Real estate investments – II

Last week we started the discussion on real estate investments and the due diligence to be exercised before purchasing properties either as personal use assets or investment assets. Investments in real estate are a good source of passive income. After the initial efforts required in making the investment, not much additional effort is required from the investor. The investment generates income on its own, hence the term ‘passive income’. The opposite of passive income is active income e.g. our monthly salary. It is an active income because if we do not work as contracted, our employer would not pay it. This week, we would look at different classes of real estate investments we may invest in.

FG, states, councils share N617.566bn for March 2019

The most accessible real estate investment class in our climes is residential real estate. It involves the renting out of your property for tenants to use as their homes. It requires a lot of hands-on management to ensure that the tenants use the property well. Landlords must ensure they retain some of the rent for major repairs, whilst the tenant is expected to fix minor repairs. Landlords must pay all taxes and tenement fees due to their local governments. Tenants are responsible for service charges and community levies -since they are the ones that enjoy the services. Landlords should ensure that due diligence is done on tenants before collecting any payments from them. It is customary these days to also collect a ‘caution fee’ or ‘security deposit’ from tenants before they move in. This is returned in full when they vacate the property so long as they do not owe any utility or service levies, nor caused any serious damage to the property they occupied. Tenants are also required to provide character references from reputable citizens. Some landlords have gone further to require tenants to bring non-binding letters of introduction from their employers.

Meanwhile, let us bust the myth that the first property you obtain must be your residence. If you cannot afford the location you desire to live in yet, invest in rental property in cheaper locations and use the passive income to finance your dream home later.

Office/ Retail Property is the next most common class. This also requires hands-on management to a sizeable number of tenants at once. It is recommended that a Property Manager (preferably a registered company) be employed to bear this responsibility. The manager would be responsible for provision of water, electricity in common places, waste management, security, cleaning of common areas and other general services. They are paid with  the service charge paid by the tenants. They should sign a Service Level Agreement (SLA) with the landlord that details the minimum standards of service to be provided and the landlord should regularly, independently verify the service quality. She should also agree to the amount of service charge the manager charges her tenants. When a landlord has a block of flats with several residential tenants, she should also consider employing a property management company.

Another type of real estate investment that is becoming popular is the Students’ hostels. Public universities usually provide accommodation for just first and final year students. The majority of the other students suffer unnecessary hardships as a result. Consider investing in smaller cities where houses to rent are not readily available e.g. Ado Ekiti, Ogbomosho, Lafia, Nsukka. Income is regular as it is extremely unlikely that the tenants would not pay rent as and when due. Employ a property manager to manage the property, maintain standards and enforce law and order. Consider investing in higher grade hostels to attract NYSC members and postgraduate students especially the Executive MBA class.

Many of us have houses in our home towns that we lock up for up to 11 months a year. If you’re lucky and your home town is a big city (e.g. Uyo, Benin or Ilorin), consider listing it as a rental property on Air BnB – the online platform that connects people looking to rent houses for short stays with available properties. Visitors to the town for graduations, burial ceremonies etc. are your potential tenants. The house earns income for you, the more frequent use keeps the house in a good state of repair and keeps burglars away. The conditions for listing are favourable and Air BnB has adequate insurance coverage for all listed properties, but you should also expand your insurance coverage to include the additional use by the short-let tenants.