Advantages and disadvantages of investing in real estate compared to other asset classes in Nigeria

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Sunday, November 21, 2021 / 5:00 p.m. / Alpha Mead / Header Image Credit: Alpha Mead

Investing is a hot topic. Gone are the days when the subject matter was limited to a certain age group or social status. Now everyone seems to have a thing or two to say on the subject. Financial security is ultimately the reason why, more than ever, the hunt for investment opportunities is dazzling; and the overabundance of information on the internet, where you too are reading this, has been a commendable catalyst. But the rise in investment opportunities has coincided with the infamy of fraudulent investment schemes, hence the need for due diligence and adequate knowledge of the subject before committing.

Historically, only three asset classes were recognized by investors and financial advisors and Real Estate was not one of them. The three are equities, fixed income securities and money market instruments or cash equivalents. However, many people – investors and analysts – have over time come to classify real estate as one of the asset classes that offer people a viable way to grow their wealth.

Nevertheless, investing in real estate is quite different from other asset classes for some reasons: the barrier to entry, the investor’s risk appetite, the investment objectives and the control of the risk. investment to name a few. In the next few paragraphs, we will share some of the pros and cons of real estate investing.

Advantages

Passive income and cash flow: No other investment class generates as much passive income as real estate. As long as you invest in a property – commercial or residential – and put it on the rental market, you will be earning passive money. You know how you spend most of the year saving for your rent only to reluctantly transfer it to a landlord or landlord when it’s due, well, that’s how you’ll feel; only that you will be the recipient with a huge smile on your face. Research shows that most people invest in real estate to earn rental income and some people have gone so far as to make it their retirement plan.

Inflation hedge:Real estate is an enigma of an investment due to its reaction to inflation compared to other asset classes. Simply put, other investment classes struggle in an inflationary economy and this has negative consequences for portfolios. Treasury bills, for example, yield so little for investors today in Nigeria due to high rates of inflation which have affected investment performance. Real estate, on the other hand, soars during inflation. Rents tend to rise in response to market forces and real estate investors are taking advantage of this. A counter-argument to this view is that the value of money is lower in an inflationary economy as opposed to a stable economy, however, the rule of thumb in Nigeria is that real estate never goes down.

Appreciation of value:The “buy low, sell high” strategy is one of the most used by investors in the real estate sector. It is for this reason that many people prefer to invest in areas with high growth potential and wait a few years after more infrastructural development has taken place in the area before flipping the asset. This is why places such as Mowe-Ibafo in Ogun State, Ibeju-Lekki in Lagos, and Oyo State, to name a few, are becoming popular among investors. And for those who have already invested, the more the road infrastructure improves, the more commercial activities such as shopping malls, salons, gyms and sports centers open up; and essentials like schools, hospitals, etc. are on the rise, the value of the assets will increase.

The inconvenients

Liquidity: Despite all the cash and passive income gains of real estate, it is not an investment class where you can easily convert your asset into liquid cash like stocks and shares. The difficulty of selling built and land real estate assets is hampering the attractiveness of the asset class. Although it can be argued that home equity loans can be used as leverage, the process of obtaining it could be long and expensive.

Entrance barrier:Real estate is seen as a rich man’s game and why not? In a country like Nigeria where a large percentage of the population earn less than N200,000 a year ($340), how then are they going to accumulate the millions needed to own a house? Mortgages, which ideally should be more accessible, have high interest rates and generally require around 30% equity on the value of the property before they can be disbursed. And for middle-income people, the cost of homes in their desired location automatically excludes them from buying a home. Again, we can say real estate investment trusts (REITs) was put in place to lower this barrier to entry, however, returns are often low and range between 2 and 5%.

Risk: Globally, real estate is considered a relatively risk-free investment compared to other asset classes such as stocks and shares, which could be adversely affected by investigative reporting. However, in a climate like ours, real estate can be risky, especially when one is not well informed in the field. From land under government acquisition, congested C-of-Os, dodgy agents and incompetent developers, investing in real estate could be a daunting task in the country. It is for this reason that alignment with trusted parties cannot be overstated before committing.

At AMDC, we understand the nuances of investing in Nigeria and have therefore developed the Guaranteed Rental Income Program (GRIP), especially for investors. With GRIP, investors who buy with us can earn up to two years of upfront rental income while we take care of tenant sourcing and property management on their behalf. We also offer a range of end-to-end mortgage options from as low as 6% to finance their purchase.

Credit: This post first appeared HERE

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