Category

Investment.

Debunking “You cannot go wrong with Real Estate”.

January 15, 2019

“You cannot go wrong with Real Estate” is just a fictitious statement based on mere perception.

We have all heard real estate success stories, especially in a booming market, but investing in property isn’t always a foolproof strategy. There are dodgy investments and when you make one, it can end up costing you hundreds of thousands or millions. Benson learnt this the hard way when he rushed into investing in property thinking it could never possibly go wrong.

He purchased an apartment for Kshs 6,000,000 thinking he was setting himself up by getting into the market as soon as possible. “I noticed the average home or apartment units prices were increasing rapidly. So I did the numbers and just thought I needed to get ahead of the market. Pretty much every day that I wasn’t in the market I thought it was going to get further and further away from me. So I rushed into the property market out of fear of missing out. I didn’t have saving so I went to a bank and asked about borrowing 100 per cent of the loan. What I ended up doing was getting a Kshs. 6,000,000 personal loan which was guaranteed by my parents and used that money as a deposit for the unit.”

He purchased the apartment and began renting it out only to realize the monthly market rent he was receiving was less than monthly mortgage repayments. Then he was also hit by extra money needed to maintain the property. He held the property for just over five years, eventually selling it. Investing in property isn’t always safe as perceived.

“I just looked at the numbers in the property market and thought it would work for me but I didn’t look at the cash flow and how I could expand my portfolio beyond that. “There’s that ‘rule of thumb’ that says property prices double every 10 years and I figured that if I was in there for the long term I would probably ride out short terms falls in the market … I obviously just wasn’t educated enough.” The apartment did, luckily, go up in value as he sold it for Kshs. 8,500,000, a Kshs. 2,500,000 profit from the purchase price — but that was after spending in paying the rent shortfall not considering accumulated interests on loan. It was learning a critical lesson in the hard way.

“Cash flow is everything. You can almost get into as much debt as you want as long as the cash flow is good,” Mr Benson says.”As long as someone else is paying for my debt, it is good debt.”

NEVER ASSUME

Experience as proved that assumption, that capital growth is the most important factor when investing, and then choosing a property based on expected or projected capital growth, is one of the biggest mistakes many flopped investors have made. If you’re buying an investment property, you need to be able to sustain that property. If the property is going to cost you money — when the mortgage exceeds the rent — you need to have sufficient money to pay for that loss. If you don’t, don’t buy it, because you are just putting yourself under mortgage stress.

You have to ask yourself, can you actually afford the investment property, rather than just buying it and relying on capital growth? If you can’t afford the loan then you should look at a property where the rent does exceed the mortgage repayments. Even the assumption that every property is going to go up in value is naive and based on mere perception. It is a big assumption that once you buy any property it will go up in value with time. I’ve got case study properties where property values haven’t gone up. Again, the assumption that any type of property is a good investment could also land you in trouble and unable to grow your portfolio.

Murigu had an investment property and that property had gone up in value but the issue he had was because it was a small property the bank saw it as a high risk and they weren’t allowing him to use the equity to purchase any more properties. I advised him to sell the property because though we could not foresee huge growth in capital, due to its location he was going to fetch good money. And by him selling it, it allowed him to purchase three more properties in areas that have now far outgrown the value than if he had just held that one property.” It is advisable to consult with property players and experts in matters of property. I would highly advise to have a professional consultant to help you in making critical decisions. The assumption that real estate will always grow in value, and that capital growth is the most important factor, is a big mistake.

“Selling that first apartment was a little bit like heartbreak. It felt uncomfortable because I had gotten too emotionally attached to it even though it was really not doing me any favours. I think understanding that you need to remove all emotion from it, and just look at the numbers, is the most important lesson” Murigu

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Residential & Commercial properties’ valuation.

January 7, 2019

My experience in real estate and interaction with various players mostly investors has necessitated writing of this article on difference on residential and commercial properties’ valuation. Like I always say, failure in real estate investments is not because of mathematical errors but due to lack of adequate, reliable and factual information when making these investment decisions.

According to most people, buying and selling a property is what makes the real estate world one of the most high-flying and busy investment sections. Nonetheless, a real estate asset can be of different kinds, and they have different intentions. Depending on the asset’s location, type, other aspects and demand, the value of the asset may vary. Thus, it’s paramount that you go for a detailed property valuation prior to buying or selling it.

Residential Real Estate

I define residential properties as single-family homes, which are normally bought as home/residence by their owners to dwell in. Normally, prices for residential properties are gotten using a few different comparable sale methods. These comparable sale methods are performed using cost per square foot, floor plans or construction cost. These valuation methods are also considered for a variety of residential homes including duplexes, villas, bungalows etc.

For example: Assume a home sells in your area for kshs.8,500,000 having two bedrooms each with a bathroom attached. And it is identical to your home in space and style. Now, when you go to sell your home, the selling agent will most likely tell you that it is worth Kshs.8,500,000 after looking at the comparable sale price. Henceforward, residential property valuation is clear-cut and comparatively effortless to perform. Take a brief note of the identical homes and at what prices they were sold thereafter adjust for any disparity and you can speedily unearth the value.

Commercial properties

On the other hand commercial real estate properties generate income. They contain apartment complexes of units or offices, retail or industrial properties. These properties are owned by investors by and large for rental income. These investors don’t reside there, but they rent out these spaces to tenants who pay them rent every month for their space.  Noteworthy, the value of a commercial real estate is calculated on the basis of the income it makes.

To calculate the income, you need to consider the income from the rented space and deduct the operating expenses. Here, income taxes and loan payments aren’t considered. The amount that remains is known as Net Operating Income. It is important to know how to calculate the Net Operating Income if you want to invest in a commercial real estate. Commercial property’s value is decided on the basis of how much an investor is ready to pay for the Net Operating Income. The investor utilises their investment funds for the property’s income. And the rate at which the income pays back to the investor for their investment is known as Return-On-Investment (ROI).

Value = Net Operating Income/Desired Return

Let’s look at an example to understand better;
Suppose, an investor is looking to buy a retail property that has a Net Operating Income of Kshs.9,000,000. Assuming in that region, investors are willing to purchase properties like this for a 10% return-on-investment.

The property value would be worth kshs.90,000,000. The value is calculated by taking the Net Operating Income and dividing it by the desired ROI (Kshs.9,000,000/10%= kshs.90,0000,000) for investors in your surrounding area. This means, if an investor were to invest kshs.90,000,000, then he would anticipate receiving a 10% return on his investment amounting to kshs.9,000,000 year after year.

It is as simple as that, now you know.

Important to note, always use commercial property valuation method prior to buying or selling a commercial property as it provides an accurate property value.

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