By Babajide Komolafe
Investment in real estate is another proven way of reducing or eliminating the devastating impact of inflation on your wealth creation efforts.
It is a proven fact that the value and price of landed property increases exponentially over time. The continuous rise in population, fixed quantity of land, and inadequate supply of housing are driving rapid rise in value and prices of landed property.
However, enjoying the value of real estate investment requires the right approach and understanding of the benefits and limitations.
Long term value: Real estate delivers value in the long term, usually more than a year. This means, if you buy a plot of land today, the return on that investment will be determined by how long you are willing to wait before you resell. If you are willing to wait for 20 years, the price would most likely have increased by over 1,000 per cent, depending on the pace of the development of the location. On the other hand, a short holding period of one or two months may produce marginal gains, often below 10 per cent.
Cashflow limitation: Cashflow from real estate is limited. To receive cash flow from that plot of land you purchased will only come if you either rent it out or you build a house on it, and collect rent from the tenants. Otherwise, you sell the house with a considerable margin. However, you will most likely not earn any income from that land until the house is completed. If you choose to collect rent from the tenant, the rent may not be more than 10 per cent per year of the amount invested, which is a far low return when compared with alternative investment.
In addition to the above, are challenges related to the cost of perfecting the documentation for the land which has become very high especially in urban centers. In some of the states, the cost of obtaining documents, Certificate of Occupancy, building permit etc can be 500% more than the cost of buying the land. When this is added to the risks of losing your land to land grabbers, the extortionist practices of ‘Omo Oniles,’ the appetite for investing your money in a landed property will drop sharply. Given these realities, the following are useful guide to profitable real estate investment.
Invest with patient capital. Patient capital is money you don’t or will not need for a long term. Your investment horizon should be five years minimum. Thus, it is not wise to invest money for critical short term needs like school fees, house rent etc. (To be continued)