Real estate is a very unique industry that creates wealth and steady streams of income for investors. No matter how little the investment is, real estate is guaranteed to yield substantial returns on investment because it is one out of the numerous investment strategies in the world that does not fail. Real estate has made a lot of people become billionaires as a result of its lucrative nature. However, the risk of investing in real estate is also very high in Nigeria; most especially when investors don’t get it right. When they get it wrong, they lose funds. So it is very important for prospective real estate investors to consider several factors before committing their funds.
There are various ways through which investors approach real estate investments to earn higher returns. Some of the ways are as follows:
- Land Sponsorship: This process of investment is common in the Nigerian real estate industry. It is one of the traditional ways and oldest method through which investors take ownership of the land after completion of the sponsorship. It usually involves the local community and their heads, the Surveyor representing the family, the agent, government, and the investor.
The process is done through an agent/surveyor who must have been approached by the family or community heads to get an investor that would be ready to sponsor either the clearing of the land, the survey, or any other form of documentation for the land. Usually such land is owned by the community and government may have already excised some parts of the land to that community. To add more value to that land, they need an investor to do the job. Depending on the location, it usually involves substantial amount of money because the intending investor would have to pay a certain amount of money to the family (Owo Iwoko, also known as a premium) before entering the land.
Apart from that, the investor would also pay the agent who connects them to the family an agreed percentage in cash and land. This form of investment can be very risky such that if the investor does not do a thorough due diligence on the land, he may end up losing his funds. So it is advisable that the investor gets his lawyers involved in all the processes before releasing any funds. If done right, the investor can own a large chunk of the land. The sponsorship is usually done such that each acre (6 plots) sponsored is rewarded with one (1 plot). For instance if an investor clears or sponsors a survey of 100 acres, he is entitled to 100 plots out of the cleared land or sponsored survey. It is advisable for the investor to take possession of the land as soon as it is carved out, fencing it, and taking immediate possession upon completing the job.
- Land Flipping: A lot of investors have become very rich as a result of land flipping in Nigeria. This is a process whereby an investor buys the land for a lower price and sells it at a higher amount to make a huge profit. There is a lot of advantage in this type of real estate investment, most especially if the investor is able to quickly resell the land and take his profit within a shorter period of time. Even if the investor decides to keep the property for a certain period before selling, the value of the land still continues to rise. Land flipping is also very easy to manage compared to managing a rental investment. The investor has little competition to deal with, and doesn’t have to spend much in advertising the land, especially if the land is located in a choice area. Flipping is also applicable to buildings wherein the investor also buys at a low price, renovates and then sells at an appreciable cost for good profit.
- Land Banking: This is one of the traditional method of acquiring land, wherein an investor buys undeveloped land at a very low price with the intention of holding it for a while, and then sells at a higher price at a later date. Most investors, who have the intention of becoming real estate developers usually key into this type of real estate investment scheme. Individuals who have vision and focus in the future of real estate investments, buy such land and resell to individuals and developers at a value that is profitable to them. Till date land banking is practiced in Nigeria by investors whose job it is to go hunting for cheap land in different areas of the country.
- Real Estate Investment funding: This is also an investment scheme developed by real estate developers to raise money for the purpose of funding real estate projects, purchases of land and other related matters. Most developers prefer raising such funds from a combined source against going through vigorous processes of obtaining loans from the bank with high interest rates. Thus, a real estate investment fund is a combined source of capital used to make real estate investments. Investors’ funds are pulled together for the purposes of executing real estate projects and at the end of an agreed tenure, a certain percentage is paid on the capital invested by each investor in the pool. The percentage paid otherwise known as the ‘returns on investment’ is usually substantial and encourages investors to renew their investments.
- Rental Properties:
This is one of the oldest forms of property investment, wherein houses are built and given out for rentals. This form of investment provides a stream of income that generates funds to the investor yearly. The responsibility that comes with rental property is that the owner or landlord must pay for the cost of managing and maintaining the property and all other issues that may arise from the rented apartment.
- Property Development:
This type of property investment is capital intensive and the process typically begins with the investor first acquiring the property, which should be at a lower cost in order for him/her to be able to earn a good profit at the end of a sale. After the acquiring the property, the developer goes ahead to either sell the land at a higher rate or may decide to build residential or commercial property and sell at a higher profit margin. To avoid loss of money, it is advisable that the developer does his research about the location, documentation, legal requirements, and cost benefit analysis before embarking on the investment project.
- Short-let Apartments: This is another newly introduced form of property investment business where properties are given on rent for short periods of time. The period is usually one day to six months. The apartments are furnished for the comfort of the occupant. Depending on the arrangements, payment can be made daily or monthly. The responsibility that comes along with short-let is the cost of maintenance of the apartment as well as the security of the environment for which cost is borne by the investor. But it is an investment that generates daily or monthly cash inflow for the investor instead of the usual yearly rented type of apartment.
- REIT(S) REAL ESTATE INVESTMENT TRUSTS: This is one of the most complex collective investment scheme where a combination of capital of investors is used to provide financing for real estate. REITS allow individuals own and manage portfolios of properties such as apartment, warehouses, retail shops etc. The complexity of this investment scheme is that it is established with the sole aim of acquiring intermediate or long term interest in real estate or property development to gather funds from the capital market where securities are issued in favour of the investors that contributed to the trust. As an investor in this scheme, you can decide to own some units in an estate instead of having the entire estate.
The problem with REITS is that the Nigerian economy is not favourable to the Scheme and it is unpopular due to inadequate education and awareness, coupled with the fact that government support for is inadequate; hence a lot of people tried it and opted out. Today it is a bit difficult for investors to delve into such investment as lots of them prefer to reap faster returns on their investment rather than having to wait for a long time.
CONCLUSION: Any prospective investor who intends to capitalize on any of the above stated options should be able to ascertain the pros and cons of such an investment viz-a-viz its risk before committing their funds so that at the end of it all, they should be able to reap satisfactory returns on their investment and always smile to the bank.
Elias Dongyen, is a Director and Team Lead at Innovative Realtors Network. He is a realtor with a difference. He takes pleasure in advising real estate investors and is interested in their success. He advises investors on the proper properties to invest wherein there would be added value to their invested funds.