Real estate investments (III)
Last week, we discussed different types of real estate properties. But if managing physical properties, looking for tenants and waiting for rents to be paid is too stressful for you, consider investing in a Real Estate Investment Trust (REIT) or a Real Estate Bond. A REIT is a Mutual Fund that invests only in real estate assets. Investors buy units of the fund and their monies are pooled together and used by the fund managers to invest in real estate assets. Income earned from the investments are distributed annually to unit holders in line with the number of units they hold. Distribution is dependent on income, so it is wise to review the underlying real estate assets that are generating (or expected to generate) money for the REIT before investing. Do the required due diligence on the fund and its managers to ensure that they meet your standards of return on investment, risk appetite and corporate governance. Real Estate Bonds are debt instruments, in which we lend money to the bond issuer to invest in real estate assets e.g. hotels, markets, expressways, railways and others. Bond issuers can be either public sector players like state governments or private sector fund managers. This is a money market investment where the rate of return and repayment schedule are fixed beforehand. It guarantees the investor a regular and predetermined inflow of money. REITs and Bonds allow for real estate investments without the accompanying hassles.
Land speculation is another way of investing in real estate. It, however, demands that the investor has a long investment time frame – minimum of five years, before expecting any returns on the investment. Land speculation is best done with money one does not need for a long time since investment in land is known to be illiquid (slow to convert to cash). The property should be in a semi urban area, where development has already begun but it is still very little. The long wait is always worth it as some investors have reported up to 40 times return on investment. The investor must obtain legal title as soon as possible, so any emerging contenders would effectively silenced. She must do some form of development on the land – e.g. allow an arable crops or vegetable farmer to use the property (under a written agreement), this way the farmer serves as a guard and protector and would alert the owner in case of any incursion. She herself or a trusted agent must inspect the property as often as possible.
In determining how to finance our real estate assets acquisition, we must look at our peculiar situations and of course the class of real estate we want to acquire. Are you building or buying? Interests on loans begin to accrue on amounts drawn as we start drawing on the loan, so if we’re building, we start paying interest even though it may take months or years before the property can be occupied. If you are buying a finished house, taking a mortgage may be justified as income can potentially start to accrue within weeks of taking possession. Obviously, we cannot use loans to finance land speculation – the interest accruing would wipe out all the profits to be made. Many of us have contributed to the National Housing Fund but are unable to access our contributions when we apply for mortgages. Those who do not want mortgages still do not get refunds on their contributions. The National Housing Fund seems to be the biggest hoax played on the largest number of Nigerians for the longest period of time. No wonder recent attempts to increase contributions rates were shut down in the National Assembly. If we choose to borrow , we expect that rent from our tenants would be the source of mortgage repayment. However, there would be times when the property would be empty, or tenants are not paying as and when due, or repair costs have eroded the revenue. Therefore, we should always be ready with a secondary repayment source if the primary source fails.
To avoid borrowing, consider pooling funds with like minded partners to purchase viable real estate investment assets you cannot afford individually. Formalise the arrangement with a notarised partnership agreement that outlines the duties/ privileges of all the members of the partnership and the income-sharing formula.
There are opportunities in real estate investment for everyone. There are different types of properties and different financing options. Take advantage now and expand your investment portfolio.