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Five Strategic Oversight To Avoid With Property Investment by diordaves(m): 5:45pm On Oct 30, 2014
1) SLAVE TO LOCATION
Most prospecting individuals wait to buy land in fully or near fully developed areas. This is not a bad thing if you are loaded to the hilt and with the ability to pay over the top for a piece of land. These type of individuals are obsessed and fixated on a particular location and spend donkey years saving just to locate and buy a piece of land in their choice location. They fail to realize two things: Fully built areas apart from being over priced; are more prone to fraud and family dispute and way more expensive to develop because of the difficult logistics of getting materials to site. Imagine Building a flat in Central Lagos or main Onitsha. It’s better to identify the “growth node” in a town of your choice, buy a reasonable size of plot(s) at reasonable price and either develop the plot slowly or wait for development to meet up with you. In Nigeria, when it comes to land, you “Buy To Wait” and not “Wait To Buy”.

2) DUPLEX MENTALITY
The diaspora community is mostly guilty of this. Most folks aiming for a retirement or family home will almost always settle for a duplex. Bungalow is not a popular choice. There are instances where diaspora with no plan of locating home immediately or even in the distance future will locate a land in a thriving city, opt to build a duplex and then have family members living in the property thereby tying down equity for donkey years. It should be noted that the amount used to develop a duplex will conveniently develop a “Four Flat” or four units of Bungalows. One could have family members living in one flat and rent out the rest for rental income and use the rent(s) to secure a plot in a growth node. When one is ready to relocate home, either develop the plot or upgrade/spruce up the flats. If you are elderly living in a duplex could pose a challenge.

3) RENTAL YIELD CALCULATION
Question: If you used 15 million Naira to develop a property and your rental income is 1.5 million a year. How long will it take you to get your money back? Easy: 15 million divided by 1.5 million equals 10 years. Right? Well………..wrong!!! This is a false perception in the building trade. So how does one calculate Rental Yield and determine the profitability of one’s project.

Firstly, let’s look at the term “get your money back”. You cannot use this term if you are renting out the property. Your money (equity) is tied up in the property, so while your money is still “inside” the property, the property is in addition yielding rental income (yield).

There are two way to make money from your property: Capital Growth and Rental Income. The increase in value over time of the property is Capital Growth and Rental Income is what the tenant(s) pay which also grows over time. Now if you divide Rental income [1.5 million] by the value of the property [15 million] times 100, which will give you 10%.

Now the Rate of Inflation in Nigeria on average is 12 % per annum leaving you a short fall of 2%. Your property is not profitable in the short run as inflation is “eating” your money. Now if you took a loan from the banks at 25% on average in Nigeria, the situation is even worse as your rental income cannot service your loan.

So from the example above all things being equal it will take 10 years to receive the initial sum invested. Mind you, this is NOT getting your money back. This is an additional money as your money is still “inside” the property. So we can effectively say after 10 years all things being equal, you are worth 30 million i.e the money you’ve received in rent plus the residual value of the property which could be more.

4) TOO MUCH EMPHASIS ON RESIDENTIAL BUILDING PART 1
As property investors, we place too much emphasis on residential building and less on business premises. We only think of building business premises if we could secure a piece of land in a major/trunk road. The economic flow/structure in Nigeria is such that folks live inner city and come to the major roads where the shopping complexes are located to shop. But what property investors fail to see is that the local economy is inner city so it makes economic sense to situate a cluster of shops inner city where the economy is. It should be noted shops are cheaper and faster to execute with higher rental income than the average residential building. So think twice; that land situated deep in a “residential” area could serve you more as a shopping complex or cluster of shops than for example four flats.


5) TOO MUCH EMPHASIS ON RESIDENTIAL BUILDING PART 2
It is agreed that there is a shortage of decent residential housing in the country. So it makes business sense to build and sell houses. The problem is with the structure of the houses put up for sale. Investors focus too much on luxurious buildings commanding mind boggling prices. The end result is that such properties are in the market for months or even years. This is a case of the majority marketing to the minority [few rich folks]. There is bound to be a glut especially with cumbersome access to mortgage loans. In such a scenario, it’s a better business sense to build a cluster of shops or shopping complex and retail out individual shops. For example a 15 million investment for a duplex can build easily a 25 shops project or more. If you retail 20 shops for 3.5 million (conservative estimate) each and keep 5 shops and the leasehold is better than wishing to sell the duplex for a stupendous amount for years. Shop retail will sell faster due to the offer price and the significance of business premises.


So which of these oversights have you fallen for or about to fall for ?

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Re: Five Strategic Oversight To Avoid With Property Investment by mufutau55(m): 12:11am On Oct 31, 2014
Welcome back Diordaves.. long time..
You are surely on point with this write-up... I fell into the Duplex thing myself.. Thank God there is also a bungalow.
Now I am thinking how does an old person climb stairs in a Duplex... I should build a giant bungalow.. so I built another bungalow, but what about those who cannot afford the second building..

Hajji M.

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Re: Five Strategic Oversight To Avoid With Property Investment by diordaves(m): 8:16am On Oct 31, 2014
mufutau55:
Welcome back Diordaves.. long time..
You are surely on point with this write-up... I fell into the Duplex thing myself.. Thank God there is also a bungalow.
Now I am thinking how does an old person climb stairs in a Duplex... I should build a giant bungalow.. so I built another bungalow, but what about those who cannot afford the second building..

Hajji M.

Hajji mufutau long time. I've been away too long. Na money palava.

I think we should dwell more on the thought process of building as much as the structural and aesthetic aspect. I tell you a true story: I have a childhood friend in Maryland. We both secured a plot of land on the very same day about three years back. I opted for a six flats and three shops; he opted for a duplex. His concern was that his mum had a raw deal over the years from his dad. You know we men na. So he wanted his mum to enjoy. We both completed and took stock. He spent about 10 million; I spent 13 million. Fast forward his mum passed away. His younger sister and her husband moved into the duplex. They constantly call him to send money for maintenance of the building, even money to clear drains on sanitation days.

So we got around recently and took a second stock. My project has a rental income of just over 2 million per annum but his duplex sets him back constantly. And he is not going home anytime soon. We've just completed converting the duplex into three flats with two tenants and the sister living rent free with her husband. I'm reluctant to tell you that the husband is long term unemployed and the sister is the bread winner. Now take a look at this scenario: Why duplex originally ?

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Re: Five Strategic Oversight To Avoid With Property Investment by diordaves(m): 11:29am On Oct 31, 2014
I saw this advert by First Bank. Can we deconstruct this project? How "profitable" will this project be? What is the level of income needed to sustain this offer? What is the total cost of this project? Will the level of finishing and location worth the cost? Is the project good value for money? What are the legal implications? etc

Re: Five Strategic Oversight To Avoid With Property Investment by diordaves(m): 11:31am On Oct 31, 2014
In case you are having difficulty with the pic, the advert also stated that the "Rental Value is 1.6 million per annum. Now from my explanation above on yield, the task (assignment) is to determine the yield of this project and confirm if this project is a good deal or not. The face value is 28 million which include land cost. The average interest rate of such mortgages in Nigeria is 23%. I'm yet to confirm from First Bank what the interest rate is. If you know the interest rate already please share.
Re: Five Strategic Oversight To Avoid With Property Investment by gabbytabby: 12:06pm On Oct 31, 2014
diordaves:
In case you are having difficulty with the pic, the advert also stated that the "Rental Value is 1.6 million per annum. Now from my explanation above on yield, the task (assignment) is to determine the yield of this project and confirm if this project is a good deal or not. The face value is 28 million which include land cost. The average interest rate of such mortgages in Nigeria is 23%. I'm yet to confirm from First Bank what the interest rate is. If you know the interest rate already please share.

Welcome back. Always a pleasure to read your contributions.

Thing with such calculations is you either over simplify or you need to make assumptions about
1) Maintenance cost, renewals and other disbursements
2) The average lifespan of the building before you might have to pull down and rebuild.
3) Inflation
4) Average increases in rental income and over what period.
5) Average voids
6) Is the property a leasehold or freehold. etc etc

I am on my way out and will have a look later.
Re: Five Strategic Oversight To Avoid With Property Investment by diordaves(m): 4:59pm On Nov 03, 2014
gabbytabby:


Welcome back. Always a pleasure to read your contributions.

Thing with such calculations is you either over simplify or you need to make assumptions about
1) Maintenance cost, renewals and other disbursements
2) The average lifespan of the building before you might have to pull down and rebuild.
3) Inflation
4) Average increases in rental income and over what period.
5) Average voids
6) Is the property a leasehold or freehold. etc etc

I am on my way out and will have a look later.

Long time gabbytabby. You've raised some real issues. These are the stuff property investors should be concerned with. I have noticed too many investors embark on projects without due diligence, social implication or even the financial calculus. It's not a surprise there are so many failed projects about.

Lets use the First Bank offer as a Case Study not only to answer some of the points you highlighted but also to drawn attention to the strategic decisions and oversights involved with property investment:

THE OFFER
The offer is a Three Bedroom Flat in a block of flats.
The average Nigerian will invest in property as a retirement/family home, as an investment or a combination of retirement/family home and investment. The average family will normally invest in duplex or bungalow as a family home or in some cases a Four Flat; live in one of the flats and rent out the rest. It is uncommon for the Nigerian family to invest in a three bedroom flat in a block of flats as a family home. However, we have witnesses such where families live in a block of flats as family homes but this is normally with Government Social Housing like FESTAC, Jakande Estates in Lagos State, 1004 in V.I etc.

THE TARGET AUDIENCE
In the light of the above, the question is begging to be asked: who is the offer aimed at? Who are the target audience? Can one safely say that 28 million Naira for a three bedroom flat in a block of flats is not for the average Nigerian both in cost and in social structure? The offer is obviously aimed at the high net worth individuals looking for a stress free investment in property, but who are these high net worth individuals? Politicians looking to launder their loots, militants, the diaspora or expatriates like the Chinese, Indians or Lebanese?

THE LEGAL STUFF
It should be noted that flats may normally be owned on a leasehold basis. As a leaseholder, you legally own the property but not the land. The land remains owned by the vendors and ownership of the property may revert back to the vendors once the lease runs out. In the term of the lease, the purchaser is simply a long tenancy for a certain period of time usually 99 or 125 years. The leasehold ownership relates only within the four walls of the flat and the leaseholder may seek authorisation from the freeholder [vendors] to carry out any structural alteration to the property. The freehold is responsible for the maintenance of the building and the common parts and premium insurance with the cost recoverable through service charges billed to the leaseholder.
It is possible for any purchaser to also negotiate the purchase of the freehold outright. In Nigeria where the justice system is slow, this may be a better option. We have instances where the freeholder will bill freeholders but fail to carry out any form of maintenance for example FESTAC Town, Satellite Town, Dolphin Estate Ikoyi, LSDPC Estates in Lagos etc.

THE FINANCIAL STUFF

Yield Calculation Part 1

Annual Rent: N1,600,000
Property Value: N28,000,000
Net Yield: 4.08%
Years Purchase: [b24.5/b] years [All things being equal, investors will receive the initial sum invested after 24.5 years!]

But we know that 28 million can’t be all the associated cost, so let’s extrapolate from Nigerian setting to see if we could rough a guess of the final cost:

Standard Purchase cost
Agency Fee 10% [guess work]: N2,800,000
Legal Fee 25% [guess work]: N7,000,000
Miscellaneous 5% [palm greasing]: N1,400,000
Gross Value: N39,200,000 [this is without Mortgage Arrangement Fee]



Yield Calculation Part 2

Annual Rent: N1,600,000
Gross Value: N39,200,000
Net Yield: 3.91%
Year Purchase: 25.6 years

Mortgage Calculation
Loan to Value Ratio 20%: N5,840,000 [i.e minimum down payment]
Loan Term 240 months [20yrs]: N292,000 [yearly capital repayment]
Mortgage Rate [guess work] 23%: N1,072,927
Interest & Repayment: N1,364,927 per annum or N113,744 per month.

I’ve tried to rough out a guess on may be the real cost of this offer.
What do you think will be the level of income needed to sustain a mortgage payment of N113,744 per month?
Will this offer suit some bank and oil workers?
To the average diaspora, is this offer doable?
For the savvy investor, is this a financially sound investment?
Re: Five Strategic Oversight To Avoid With Property Investment by chitown(m): 8:57pm On Nov 03, 2014
Diordaves,
Great article!! I am also one of diasporans who built a huge duplex (5 bedrooms) and 2- 3 bedroom together. In view of the fact that am not returning to Nigeria anytime soon. I have given instructions to covert the downstairs of the duplex to a 2- 2 bedroom flats which will net a combined yearly income of #500,000. The other 3 bedroom flats will provide an estimated income of #700,000 yearly. I am in agreement that building duplexes by diasporans who are not returning home soon may not be getting great value for their money. By the way, I still have a 3 bedroom left which I will retain for myself when I return home. I will keep that for now until I am able to develop half a plot left. The Half a plot will be designed in such a way that could easily be converted to rental properties. Thanks for this great topic.

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