WEALTH CAN BE ACCUMULATED BY INVESTING RIGHT IN REAL ESTATE
WEALTH CAPSULE 19
CONVERSATION WITH MY BILLIONAIRE FRIEND
The wise young man or wage earner of today invests his money in real estate – Andrew Carnegie
Buy land, they’re not making it anymore – Mark Twain
The best investment on earth is earth – Louis Glickman
He is not a full man who does not own a piece of land – Hebrew Proverb
This week’s conversation paddles around the shores of real estate investment, an area where my Billionaire Friend could be described as an expert and practitioner. He has built a nest of solid portfolios in that area both within the country and outside. I paid attention as he delivered what could be described as a MASTERCLASS on real estate investment. We observed the usual courtesies and protocol, and he hit the ground running pronto.
Here we go:
“Real estate investment is a handy investment source for generating predictable cash flows, excellent incomes and capital gains, obtaining tax advantages and diversifying wealth with possible leverages.
“Real estate investors generate wealth through rental incomes, capital appreciation and profits through investments in properties. Real estate investment trusts (REIT) can also be created for investing in real estate without having to own or operate or self-fund properties. The cash flows generated from real estate are the net incomes made from real estate investments after real or opportunity costs of mortgage payments, and operating expenses have been deducted”.
“A key benefit of real estate investment is its ability to consistently generate cash flows if well-chosen, positioned and strategised. In many cases, such cash flows grow above annual inflation over time, especially long after paying off mortgages.”
“Generally, people commonly invest in residential properties. However, other forms of investing in real estate physical developments include investments in commercial business properties and investments in non-physical real estate. These non-physical investments include ancillary investments where income can be generated from vending machines in office buildings or laundry facilities in low rental apartments. Hence, investing in real estate does not primarily end with investing in physical forms of property”.
“Real estate investment also includes industrial investment in warehouses, storage units, built estates for manufacturing activities and assembly plants. Hence, real estate is a wide niche of investment available for wealth builders to grow their wealth”.
“Indeed, the income obtained from real estate investment over the years always almost ensures that investment costs are covered, while the capital gains provided are far-reaching with such investments. This is why real estate investments are highly recommended and globally patronised by wealth builders for generational wealth, as against investing in stocks and other speculative and volatile investments”.
“Another type of real estate investment worth considering is an investment in landforms, especially through the provision of mortgages. This is done by setting up mortgage banks to give out real estate loans and creating investment trusts for real estate investors”.
“In some ways, starting real estate investments would require that the real estate investors, among other things, identify their financial stage before commencement, which involves ensuring that they properly and clearly understand their financial position and capability for such investment. Other requirements include choosing the specific real estate investment strategy and picking rightly the real estate market for investment. This, in itself, involves ensuring that the real estate market chosen by wealth-builders is properly identified and selected for optimal outcomes within their innate skills and knowledge”.
“The other way for consideration is to decide on the best investment property criteria. Investment property criteria here simply mean looking at the factors that would determine the best possible outcome. This is followed by building up the team to actualise the real estate investment project. Building up the team here includes identifying and positioning the necessary experts for the project, such as land surveyors, architects, electrical, plumbing, and building service engineers, etc. This is followed by lining up the finance necessary for executing the intended real estate investment”.
After this, the appropriate funds would then be raised, either by down payments or through dipping into the reserves of wealth owners or the sourcing of other equity partners or loans. This is then followed by finding the best ways to market the real estate investment. Wealth builders must then schedule their time and ensure that their real estate investments are properly optimised”.
“At this stage, it is necessary to mention that the extent of value appreciation in real estate investment is highly dependent on the macroeconomic factors of the real estate investment location. This is so because macroeconomic factors greatly influence whether there would be a good and sustainable demand for real estate investment projects. For instance, where the residential real estate is located within areas with good schools, they tend to yield good investment returns. Generally, real estate investments grow more in environments which have well-managed macroeconomics. As a rule, the higher the risks and level of inflation, the higher the returns obtainable on investments”.
“From experience, investing in storage units and warehousing has, in the past, been very lucrative for those wealth builders who owned real estate in Apapa, Lagos, for many years. Indeed, it was a choice area for real estate investors in warehouses and storage units for servicing the Apapa, and later, the Tin Can Island ports until the area became congested and poorly managed by the state. However, wealth-builders have an opportunity for future investment in the Lekki Free Trade zone area of Lagos State, the deep-sea port built in Lekki and the massive Dangote refinery and fertiliser project cited in the Lekki axis. Investors who key into building warehouses and storage units in this new investment zone of Lagos State have solid capital gains and good rental incomes to earn”.
“Real estate investment requires concentrated focus and good investment locations, as Donald Trump espoused in his famous real estate investment book”.
“From personal experience, I have discovered that investing in commercial properties is far more lucrative than investing in residential properties in Nigeria. It is with considering factors such as the poor state of the Nigerian economy, its poverty rating, and its high rate of unemployment. In addition, investments in commercial properties tend to attract letting by international companies depending on location. A well-located commercial property in Nigeria tends to attract foreign companies in Nigeria to stay for extended lease periods, which therefore gives steady incomes and significant capital gains in the long run on such commercial estate investment. Indeed, one of the safest ways to store wealth for future generations is an investment in commercial real estate properties”.
ANY OTHER MODEL?
“One individual who has modelled the magic of investing in real estate in Nigeria is Chief Samuel Adedoyin, a renowned industrialist. He is said to own a significantly large number of properties in various parts of Nigeria and has made a huge success of the venture. He started from ordinary trading into owning big manufacturing industries and, at one time, also held a bank. Therefore, real estate is an asset class recommended to wealth builders for growing, accumulating and sustaining wealth. This covers a broad category of operating, investing, and all the financial activities for making money from the property or generating cash flows surrounding tangible properties. It is a secure way of ploughing wealth if managed responsibly with a clear understanding of the risks and rewards”.
“In investing in real estate, there are four categories of investments to consider, as discussed earlier: land, residential, commercial and industrial. Wealth builders can grow wealth gradually and consistently by investing in one or all or some of these. And as discussed, real estate investment can be a great way to grow wealth while also hedging against the market volatility of other investment vehicles in providing stability for wealth portfolios. Wealth builders can acquire and build knowledge about real estate investments by reading books, such as that of Brandon Turner on “creating wealth and passive income through real estate investment”. Another book for reading by wealth builders is “The Due Diligence Handbook For Commercial Real Estate” by Bryan Hennessey. Another book recommended in this sphere is “The Millionaire Real Estate Investor” by Gary Keller”.
HOW DO YOU PICK IDEAL LOCATIONS FOR INVESTING IN REAL ESTATE?
“The answer to this is evaluating the big picture in terms of location criteria which could include the availability of good jobs, economic buoyancy, population growth rate and rent/price ratio. For employment and economics, it is evident that, where there is generally a good level of employment and there is buoyancy in the economy, then investing in residential properties can be very lucrative for wealth builders. But in such investment environments, where unemployment is very high and there is poor macroeconomics, then investing in residential properties in such areas would be very unprofitable. From my personal experience, I have discovered that investing in residential properties is dependent on three factors: the level of employment, the buoyancy of the economy, and of cause, the policy of companies about renting properties for and on behalf of their personnel”.
“There was a time in Lagos when building luxury residential properties was very lucrative. If you bought a piece of land in a good location and built residential property, you would be assured that such property would give you amazing returns. However, this is no longer the case. Investing in residential property is now a very poor choice for real estate investors in Lagos, generally. Hence from my personal experience, it is better to invest in commercial properties in Lagos, which offers the best location choice for real estate investments, particularly for commercial properties”.
THE ELEMENT OF RENT/PRICE IS ALSO VERY IMPORTANT
“The rental values obtained from real estate investments must be reasonable in order to provide quick returns on their costs of acquisition. In evaluating locations for real estate investments, it is important to look out for convenience, workability, safety, crime rates, good school districts, state of public transportation, local laws, finances, taxes and barriers to supply of materials, finance and expertise required”.
“In Nigeria, it is vital to consider locations with excellent and regular power supply. For instance, any residential investment in the Magodo GRA II area of Lagos state is now more likely to attract good rental income than other areas in Lagos state. The Magodo GRA II area has entered into an agreement with the Ikeja Electric Disco to provide at least 20 hours of power supply. This gives a lot of assurance to potential rental residents of such an area of constant power supply, which translates into providing good rental income for the property owners in that estate in Lagos”.
“A form of lucrative investment which is yet untapped in Nigeria but very common in the advanced world is real estate investment by investors for providing manufacturing estate for manufacturing and assembly plants. But hopefully, as Nigeria’s economy grows and as the opportunities for investments rise, there would be a lucrative need for estate investments in manufacturing facilities and assembly plants in Nigeria. This involves real estate investors building sites for investors in manufacturing and assembly plants and leasing out such sites, on a long-term basis, for good returns”.
ANOTHER EVOLVING OPTION
“A now common real estate investment in Nigeria is retail real estate investment. Retail real estate investment, referred to here, includes investing in shopping centres, traditional malls, cinemas, supermarkets, etc. This is now noticeable in many urban places and lively cities of Nigeria. Property owners who invest in shopping centres make significant gains in terms of investment returns. From my years of experience in real estate in Nigeria, I have discovered that investing in commercial properties, warehousing and storage units pays more. Outside Nigeria, I have profited well from residential properties. However, the downside of investing in properties outside Nigeria is the absence of honesty, trust and reputation of real estate agents, who most times put tenants in properties, but do not remit regular returns to real estate owners. Another very important personal example that needs to be mentioned is the unfortunate investments in areas that eventually turned out to be dilapidated and run down, rather than growing. Indeed, this is one of the reasons why real estate investors need to be very careful and obtain expert advice for properly choosing the locations of their real estate investments”.
“To wrap up, real estate investments, when rightly carried out as extensively advised here, are an assured way to build wealth and ensure that wealth owners build, grow good wealth and accumulate wealth which can be sustained over generations and which gives real estate investors dependable cash flows, liquidity and ensures generational transfer of their wealth and providing dependable legacies”.
Can’t wait to catch up with you next week
A key benefit of real estate investment is its ability to consistently generate cash flows if well-chosen, positioned and strategised. In many cases, such cash flows grow above annual inflation over time, especially long after paying off mortgages.
From personal experience, I have discovered that investing in commercial properties is far more lucrative than investing in residential properties in Nigeria, given the factors already here mentioned, the poor state of the Nigerian economy, its poverty rating and its high rate of unemployment.