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 was limited to a certain age group or a certain social status. Now everyone seems to have a thing or two to say on the subject. Financial security is ultimately the reason why the hunt for investment opportunities is dizzying more than ever; and the information glut on the Internet, where you too are reading this, has been a laudable catalyst. But the increase in investment opportunities has coincided with the infamy of fraudulent investment programs, 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 advisers and real estate was not one of them. The three are stocks, fixed income securities, and money market instruments or cash equivalents. However, over time, many people – investors and analysts – have come to classify real estate as one of the asset classes that provide people with a viable means of building wealth.

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

Advantages

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

Inflation hedge:Real estate is an investment conundrum because of its reaction to inflation relative to other asset classes. Put simply, other investment classes are struggling in an inflationary economy and this has negative consequences for portfolios. Treasury bills, for example, make so little return to investors today in Nigeria due to the high inflation rates which have affected the performance of the investment. Real estate, on the other hand, skyrockets during inflation. Rents tend to rise in response to market forces and real estate investors take advantage of this. A counter-argument for this view is that the value of money is lower in an inflationary economy than in a stable economy, however, the rule of thumb in Nigeria is that real estate never goes down.

Value appreciation:The “buy low, sell high” strategy is one of the most widely used by real estate investors. It is for this reason that many people prefer to invest in areas with high growth potential and wait a few years after the development of additional infrastructure in the area before reversing 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, trade fairs, gymnasiums and sports centers open up; and essentials like schools, hospitals, etc. are on the rise, then the value of the assets will rise.

The inconvenients

Liquidity: For all cash flow and passive income gain from real estate, this is not an investment class where you can easily convert your assets into cash like stocks and stocks. The difficulty of selling real estate and land assets reduces the attractiveness of the asset class. While it can be argued that home equity loans can be used as leverage, the process of obtaining it can be lengthy and expensive.

Entry 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 earns less than N200,000 per year ($ 340), how then are they going to accumulate the millions to own a house? Mortgages, which ideally should be more affordable, have high interest rates and typically 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 desired locations automatically excludes them from buying homes. Again, we can say real estate investment trusts (REIT) has been put in place to lower this barrier to entry, however, returns are often low and range between 2% and 5%.

Risk: Overall, real estate is considered a relatively risk-free investment compared to other asset classes such as stocks and stocks, which could be 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. Whether it’s land bought by the government or congested CEOs, dubious 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 therefore have developed the Guaranteed Rental Income (GRIP) program, especially for investors. With GRIP, investors who buy with us can earn up to two years of initial rental income while we take care of locating tenants and managing the property on their behalf. We also offer a range of end-to-end mortgage options starting as low as 6% to finance their purchase.

Credit: This post first appeared HERE

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