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Factors to look at when investing in real estate: location and potential returns

Alternative investments like real estate, private equity and structured financial solutions have outperformed traditional investments such as stock and bonds generating returns of, on average, more tha
n 20% per annum over the last five years. Among this, real estate has been the best performer recording returns of on average 25% per annum over the five-year period.

An analysis on performance of portfolios by Cytonn shows that returns on those with real estate exposure in 2015 were 6.7% higher than the returns on portfolios without real estate exposure. Real estate is thus a good investment both for profits and for diversification of an investor’s portfolio to minimise losses.

Despite the high returns, investment in real estate is not foolproof and one can just as easily make losses, especially if the product delivered does not receive expected uptake or occupancy. That is why it is important to explore two key factors that an investor should look at before making an investment.

Location is what will determine how fast a product will move in terms of both renting and selling. While returns, which is mainly touching on how to gauge the level of expected returns from a research perspective, will then be used to guide the investment decision. Based on these factors, you can then invest in real estate sharply, conveniently and earn the highest possible returns from this asset class.

Location – The importance and effect of location on the potential returns from a real estate investment can never be overstated. Being a physical asset, the potential clients must see, test and gauge if the property they are eying meets their requirements before buying or renting. Before selecting a property to develop, a potential investor should critique the location based on the following two key issues:

Infrastructural development – How is the infrastructure around the place, is the site close to a tarmac road, and are there alternative means of transportation? Is there electricity on site, sewer connection? Does the government supply water? If these services are available, then a site is ideal as it will have lower construction costs as the developer or investor will not have to provide them. If absent any plans in the pipeline to develop them and the timelines for the same if in tandem with the timelines the developer hopes to go to market may suffice. Should there be no plans, then the development may be futuristic and the investor may have to hold to the land for some time. Alternatively, the investor may provide the services but often such undertakings are expensive and may drive the price of the property to levels above market making selling hard.

Security – The security of a place often plays a big factor when buyers decide on whether to invest in a property. An ideal location with ease of access and good amenities may not achieve the sales expected if in a place with poor security. Hence before purchasing land, a real estate investor ought to conduct a background check on the security of the place to avoid being stuck with a product due to insecurity and hence make losses in the high performing real estate sector

Returns – While real estate generally earns high returns, it is not often the case and poor choice of investment in the sector without prior research may lead to making losses. Thus, before investing in real estate, an investor ought to gauge the level of expected returns on the product to establish viability. From a market research perspective, an investor can gauge the potential returns of a real estate investment using the following metrics.

Rental yields – This refers to how much the property pays back itself on an annual basis. It is calculated by dividing the annual rental income by the price of the property. A yield of say 5% means the property earns back 5% of its value on an annual basis and will hence take 20 years to recover initial investment, if the property is held as an income generating asset and not sold. A 10% yield means a property will take ten years to pay itself back. For rental yield for example, the higher the yield the better.

Capital appreciation – This refers to the rate at which the property appreciates in value. This can be due to demand or appreciation of land on which the property stands. Capital appreciation is calculated by dividing the current price by the price at a given base period then compounding to get the annual growth rate. It can be used to estimate future prices for modelling and to estimate the selling price at a future time point.

Total Return – This is the total return an investor is likely to get on a real estate investment. It is calculated by summing up the rental yield and the capital appreciation such that on sale of a property, the investor will gain from the increase in value of the property as well as the rental income earned. The increase in the value of the underlying asset is the key differentiating factor between real estate as an asset class and other asset classes.

Occupancy – Refers to how much of a development has been absorbed by the market through renting. Calculated as a percentage, it is obtained by dividing the number of units occupied by the total number of units available. A high occupancy leads to higher returns and low occupancy significantly reduces the return potential of a real estate investment.

Uptake – Refers to how much of a development has been absorbed by the market through sales. This is calculated as the number of units sold divided by the number of units available and is expressed as a percentage. Occupancy and uptake indicate the demand for the real estate development. High rates of the two indicate there is demand and low rates indicate that the market may be oversupplied or that there is no demand.

To get the above metrics, a potential investor has to visit comparable properties in the chosen location and collect data on the same, compute the metrics then make decisions off the findings. While the above does not guarantee the success of a project, it goes a long way in minimising the risk of losses to an investor and is hence worth it.

From the above, sharp real estate investment is very tedious. One has to first look for the site, gauge its attractiveness based on infrastructure, access, amenities, and security and if it checks the box, carry out a research to estimate potential returns. After that the site acquisition begins and it can be as messy as it is tedious involving sale agreements, due diligence documentation to name but a few then get approvals before beginning the development. It is hence hard to do this by oneself unless it’s a full-time job.

To invest sharply, conveniently and stress-free in real estate sector, an investor may also consider three things. Firstly, get a partner. Do not go at it alone get professional help to guide in site acquisition, market research, project, and construction management to make the process faster and quicker.

Secondly, buy real estate projects off plan provided all the above factors are clearly provided and due process has been followed. This enables you to enjoy returns without working for it big time.

Thirdly, consider real estate backed notes and listed property through Real Estate Investment Trusts (REITs). This enables one to enjoy liquidity similar to that of traditional investments such as stocks and earn the high returns in real estate without the hassle of dealing with property.

It is thus possible to structure investment in real estate to suit your needs and still enjoy the high returns of the asset class.

BY ELIZABETH NKUKUU.                                                                                                        

 Writer is Chief Investment Officer and Head of Cytonn Real Estate.

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You do not have to be rich to join property market.

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PHOTO| FILE| NATION MEDIA GROUP

Don’t wait until you have saved enough to build a house. Put the ‘little’ cash you have in a joint land-buying venture and watch your investment grow. 

In Summary

  • Indeed, real estate has proved to be an avenue for creating wealth.
  • Whether it is building your retirement home or buying plots as a group, many of us have dreamt of investing in property at a certain point in our lives.
  • However, sometimes investing in real estate can be intimidating for beginners due to fear of the unknown.

“Earth is the best investment on earth.”

That is a statement by Mr Gilbert Kibire, the CEO of Icon Valuers Ltd, a real estate firm based in Nairobi, a statement echoed by his colleague, Mr Martin Cheboror.

“Land is the only asset you can invest in, where its value will almost always appreciate,” Mr Kibire expounds.

Indeed, real estate has proved to be an avenue for creating wealth. Whether it is building your retirement home or buying plots as a group, many of us have dreamt of investing in property at a certain point in our lives.

However, sometimes investing in real estate can be intimidating for beginners due to fear of the unknown.

Mr Cheboror explains that these reservations are legitimate as he has seen people lose millions of shillings and go bankrupt overnight in real estate deals gone awry.

“For smart investors who consult widely and seek guidance from professionals, the industry sure is lucrative, as we have facilitated deals in which people have made millions of shillings overnight,” he says.

Below are 10 tips that will help you get started in real estate and turn investing in property into a lifelong pursuit to secure your financial future.

  1. START SMALL, START NOW

A common truism in property circles is that, with real estate, you don’t wait to buy, you buy and wait.

“Many people lose out on making a fortune because they think the money they have is too insignificant to get them into the real estate business.

They don’t know that there are investment packages and opportunities they can exploit if they seek guidance from a real estate agent,” Mr Cheboror offers.

To drive the point home, Mr Kibire gives the scenario of two individuals with Sh100,000 each, and who both want to own a home in 10 years.

While individual A might think it is better to save until he can raise the capital required to build a home, individual B, who gets into a joint land-buying venture with his Sh100,000, will be better off as his stake in

the venture will have risen over the years since the value of land always appreciates.

“There are many financing options available to people with an interest in the real estate, ranging from bank loans to mortgages and micro-finance savings packages. Just make sure the income or appreciation

value of your property surpasses the interest on the loan to avoid burning your fingers,” advises Mr Kibire

You don’t need to buy an apartment complex right out of the gate. It is okay to start small, even if it is with REITs or partnerships. Just start.

  1. REAL ESTATE IS NOT A GET-RICH-QUICK SCHEME

Most people find the allure of buying property today and selling it after a short time hard to resist. However, the two professionals caution against getting into real estate with such an attitude because, like any

other investment, there is always an element of risk involved.

“One virtue that will prove very vital in this business is patience, which goes hand in hand with the principle of delayed gratification.

A person seeking to make a fortune in the real estate sector should be prepared to work hard and learn over a long time to understand how the market works,” Mr Kibire says.

  1. DO NOT QUIT YOUR REGULAR JOB JUST YET

If you are looking to  getting started in the property sector, quitting your regular job might not be a very sound move, especially if it is the job that provided the initial capital for your investment.

According to Mr Cheboror, people who quit their jobs to concentrate on real estate are oblivious of the fact that they can get professionals to handle the management part of their investments.

“Property agents and land economists have obviously been in the industry much longer, and are thus more experienced in competently managing your investments,” he says.

Relying on professionals saves you time as it only requires you to play a supervisory role.

  1. DO NOT UNDERSTATE THE IMPORTANCE OF DUE DILIGENCE

The average Kenyan looking to get into real estate is always paranoid. This is because cases of people buying land whose title deeds are later revoked are rampant in many parts of the country.

“We have had people asking us to do a title deed verification when their investments have already gone up in smoke.

By then it is too late, and there is little we can do. To avoid being sucked into such unscrupulous deals, we advise land buyers to consult  professionals , who will carry out due diligence to verify the legitimacy

of the property in question,” says Mr Kibire.

Even when buying property from a family member, a friend or a person you think you know very well, resist the temptation to skip carrying out due diligence as unforeseen circumstances  could later lead to

life-long scarring.

“We know of people who spend the rest of their lives servicing loans for properties that turned out to be phony,” Mr Cheboror offers.

Given the kind of emotions land  issues raise, it is certainly better to be safe than sorry.

  1. SURROUND YOURSELF WITH THE RIGHT TEAM

When getting started, it is advisable to build a team of professionals  you can easily consult before making any move, especially one that involves high financial expenditure.

A property valuer, a conveyancer, an accredited contractor and a loan adviser are a few of the professionals whose advice you cannot afford to shrug off.

While adding the professionals to your payroll might seem costly at a glance, a closer look will reveal that it actually saves you money.

Mr Kibire, the CEO, cites the case of a client who wanted to buy a house in Nairobi valued at Sh10 million, a week before the interview.

Before he could seal the deal, however, the prospective buyer decided to call  the valuation firm for advice.

“Our team visited the property and advised the client not to pay a cent more than Sh7 million for the property. He later sealed the deal for Sh6.5 million. While we only charged him 0.25 per cent of the property

price for our services, he ended up saving a huge sum,” Mr Kibire  says.

  1. BUY THE WORST HOUSE IN THE BEST NEIGHBOURHOOD

“The importance of location in any real estate investment cannot be overemphasised.

This is because property in prime locations is measured not so much by the cost of construction, but by the value and high appreciation rate of the land on which the property sits,” Mr Cheboror says.

Investing in a simple establishment in a high-end neighbourhood always pays handsomely.

However, the reverse can be the worst mistake an investor could ever make. Buying the best house in the worst neighbourhood, he warns, will always turn out to be disastrous as the value of the land

underneath hardly appreciates, and future buyers will most likely shun the property because of the neighbourhood.

  1. BEAR IN MIND  THE 1 PER CENT RULE

When putting up commercial or residential property to let, seek advice from your agent and do your calculation in such a way that, when the property is finally ready for occupation, the money collected

as  monthly rent is always more than 1 per cent of the total investment cost. This is what Mr Kabire refers to as the 1 per cent rule.

“Say you put up rental apartments at a cost of Sh1 million. The total monthly rent collected from an apartment should always be at least Sh10,000.

This will enable you to recoup your investment in less than 10 years,” Mr Kibire says.

However, the 1 per cent rule is not cast in stone.

“Some investors recoup the principal investment in a shorter time, even four to six years. But those whose buildings on prime land in places such as Westlands and Kilimani take as long as 30 years.

These investors rest easy knowing that the land on which their buildings sit is gaining value at a much higher rate than the rents,” he adds.

  1. GOOD BOOK-KEEPING WILL SAVE YOU A FORTUNE

Mr Cheboror points out that many small-scale constructors do not appreciate the value of accounting for every shilling spent while constructing.

They thus end up getting duped by unscrupulous foremen and contractors, so building a house ends up feeling like pouring money into a bottomless pit.

He advises that investors get into the habit of keeping all the financial records pertaining to the construction.

This, he explains, is useful in determining the amount of rent to be charged, or the price of the building, were it to be put up for sale.

Keeping records can also save you money when the time comes to file your tax returns with the Kenya Revenue Authority (KRA). The financial records put you in a good position to enjoy tax exemptions.

  1. DO NOT FALL IN LOVE WITH THE PROPERTY

When buying property for resale, you are better off checking your emotions at the door. “There are buildings put up for sale that are over-designed and over-decorated.

These buildings have great curb-appeal, that is, they look appealing at a glance. People tend to fall in love with such buildings and hence end up paying inflated prices, only for them to get shocked when they

later cannot sell the building at a profit,” Mr Kibire says.

“We always advise our clients that real estate is not a sentimental business. One should always be on the lookout for profits and not let the visual appeal of a property cloud their judgment,” he adds.

However, when buying your own home, you can go ahead and fork top dollar for a property with great curb appeal.

  1. AVOID THE PATH OF LEAST RESISTANCE

The temptation to cut corners to save some money will certainly arise at some point. The agents agree that taking shortcuts is rarely ever worth it; if anything, it usually results in the loss of entire investments,

and sometimes even lives. Going by the book might seem expensive, but it saves you a lot of mental agony and is actually cheaper.

“Hire only contractors accredited and licensed by the National Construction Authority,” advises Mr Kibire.

“Take note of the national construction regulations and county by-laws to avoid the possibility of your property being demolished in future.

Conduct surveys to avoid encroaching on public land, and use only genuine materials while constructing. I have seen entire buildings being marked as unfit just because the owners did not see the need to

conduct the necessary inspections at the foundation stage.

Original Post from www.nation.co.ke

PHOTO| FILE| NATION MEDIA GROUP

 

 

3 Effective Ways to Save Money When Building a House

 

For a long time, timber, bricks, blocks and quarry stones have been the most commonly used materials in the Building Construction Industry. With modern technology, other new types of materials for wall construction have been introduced and approved in the market. Let’s look at the 3 types of materials that are cost effective and much faster to use than the conventional brick and stone materials,when building a house

 

1. Expandable Polystyrene System.EPS

 

EPS is an industrial system of constructing a structural wall of reinforced concrete. This is a wall made of panels that consisting of polystyrene materials sandwiched by an electro welded, zinc coated square wire mesh, Which in turn are connected by 33 connectors per m2 realizing a three-dimensional hydrostatic reinforcement steel. Polystyrene is the white soft materials normally used to support or protect delicate consumer goods like television sets, radios etc when transporting.

The panels are assembled on site. Once the panels have been assembled and connected to the steel bars on the ground slab, in situ concrete is poured on it on the panels on both sides. Roof, stairs and slabs can be done with these materials.Building a house with EPS has been widely adopted in European /Western countries.

Advantages of EPS Panels.

  •  Speed of construction a 3 bedroom house can take 4 weeks to build to completion.
  •  Doesn’t need special equipment to use, and easy to work with during the erection phase.
  •  Good sound insulation.
  •  Good Fire and Heat Insulation.
  •  Long life and low maintenance.
  • Cost effective as compared to normal types of materials.
  •  Reduce the negative environmental impact. Reduce quarry activities, deforestation.

2. Hydraform Interlocking Blocks

Hydraform interlocking block is a walling material made of three inputs, namely soil, cement and sometimes sand. In Kenya it’s also known as MAKIGA interlocking blocks. This is a type of wall material that doesn’t use mortar to bond. It has grooves on all the four sides that lock into each other hence the name interlocking blocks. It can be used for storey building with reinforced columns used to handle the loads. Some of the main of the advantages of this material includes;

  •   Speedier construction,Building a house with Hydraform blocks is faster than normal building blocks.
  •  It’s very cost-effective. Save about 40% compared to normal quarry stones.
  •  It doesn’t require special skills to use hence semi-skilled workers can build the interlocking wall.

3.Pre-Cast Concrete Panels.

This wall material is made by casting concrete in a steel pallet in a factory and curing in a regulated curing chamber. These Pre concrete panels come in various sizes depending on the use. Some can be used for doing the slab work.Pre cast beams are also made to work with the panels.

Boleyn a Chinese company has built a Kshs.3billion factory in Kitengela for manufacturing Pre-cast Concrete panel and Expandable Polystyrene System panels.

Advantages of Pre-Cast Concrete Panels.

  •  It can cut the construction period and labor by up to 60%. This technology can be used for high-rise apartments, large-scale projects as well as stand-alone. With this material you can build a 2 bedroom house in 8 days
  • It has Superior strength durability.
  •  Provides excellent protection against explosion and severe weather effects.
  •  High-quality wool with a uniform consistency.
  •  It has very low maintenance.

The only downside of these panels is special means of transport required in transporting like the low loaders and crane for lifting and installing it on site. So a small project like a single bungalow may be expensive construct using these pre-cast panels.