Anyone serious about their future and finances will strife to know how real estate investing works even if it is for the purpose of diversifying their portfolio. It is interesting that real estate investing works differently relative to geographical location.

For instance, the US Census revealed that 68.8% of Americans used a mortgage to buy their homes due to the lump sum involved. The reverse is the case in Nigeria because we don’t have a structured system that makes mortgages accessible. Besides, the high unemployment rate, underemployment and exorbitant interest rate make a mortgage generally unaffordable to most Nigerians.

Thus, to know how to get started in real estate investing, potential investors must have sound knowledge of how the industry works in their country. This post is loaded with that knowledge and compares it with how it differs in the US, the UK and Canada.

Alternatively, potential investors should look for one of those good real estate investing books out there. Among the best books on real estate investing to consider is “10 Amazing Secrets To Wealth Creation Through Real Estate Investing In Nigeria“. It will amaze you that such a powered-pack ebook is one of the free real estate investing books online.

Before we proceed, let’s first define real estate investing.

Real Estate Investing Definition
Real estate investing is the use of houses, plots of land, offices, shopping complexes, warehouses etc as a vehicle for making money and growing generational wealth. It is the act of buying, managing and selling properties to make a profit.

Real estate as an investment vehicle is very lucrative in Africa because of the high population and low housing in the continent. Since scarcity pushes prices up, the value of properties in Africa is constantly rising. This is similar to what’s obtainable in the West, except for the 2007 recession and COVID’ 19 periods.

Now that we know what real estate investing is, let’s look at how it works.

How Does Real Estate Investing Work?
Without wasting time, let’s go straight to answering the question on the ground – how does real estate investing work?

Depending on their depth of knowledge, portfolio diversification intent, interest and time, investors design a business plan for their real estate investing goal and implement it. Some other investors use a sample real estate investing business plan as a template that guides their investment decision.

The alternatives available to real estate investors are:

1. Rentals
2. House/Land Flipping
3. Land banking
4. Real Estate Investment Trusts (REITs)
5. Real Estate Investment Groups (REIGs)
6. Real Estate Crowdfunding
7. Real Estate Mutual Funds
8. Real Estate Limited Partnership

Rentals
This is a real estate investment strategy where an investor or group of investors search for, purchase, maintain and service a property for the purpose of renting it, earning rental income and capital appreciation. It is one of the oldest forms of real estate investing.

It is also a direct or active strategy as the investor or owner of the property has to be fully involved in its management which includes getting a tenant, paying taxes, overseeing maintenance etc.

One major benefit for buyers of rentals in the UK, US or Canada is they buy it with a mortgage. With a 5% – 20% initial deposit, the investor takes ownership and starts earning rental income. This makes it possible for the balance to be paid with the rental income.

Investors earn regular income from real estate, and most maintenance costs are tax deductible. This is very rare in Nigeria.

However, the investor earns nothing when the property is vacant.

House or Land Flipping
This is a short-term real estate investing business plan or strategy where investors buy a property in a rising market, wait for some months for the price to rise further and finally sell it off.

Some investors update, renovate or convert to a smart home before selling for a much higher profit. This strategy is called “Repair and update”.

While the strategy where investors sell properties the way they bought them is “Hold and resell”.

Flipping is more associated with houses. Nevertheless, investors can also apply the strategy to a piece of land.

It is a universal strategy investors apply in Nigeria or the Diaspora – the US, UK and Canada.

Investors should time the market right to resell before it gets cold or slows down. Obviously, flipping is a highly speculative real estate investing business plan or strategy. Thus, making it riskier.

Land Banking
Land banking is similar to flipping. The main differences are:

While flipping is more centred on houses, land banking is fully centred on land.
While flipping is holding and reselling a property within 4 – 6 months, land banking is a long-term strategy.
While flipping can be quite risky, the land banking strategy is very lucrative with little or no risk.
Finally, land banking is more done in Nigeria than in the West – the US, UK and Canada.

Real Estate Investment Trusts (REITs)
Real Estate Investment Trusts offers exposure to real estate without owning a property. All you have to do is buy stocks from a REIT, and the organization will use the pool of funds from you and other investors to purchase income-yielding properties like malls, office buildings etc.

90% of the profit from these exchange-traded trusts is distributed to their investors at the end of the financial year as dividends. This passive real estate investing strategy is highly liquid, making it easily re-convertible to cash.

This is more like buying stock from a company that specializes in real estate investing than directly buying real estate yourself. The major downside of this strategy is its volatility.

There are 2 types of Real Estate Investment Trusts:

1. Equity REITs which specializes in the business of real estate investing and
2. Mortgage REIT specializes in providing finance for real estate.
While this strategy is common in the West, RevolutionPlus Property Limited and GText Homes are 2 giant Real Estate Companies you can buy REITs from in Nigeria.

Real Estate Investment Groups (REIGs)
Real Estate Investment Groups admits investors by allowing them to buy in-house rental properties from the REIG. It also manages and maintains the property for investors for a percentage.

REIGs pool aside a portion of the monthly rent to cover vacant months of affected investors’ vacant properties. This guarantees a rental income for group members and capital appreciation when the property is finally sold.

However, it is susceptible to unscrupulous managers.

Please note that GText Homes also renders this service, and it is more common in the West.

Real Estate Crowdfunding
Real Estate Crowdfunding, also known as Online Real Estate Platforms brings like-minded investors together to co-finance huge projects undertaken by a real estate developer. Some investors who have a preference for this passive real estate investing strategy diversify their portfolio to several Online Real Estate Platforms. This type of strategy ties down cash for a significant period of time. And it is more applicable in the West than in Nigeria.

Real Estate Mutual Funds
This strategy focuses on investing in Real Estate Investment Trusts or Real Estate Companies. Real Estate Mutual Funds cover a wider range of properties than REITs. This is more prevalent in the West than in Nigeria.

Real Estate Limited Partnership
In a Real Estate Limited Partnership, a property manager or general partner gets investors/limited partners to finance their project in exchange for part ownership. It is a passive real estate investing strategy where each partner earns a percentage of income generated from the property and their final share when the property is sold. At that point, they dissolve the partnership.

Types of Real Estate Investing
There are different types of real estate investing, some of which are already listed and explained above. The other types of real estate investing aside from the ones listed under the subheading – “How does real estate investing work?” are:

1. Residential real estate is any property that provides shelter for individuals or families.
2. Commercial real estate is a property that serves as a business space.
3. Digital real estate investing, also known as virtual real estate investing encompasses all valuable digital assets like domain names, websites, ebooks etc.

Is Real Estate Investing Worth It?
Considering the lump sum involved in real estate investing, it’s normal for investors to inquire if it is worth it. One thing is sure here; no one would waste their hard-earned money buying properties if there is no benefit of real estate investing.

Some of the benefits of real estate over other types of investment are:

1. Real estate is less risky because of its low volatility compared to the stock market.
2. Real estate is a perfect portfolio diversification strategy for stocks and bonds because it has a negative relationship with them. This implies that real estate value rises even when stock prices drop. It helps to keep one’s portfolio healthy by reducing the overall risk, and volatility of their investment.
3. The value of real estate also rises when general prices rise because the cost of building materials also rises. This makes real estate investing a perfect hedge over inflation.
4. Only very few investment vehicles like real estate offer the privilege to gain control and earn returns just by making a deposit for the property. Most other investment vehicles require full payment before control, earnings and ownership rights are enjoyed.
5. The tax benefits of real estate investing make it stand out from other investment vehicles. Most real estate expenses, renovation and maintenance costs are tax-deductible.


Key Takeaways on How Real Estate Investing Works
Getting started with real estate investing is a giant step toward a great financial decision.

1. It should start with getting the right knowledge from one of those real estate investing books out there like “10 Amazing Secrets To Wealth Creation Through Real Estate Investing In Nigeria“.
2. Potential investors should map out a good real estate investing business plan or use a great real estate investing business plan template recommended by their mentor.
3. One or more of the alternative investment vehicles of interest listed under the subheading “How Does Real Estate Investing Work?” should be chosen and judiciously implemented. Always remember that consistency is key, especially in the long run.
4. Diversify your portfolio to minimize risk. Never put all eggs in one basket. Consider other industries and investment vehicles here.
5. Occasionally analyze your results, tweak your real estate investing business plan and strategy where necessary and upscale.
And the sky will be your new beginning.

You can get in touch with one of our real estate consultants if you are serious about real estate investing in Nigeria, and you will get professional advice for free.

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