HOW TO BUILD A PROFITABLE REAL ESTATE PORTFOLIO

Real Estate has steadily become a goldmine in Nigeria, especially as economic and demographic changes drive demand for commercial and residential real estate, which in turn provides opportunities for investors to reap substantial short and long term returns. The attractiveness of the real estate sector has been further enhanced by improved access to capital for eligible developers and investors

According to the PWC Emerging Trends in Real Estate Report 2014, the main drivers of Commercial and Residential real estate are Job growth, income and wage growth, interest rate reduction, inflation reduction, and favourable tax policies. Other factors that influence real estate investment are construction costs, vacancy rates, land costs, financing costs, infrastructure development costs and projected home prices.

Building a profitable real estate portfolio requires an immense degree of circumspection and diligence, especially where the investor is a newbie or insufficiently experienced in the identification and acquisition of suitable real estate assets. In order to be successful in this journey, you need to avert your mind to the following tips:

 

  1. Identify your target Market segment: As with any other business real estate investment requires the identification of a demographic. You need to envision the type of tenant you require for your property; for instance it would be foolhardy to develop luxury apartments or 5-Bedroom Duplexes within a low income area. If you are interested in attracting young bachelors/spinsters then it would be profitable to develop studio apartments or miniflats. On the other hand, 2-bedroom flats would appeal to newly weds and upwardly mobile singles, whilst apartments with 3 or more bedrooms are designed primarily for larger middle class families. You must think on this carefully before investing a single naira into the project, as it will affect your profit levels (and stress levels!!).
  2. Location! Location!! Location!!!: The selection of the right location could spell success or disaster for your property investment. For this purpose let us assume you have identified your target market segment, e.g. an upwardly mobile newly married couple who both work within the Lagos Island and surrounding areas. It would consequently make no sense investing in property located Epe, Ikeja, or Ojodu Berger for this purpose. The location of your property investment is thus the major driver of income.
  3. Identify expected Rental Yields: As a rule of thumb, the rental yields from a property should not be lower than the rate of inflation. For instance, if the inflation rate is 10% per annum a property worth N1,000.000 should not lease at less than N100,000 per annum. If your property consistently yields less than 10% per annum, you’re losing money due to the reduction in the time value of the money invested in the property, as well as the cost of maintaining the property, especially as the property depreciates from wear and tear arising from use. Consequently, you should seek out property in areas which historically attract significant rental yields and where rental yields still have the runway to increase. If yields consistently drop below 5% of the value of the property over an 8-10 year period, then its time to sell the asset.

 

  1. Follow Tastes and Trends: If you wish to avoid losing your capital investment in real estate it is essential that you are able to identify and respond to changes in the tastes of your target demographic. Once you notice that the trend has started to change on a permanent basis, it is imperative that you respond to the changes in order to ensure that you do not have an idle or inefficiently employed asset on your hands.

 

We hope these tips will prove useful to you as you begin to navigate the world of real estate investment

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