was such a time many highbrow settlements today stood fallow, deserted, and something akin to a wasteland. Of course, due to the lack of attraction, very little value was attached to landed properties in these areas. Fast forward a few decades later, investors who took the plunge to invest either due to a paucity of funds to inject into more promising options or those who invested out of sheer foresight, are now proud owners of landed properties worth a king’s ransom. Popular examples here include several parts of Lagos Island, and Shelter Afrique (Uyo), among others.

Because real estate is dramatically affected by its location and factors such as employment rates, the local economy, crime rates, transportation facilities, school quality, municipal services, property taxes, and several other factors, property values can sometimes skew in unpredictable dimensions, leading to sharp appreciation in value based on how these indices play out over time.

All of these being said, real estate, as a venture, does not consist of merely acquiring a piece of land. According to Investopedia, real estate is defined as the land and any permanent structure, such as a home, or improvements attached to the land, whether natural or man-made. As such, real estate encompasses the land, plus any permanent man-made additions, such as houses and other buildings.

By this definition, it stands to reason that an investment in real estate, despite the obvious guarantees, does with come without sizable risk, and there is a plethora of historical antecedents to caution potential investors that if discretion is not employed, an investment in real estate may not go as smoothly as anticipated.

This is because, if real estate investment does not consist of merely acquiring a piece of land, skills such as knowing the appropriate location, understanding the dynamics of cities and desired neighborhoods, and having a firm grasp of property types that may yield the most profit and cash flow, and where the rate of renters and homebuyers is higher are all important aspects of real estate.

A realtor, Olamide Samuel, in his pitch on factors that could make or mar a real estate investor, stated that several investments in the business had hit bottom due to a wide range of factors. Hence, throwing money into real estate does not insulate an investor from incurring monumental losses.

Olamide said, “Of course, an investment in real estate can fail. Real estate is business, and the same rules that apply to doing any other business apply to it, otherwise, you will end up throwing away a huge sum of money.

“Take a look at the building that collapsed in Ikoyi last year. That was somebody’s business. That was somebody’s investment, but they did not manage the business well. They decided to cut corners and avoid due process.

“We saw what happened in the end. They did not manage the business well, and it failed. The amount of money lost to that incident amounted to billions of naira.”

According to him, real estate investing, like any other business, required a comprehensive understanding of the market variables as well as the intuition to forecast how events might unfold in the future for any given property. Therefore, as appealing as real estate investment may appear, it is not as simple as it appears. Many new investors enter the market with the hopes of making rapid money, but many inevitably fail.

According to investment think-tank, Danbelinvestment, the management of cash flow is one of the numerous reasons why investors fail to stay in business for a long time, real estate inclusive. Any mistake including paying too much for the wrong property, mismanagement of your property, not selling for a profit, and mismanagement in the business organization could lead to negative cash flow and unprofitable investment properties.

A property management company, WeLease identifies lack of focus and commitment as a putative reason why a real estate investor would likely botch an investment. The point here is that too many real estate rental investors treat it like a hobby or a part-time job. Instead, the investor must treat real estate investments as a “real business.” That is because it takes a lot of work for a successful investor, especially for real estate investments.

The President, of Nigeria Institution of Builders in Facility Management, Dr. Olufemi Akinsola, believes mentorship and feasibility studies will be crucial for any real estate investor who wants to succeed.

The real estate veteran noted that many investors hastily put money into real estate investments without getting adequate counsel from professionals on possible risks or downsides to such investments.

Another possible benefit that could come from the right consultations, according to Akinsola, would be a definite determination regarding certain extenuating circumstances that could surround a piece of property. In most cases, when due diligence is not carried out, what was projected to be a promising investment opportunity could end up resulting in protracted legal tussles that could damage the interests of the investor.

Olufemi said, “It is expected that before you start developing, all the encumbrances over the land would have been resolved. However, par adventure if something pops up that needs what seems to be freed becomes unfree it distorts the process of work.

“If you buy land from a family that is assumed to be the owner of the property without finding out whether there is a court case on it and eventually the opposition now win the court case and they want to take action to recover, then it means you either go to that family to buy or you wait perpetually if the other family will go back to court to reclaim the right of ownership of that property. That’s why work would be stopped.

“Another thing is if land to be used for real estate development happens to be in a portion of land that has been ravaged by war, nobody can develop on that terrain. If you notice now, development was stopped for some time because most of the expatriates working on developmental projects were kidnapped and ransoms are expected to be paid so nobody wants to go there.”

He further pointed out that should an investor fail to consult the services of real estate practitioners before investing, there was also the risk of purchasing a landed property that might be unfit for developmental purposes. A clear example, he pointed out, would be wetlands with poor soil that makes it difficult or sometimes impossible to erect structures on them.

Source: Punchng.com