Real estate is regarded as one of the world’s most profitable and lucrative rising industries. In recent years, the Nigerian real estate industry has swiftly developed and is experiencing exponential growth as a result of rising foreign direct investment, growing urbanization, and strong corporate demand. According to CBO Capital’s January 2015 research, the sector is worth 6.4 trillion naira ($39 billion) and increasing at 10% per year.
Investing in real estate is a lucrative career path that is fraught with obstacles and hurdles. The market is well-established, with various new and old competitors vying for market share. Do not, however, be scared by the competition; instead, concentrate on your investment strategy.
What is Real Estate?
Real estate is property that consists of land and buildings, as well as natural resources such as crops, minerals, and water, among other things.
Real estate is a type of real property. It differs from personal property, which are items that are not permanently attached to the land, such as vehicles, boats, jewelry, furniture, and farm equipment.
Types of Real Estate
Real Estate can be divided into four types and they include:
- Commercial real estate: They include Apartment complexes, gas stations, grocery stores, hospitals, hotels, offices, parking facilities, restaurants, shopping centers, stores, and theaters.
- Residential real estate: They include condominiums, co-ops, townhouses, duplexes, triple-deckers, quadplexes, high-value homes and vacation homes.
- Industrial real estate: They include factories, power plants, and warehouses.
- Land: They include undeveloped property, vacant land, and agricultural land (farms, orchards, ranches, and timberland).
Why is Real Estate Important in Nigeria?
Real estate in Nigeria, as in many other parts of the world, is an ever-increasingly valuable investment that should not be overlooked!
Real estate investment is one of the most secure investment options. This is true for a variety of reasons. For starters, in times of high inflation, economic recession, or depression, real estate investments serve as a solid backbone for the investor because their value does not depreciate. Take a look at Nigeria during the worst of the COVID-19 pandemic; lands and properties either remained the same or increased in value. This type of investment is hard to come by.
Real estate investment, particularly in Nigeria, is your best option for retirement. As lovely as pension schemes are, there have been cases where pensioners have died while trying to get their pension. What you want is an investment that will ensure a peaceful and enjoyable retirement life.
Real estate investing provides the investor with continuous passive income: There comes a time in a man’s life when he cannot be actively involved in generating income. At this point in time, a man requires ways to generate passive income. This is provided by real estate in the form of rent, lease, outright sale, and so on.
Real estate investing ensures a smooth transition for your next generation. Nigeria is a country where the government does very little to ensure the future of future generations. So, in order to protect your family from the future misery time bomb, you must make these investments now.
Ways To Invest In Real Estate In Nigeria
Buy a rental Property
Buying an investment property is the most obvious way to become a real estate investor (or several). When I say “investment property,” I mean a residential or commercial property that you intend to rent out to tenants, not a fix-and-flip, which we’ll explain shortly.
The trick is to buy in areas where the rent is high but the tax payment is lower than the rent. Purchasing a property in the Island area of Lagos Nigeria, such as Lekki, Victoria Island, Ikoyi, and the like, is one example.
There are two disadvantages to owning such a property, the first of which is having to pay a large sum of money upfront before purchase and the second of which is having to pay a large sum of money after purchase (when it comes to maintenance).
The other issue is dealing with tenants. If you are new to this, you will come across various tenants who must be screened. Some would tire you out with stories that may or may not touch others. If, on the other hand, you are the type who easily yields to people, you may want to outsource these aspects to a property management service.
House hacking entails purchasing a two- to four-unit residential property and living in one while renting out the others. It can, however, apply to purchasing a single-family home and renting out one or more rooms.
The obvious disadvantage is the lack of privacy. Having your own yard has its advantages, but it can lead to some difficult situations if you live in the same building as your tenants. Even yet, if you’re a first-time real estate investor who doesn’t require your own home, you might want to think about house hacking.
Try House Flipping
House flipping is the practice of purchasing a home with the sole intention of repairing it and quickly selling it for a profit. When done correctly, house flipping can be extremely profitable.
Build Own Home on Spec
A spec home is one that is built with the expectation that a potential buyer will buy it.
Many real estate agents and companies in Nigeria are involved in this. They collaborate with developers to construct a variety of homes, the majority of which are in high demand, and then sell them. In markets with a limited supply of new homes, building a spec home can be an especially profitable investment strategy.
Buy Land Properties
Land properties are very lucrative and they are long term real estate investment. It involves the buying of acres of land or a plot of land to sell later after a period of 1-2 years.
Pros and Cons of Real Estate Investment
- Real estate increases in value over time: Over time, well-chosen real estate appreciates at a rate that far outpaces annual inflation. Yes, there are market corrections from time to time, and people can buy the wrong type of property at the wrong time. However, I’ve discovered that there is always the opportunity to purchase a high-quality property at a low price, make improvements to increase equity, and then sell for a profit. It’s the real estate equivalent of the stock market adage “buy low, sell high,” and real estate always has intrinsic value.
- Real estate generates consistent cash flow: Rental properties can provide a consistent monthly income stream known as “cash flow.” This is the money that remains after all bills have been paid. Once your property is established, cash flow provides ongoing, monthly income that is mostly passive, allowing you to devote your time to building a business, spending time with family, or reinvesting in more real estate.
- Real estate provides you with control: With real estate, you have far more control over your overall investment success than with other types of investments. You can’t sit on the board of directors and influence management decisions that affect the value of the stocks you own. You have a lot of control over a lot of decisions when it comes to real estate investing. Investing in real estate allows you to reduce risks and grow your portfolio at a much faster rate.
- Real estate serves as an hedge against inflation: Inflation is the economic phenomenon in which prices rise over time as the value of money falls. Many investments lose value as a result of inflation. If you made a 5.5 percent yearly gain on your stock portfolio last year, your actual profit was just 3.9 percent because your money’s purchasing power was depreciating due to inflation.
- Real estate increases equity: Your tenants are essentially buying the property for you when you use leverage wisely. Each month, rental income pays down your loan and builds equity for you. When you use a mortgage to purchase a rental property, your tenant pays the mortgage payment, increasing your net worth each month. Consider it a savings account that grows on its own without your monthly contributions.
- Real estate has distinct tax advantages: The unique tax advantages of real estate allow investors to build wealth over time. Rental income is exempt from self-employment tax, and the government provides tax breaks to real estate investors. These include depreciation and significantly lower long-term profit tax rates. And, depending on your income level and classification as an investor or real estate professional, your rental property may provide you with an excess of tax deductions that you can apply to your other income. Because rental real estate is a business, many expenses, such as travel costs to check on your properties, are tax-deductible business expenses.
- Real estate allows you to use leverage: You can use the power of leverage to rapidly increase the size of your real estate holdings and accelerate your wealth-building results. The use of borrowed capital to purchase and/or increase the potential return on investment is referred to as leverage. Leverage is a powerful advantage of real estate investing when used wisely to minimize risk. With proper due diligence, you can use leverage to build your wealth exponentially, especially in the current low-interest-rate market.
- Real Estate is time consuming:
You must devote time to learning about real estate and managing your investments. There is a learning curve to real estate, and if you don’t know what you’re doing, you might lose a lot of money. Managing your rental properties can also be time-consuming.
- Real estate involves Money:
To make money, you must first have money. Forget about the gurus who claim, “You can get rich buying real estate with OPM (Other People’s Money).” While you can buy stock with a small amount of money, real estate investing requires a larger financing. To begin, you’ll need a down payment, closing costs, and funds to repair and update the property in order to maximize rental income. There will also be ongoing expenses such as property taxes, insurance, mortgage payments, and property maintenance once you own the property.
- Real estate investing entails unique risks:
Risks must be understood and mitigated as much as possible. The following are some of the major risks of investing in real estate:
1. Purchasing the wrong property at the wrong time.
2. Increased liability for accidents that may occur on your property.
3. Being stuck with a “professional renter” who knows how to game the legal system at your expense
4. Being over-leveraged. This is a stumbling block for many real estate investors. When investing in real estate, you must be able to make monthly payments on your debt despite market fluctuations, tenant problems, property vacancies, unexpected repairs, maintenance costs, and other expenses that come with the territory.
- Real Estate Can Be Difficult: Tenants can cause issues that cost you money and valuable time in court. If you own rental properties, your cash flow can suffer significantly if you rent to a tenant who does not pay or leaves the property in bad condition when they move out, or both.
- Real estate is a long-term investment: Real estate should always be purchased with a long-term plan in mind. It’s not get rich quick investment. You’re purchasing a tangible asset that you won’t be able to quickly liquidate for cash if you require emergency funds. Selling a home takes time, and the transaction costs are higher than selling stock.
That’s all! I hope you’ve learnt something new. All of the above-mentioned tips can be used individually or in combination. Go ahead and start investing with whatever you have available to you.