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.
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