There is a common analogy to be drawn between the business of property investment and the sport of surfing. Surfing is the art of riding the waves that an ocean churns up and as such, surfers don’t create waves, but just ride it. For the surfer, when the waves aren’t there, you just don’t surf that day. On the other hand, when surfers see a good wave, they make the most of it.
Likewise, the real estate market turns up certain trends and opportunities that a prospective investor would do well to latch on to (catching a wave) and enjoy the ride for as long as possible. Most importantly, an investor must know how to choose the right portfolio that matches budget as well as set an exit strategy so he doesn’t run into debts.
Basically, there are four segments in the Nigerian real estate market, each with its own unique investment “waves.” An investor may decide to focus in any of commercial, residential, industrial or tourist segments of the property market. The potential Return on Investment in any of these segments is huge, but focusing on commercial or residential properties are the most common trends among private investors in cities like Abuja and Lagos. The investor doesn’t want to be the proverbial “Jack of all trade, and master of none”
Build and Sell
Regardless of the investor’s equity, opportunities already exist waiting to be leveraged in the “Build and Sell” segment to match any kind of budget. Usually, an investor with say an initial equity of say N7 million may approach a real estate developer in Lugbe, for instance, to get an allocation of 600sqm at the cost of N1.5 million. With less than N5 million, the investor can build a 3-bedroom detached bungalow under 3 months barring any other contingencies in the market. On the average, a 3 bedroom flat in Lugbe currently sells for N16 million and rents for N750,000 per annum. In another six months, the new property would have been snapped up and the investor would be thinking of investing the profit from that first deal in another “Build and Sell’ development.
Usually, the private investor will be given specifications on design, fencing, roofing, colour, finishing where applicable but the responsibility to deliver quality structures that will quickly generate buyer’s interest remain with him. The mutual benefit to the real estate developer and the private investor is mutual, but more interesting is the fact that the latter leverages on the former’s business. The private investor may not need to worry about providing such infrastructures as road network, centralized water, security, electricity and other management services already being provided by the principal developers. Some developers have clauses in the contract which allows an investor to sell at a profitable bargain price if the property remains in the market for over a year.
However, the “Build and Sell” model can be a risky investment because it comes down to the cost of building and how fast the property will sell. Without a good understanding of location and management of cash flow, the private investor might ride into a storm of debt and eventually unprofitable forced-sale. The time of Return on Investment can be fast-tracked if an investor chooses an occupied area rather than an upcoming area no matter how cheap the latter could be. An investor can be hit by a negative cash flow in “Build and Sell” without a proper investment plan that takes into consideration the equity build-up and capital appreciation on the property. Trouble usually begins when an investor has only a mind for quick yield on invested equity. Engaging in a real estate model like “Build and Sell” for which the projected cash flow are base on capital appreciation (prices going up) rather than other sources is considered speculation rather than investment. To avoid this, the standard practice is to have a long term plan not limited to outright sale. Long leases and rents are holding strategies when outright sale does not look profitable, but the market for residential apartments in Abuja has been experiencing an upward movement in the past five years.
Other investment strategies to employ in working the “Build and Sell” model is to finance the building of the house using some sort of financial instrument such as a mortgage loan collateralized by the land on which it would be built. It is not advisable for a new investor to finance the model using their own capital. Where obtaining mortgage or other loan is not feasible, a Joint Venture arrangement where an estate developer provides the land with the option of assisted sales can be negotiated. This arrangement mitigates the risk of negative cash flow, economic downturn and market decline. The “Build and Sell” option is a profitable real estate “wave” to ride all the way to the bank, if it is properly handled.
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