Every diversified investment portfolio should have real estate investments. To qualify as aninvestment, the property must generate net revenue for the investor. Our residences do not generate income, instead, we spend large amounts of money maintaining them. They are personal use items. We should aim to have both personal use and investment real estate assets in our wealth portfolio.
The first real estate purchases most people make are for their personal residences. Whether we are buying for investment or for personal use, the same due diligence is required; however, when we are investing, minor standards may be overlooked e.g. location – you can invest in real estate in a location where you would not live yourself.
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Due diligence is the investigation of a potential investment to confirm all the facts. In real estate, the first step is to ascertain that you are dealing with the rightful owner, so confirm Title at the Land Registry – this will show if the right person is the one selling it and if there is any litigation pending on the person’s title. Even if you are buying a property in a residential estate from an established real estate company you should still go through this process. Stories exist of estates along the Lekki – Epe corridor that did not complete the transfer process with the indigenous land owners before selling to the public. The buyers were then embarrassed by the original land owners who refuse them entry into their estates. In Nigeria, we have the added burden that not all properties have been registered at the Land Registry – so confirming the title of such a property becomes doubly laborious. If you do not have the time and energy to interview family members and neighbours, it is best not to buy unregistered properties.
Due diligence also means verifying the type of title and length of the lease. We should all know that due to the unpopular Land Use Act, all land in our states are owned by our Governors, who issue us Certificates of Occupancy for 99 years maximum. So, when a person is transferring her title to us, we should be mindful of the number of years left from her own original 99 years.
Before parting with our money, we must also pay a visit to the Ministry of Urban Development or Town Planning Department to check out the government’s development plans for the area. It is not unheard of for unscrupulous land owners to be fully aware that the government is about to build an expressway across a property and yet, quickly sell the property at a rock-bottom price to an undiscerning buyer. When buying property in a semi-developed area, a visit to the Town Planning office would help you to find out who your future neighbours would be. Has the area been earmarked as an industrial area? Is it commercial? If you are planning to use the property for residential purposes, these uses may create a problem.
Due diligence also requires physical inspection of the property and independent valuation by your own agents. Especially if you want to live in the property, a visit would reveal the appropriateness of the location to your personal preferences – neighbours, serenity, exposure, closeness to amenities, security and crime rate, etc. Buying a used house demands that you visit it to see the state of the house, as this would be a great determinant of its market price. Even if you are buying it as an investment to rent out to tenants; you need to be sure that you would not spend all the rent collected on repairs.
Real estate investments can be done directly or indirectly by buying units in a Mutual Fund that invests in real estate and infrastructure projects. The Mutual Fund shares income periodically to unit holders. This way, you earn the income from real estate investments without the stress associated with managing properties.
When we borrow to pay for real estate investments, we expect the rents collected to be the primary source of repayments. However, we must make adequate provision for alternative sources because there could be times when the property would be empty, or the tenant does not pay on schedule.
The population of the world is growing, meanwhile, the space on earth remains constant – creating greater demand on the limited space. The increasing demand leads to constant appreciation of real estate values. From this we see that real estate investments are profitable if well managed.
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