REAL ESTATE PROFITABLE IF INVESTORS MAKE WISE DECISIONS

Real Estate profitable if investors make wise decisions

 

 

 

 

By Beatrice Mwangi Wacuka (Real Estate Research Analyst)

 

 

 

 

 

Creating wealth is an art-craft that requires research and learning

to ensure one invests in the most profitable avenues. In spite of this,

there is also need to note that the higher the returns, the higher

risks. Therefore, it is important that one fully understands the

investment options and thus make informed decisions. Some of the

investment vehicles available in the market include; bank fixed

deposit, stocks, government bonds and real estate, among others.

 

 

 

 

 

In this article, we delve into investing in real estate, outlining what

an investor should know before committing their capital. To begin

with, buying and owning real estate is an investment strategy that

can be both satisfying and lucrative. It is generally capital intensive

and illiquid hence the need to be well informed before committing

the funds.

 

 

 

 

 

To begin with, there are 3 common ways through which one can

invest in real estate among them, rental properties– an investor

could prefer to build or buy property, and rent it out thus obtaining

a rental income. The amount one can collect from rental property is

dependent on the type of property, its location, proximity to

amenities and availability of facilities among others. Rental

property offers the investor the benefit of a regular income, often

monthly subject to having a tenant, and the property value can

appreciate over time. On the flipside; it can be tedious managing

tenants, there is potentially damage property from tenants and

reduced income from potential vacancies

Secondly, flipping- flippers buy properties with the intention of

holding them for a short period—often no more than three to four

months—and quickly selling them for a profit. The two primary

approaches to flipping a property include; (i) repair and update,

where one buys a property that they think will increase in value

with certain repairs and updates. Ideally, complete the work as

quickly as possible and then sell at a price that exceeds the total

investment (including the renovations), (ii) hold and resell- here the

investor buys in a rapidly rising market, hold for a few months, and

then sell at a profit. With either type of flipping, the investor runs

the risk that they won’t be able to unload the property at a price that

will turn a profit. The third way is through REITs– A real estate

investment trust (REIT) is best for investors who want portfolio

exposure to real estate without a traditional real estate transaction.

 

 

 

 

 

A REIT is created when a corporation (or trust) uses investors’

money to purchase and operate income properties. REITs are

bought and sold on the major exchanges, like any other stock. REITs

pay through annual dividends, and investors who don’t need or

want the regular income can automatically reinvest those dividends

to grow their investment further. Key to note, the Kenya REIT

market has over the years performed poorly attributable; i)

insufficient institutional-grade real estate assets, ii) lack of investor

appetite in the instruments, iii) high minimum investment amounts

set at Kshs 5.0 mn that is over 100x the median income in Kenya,

and, iv) low investor knowledge.

 

 

 

 

 

It’s important to get clued-up if you’re looking to start or expand

your property portfolio. For first-time investors, the real estate

market can seem like somewhat complex, and it can often feel like

property investment is a hard sector to navigate. But this doesn’t

have to be the case if the potential investor takes into account a

variety of factors among them;

 

 

 

 

 

Market Research– It is important that the potential investor

undertakes an in-depth research on the current real estate

landscape with the aim of establishing the current property trends,

historical and current property performance in terms of returns,

price appreciation, rental yield. This equips them with essential

information on the market gap and the existing investment

opportunity,

 

 

 

 

 

Location– The location of property is as important as the property

itself. The location determines the security, potential of property

value growth, proximity to amenities and availability of utilities. It

is advisable to aim for a prime location thus increasing the chances

of good returns, somewhere in the middle of a development push,

and somewhere that has a good track record when it comes to

property growing in value,

 

 

 

 

 

Type of Property– This could simply refer to making a choice

between a commercial and residential property guided by the

objective of the investment. The next choice is between rental

versus buy to sell properties. Rental properties are for investors

looking for long-term gains through rental income, while buy-to-sell

approach offers the chance for higher returns in the short-term, but

the strategy comes with much more added risk. Finally, it is

important to establish the type of market one intends to venture

into i.e low end, mid end or high end market segments. These

segments are determined by the value of property with the high end

market segments having the highest priced property in the market

and are located in prime locations,

 

 

 

 

 

Diversification- When investing in property it’s important to

diversify your portfolio. Spreading your money across multiple

properties allows you to mitigate risk and increase the potential for

returns because you will not be subject to the success or failure of

just one piece of real estate. In the case where one property

performs poorly, the others will balance it out, while another might

prosper elsewhere,

 

 

 

 

 

Risk Analysis- Just like with all other investment avenues, investing

in real estate is associated with several risks that could have mild to

adverse effects on property returns. Therefore, it is important that a

potential investor maps out all potential risks, evaluates their risk

appetite and establishes a way of mitigating the risks.

 

 

 

 

 

In conclusion, real estate can be profitable when potential investors

have the knowledge to make wise investment decisions. It can

provide steady cash flow, substantial appreciation, tax advantages,

and competitive risk-adjusted returns, making it a sound

investment. It’s therefore important to weigh all the major factors

that could determine the performance of your property, some of

which are mentioned above- whether you opt for physical property,

REITs, or something else.