5 things to know before investing in real estate

KEY POINTS

Buying and owning real estate is an investment strategy that can be both rewarding and profitable. It is generally capital intensive and illiquid, hence the need to be well informed before committing funds.

Creating wealth is an artistic profession that requires research and learning to ensure that you invest in the most profitable avenues. Despite this, it should also be noted that the higher the returns, the higher the risks.

It is important to fully understand the investment options and thus to make informed decisions. Some of the investment vehicles available in the market include; bank term deposits, stocks, government bonds and real estate, among others.

Buying and owning real estate is an investment strategy that can be both rewarding and profitable. It is generally capital intensive and illiquid, hence the need to be well informed before committing funds.

There are 3 common ways to invest in real estate:

Rental properties

An investor may prefer to build or buy real estate, and rent it out, thereby earning rental income. The amount that one can collect on a rental property depends on the type of property, its location, proximity to amenities and availability of facilities, among others.

The rental property offers the investor the benefit of a regular income, often monthly subject to having a tenant, and the value of the property can appreciate over time.

Turnaround

Pinball machines buy properties with the intention of holding them for a short time (often no more than three to four months) and quickly selling them for a profit.

The two main approaches to reversing a property include: (i) repair and update, when buying a property which he believes will increase in value with certain repairs and updates. Ideally, complete the work as quickly as possible and then sell for a price higher than the total investment (including renovations), (ii) hold and resell – here the investor buys in a sharply rising market, holds for a few months , and then sell at a profit.

REIT

A real estate investment trust (REIT) is ideal for investors who want to expose their portfolio to real estate without a traditional real estate transaction. A REIT is created when a company (or trust) uses investor money to buy and operate income properties.

REITs are bought and sold on major stock exchanges just like any other stock. REITs pay through annual dividends, and investors who don’t need or want regular income can automatically reinvest those dividends to further grow their investment.

The Kenyan REIT market has over the years attributable poor performance; i) insufficient institutional quality real estate assets, ii) a lack of investor appetite for instruments, iii) high minimum investment amounts set at Kshs 5.0 million, more than 100 times the median income at Kenya, and, iv) poor knowledge of investors.

It is important to educate yourself if you are looking to start or expand your real estate portfolio. For new investors, the real estate market can seem somewhat complex, and one can often feel that real estate investing is a difficult industry to navigate.

Here are five things to watch out for if you want to invest in real estate:

Market research

It is important that the potential investor undertakes extensive research into the current real estate landscape with the aim of establishing current real estate trends, historical and current real estate performance in terms of yield, price appreciation, rental yield.

Location

The location of the property is as important as the property itself. Location determines safety, property value growth potential, proximity to amenities, and availability of utilities.

It is advisable to aim for a prime location, thereby increasing the chances of good returns, somewhere in the midst of a development spurt, and somewhere that has a good track record of growing real estate value.

Property type

It could simply refer to making a choice between commercial and residential property guided by the objective of the investment.

The next choice is between renting and buying / selling. Rental properties are for investors who are looking for long-term gains from rental income, while the buy-sell approach offers the potential for higher short-term returns, but the strategy carries a much higher risk. .

Finally, it is important to establish the type of market that one intends to venture into, i.e. low-end, mid-range or high-end market segments.

Diversification

When investing in real estate, it’s important to diversify your portfolio. Spreading your money across multiple properties allows you to mitigate risk and increase the potential for returns, as you will not be subject to the success or failure of a single property.

Risk analysis

As with all other avenues of investment, investing in real estate comes with several risks that could have mild to negative effects on real estate returns.

Therefore, it is important that a potential investor lists all the potential risks, assesses their risk appetite and establishes a way to mitigate the risks.

In conclusion, real estate can be profitable when potential investors have the knowledge to make sound investment decisions. It can provide stable cash flow, substantial capital appreciation, tax benefits and competitive risk-adjusted returns, making it a good investment.

Read more: Unboxing Real Estate Investment Trusts (REITs)

By Beatrice Mwangi ~ Real Estate Research Analyst

About the Soko Directory Team

Soko Directory is a digital finance and markets portal that tracks brands, NSE-listed companies, SMEs, and trendsetters in the market ecosystem. Find us on Facebook: facebook.com/SokoDirectory and on Twitter: twitter.com/SokoDirectory

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