Overview
For a long time, the real estate sector has been a steadily growing specialization. It offers a plethora of options for astute, progressive investors and developers. Real estate investments can come in a variety of forms, including stocks of real estate-related companies, mutual funds, publicly listed Real Estate Investment Trusts (REITs), land, residential, commercial, retail, and industrial developments, and investment buildings. We discussed how to find current investment possibilities in several real estate topics in our blog post, Secrets to Real Estate Investing. In this piece, we go over the benefits of real estate investing as well as important things to think about before making a real estate purchase.
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An Overview of the Real Estate Industry
Locally, the real estate market has not stopped expanding. In 2019, the sector grew by 1.2% points, from 4.1% in 2018 to 5.3% in 2019, as reported in the Kenya National Bureau of Statistics (KNBS) Economic Survey 2020 report. The following factors have contributed to the sector’s growth: i) Rapid population growth, which was 2.2% in the KNBS Census Report 2019, 1.0% more than the 1.2% global average. This kept driving up demand for more real estate, which in turn led to: i) improvements in client preferences and tastes; ii) the opening up of previously undeveloped areas for development through infrastructure improvements; iv) the growth of the middle class; and v) the ongoing entry of multinational corporations that operate as competitors or clients, thereby influencing industry standards. Those who possess the greatest knowledge and guidance can make highly profitable investments in the future.In light of this, we will now go over a few precautions that prospective real estate investors may take to reduce risks and increase returns.
Important Things to Think About Before Investing in Real Estate
Be Detailed About Your Goals and the Theme You Plan to Explore: It’s critical to use resources sensibly and prevent unanticipated financial setbacks by selecting the appropriate level of risk, return, and investment length. Given the breadth of the real estate market, an investor must be clear about the topic they plan to pursue.
Conduct market research and have an open mind to ongoing education. An investor should make an effort to learn about the important players, performance history, and future prospects of the particular topic they plan to invest in. This may be acquired via going to the actual locations, reading research studies written by real estate professionals, or going to real estate exhibits. Although research cannot ensure project success, it lowers inherent risk by alerting investors to probable obstacles,
Analyze your finances and take your cash flows into consideration. An illiquid asset class that requires time to recover one’s initial investment is real estate. Consequently, in order to determine the venture’s capital needs and anticipated returns, an investor need also take into account his cash inflows and do financial research. Financial analysis may be used to estimate and determine projected costs, expected returns, and growth of invested capital. As a result, this makes choosing the best venture easier and serves as a guide for investors seeking to raise money.
Perform a thorough investigation of the potential investment opportunity. The investor should perform appropriate due diligence on all aspects of the venture, including the sellers and other parties with whom they will be working, as well as any legal restrictions or guidelines on developing on the specific land parcel or investing in the real estate entity, given the unstructured nature of real estate in Kenya and the asymmetry of information. This guarantees the investment’s availability, profitability, and legality, thereby guaranteeing the returns. To ensure efficacy, an investor should engage the services of a registered lawyer for due diligence.
Assemble an Expert Team It is difficult for a single investor to invest and manage the entire process due to the labor-intensive nature of real estate. As a result, you will require experts to work as consultants, contractors, or developers. Investors should make sure the real estate agent they choose has a lot of expertise, a solid track record, and is properly registered with the appropriate organization. This will lower investment risk and boost professionalism, guaranteeing a smooth growth process and the investor’s desired return.
The exit strategy encompasses the identification of the target market and the positioning of the product within it. In real estate, common exit tactics include: i) buying and keeping rental property for a while, during which time rental revenue covers all costs and generates an annual profit for the owners; this method pays for itself through property ownership. There are several ways to make an investment: ii) lease option, in which the owner leases the property to a tenant with a contractual option to buy it; iii) wholesale, in which real estate wholesalers find and buy deeply discounted investment properties that they resell to other investors for a tiny profit; iv) rehabbing, in which a house is bought, renovated, and sold for a price higher than the initial investment costs; and v) seller financing, in which the buyer obtains bank financing for the property and the seller gets paid in full. After that, the buyer gives a down payment to the seller directly—in this example, the bank—and continues to make monthly mortgage payments for the term of the loan.
Advantages of Real Estate Investing
You may buy the best home by carrying out adequate study and applying a rational analytical approach based on financial considerations. The following are some advantages of a profitable real estate investment:
High Returns: Over the past five years, this sector has routinely outperformed other asset classes, with serviced offices, for example, generating average annual rental returns of up to 12.3%. The average rental yields in the residential and commercial office sectors increased slightly as of Q1 2020, from 5.0% and 7.5% in Q4 2019 to 5.2% and 7.8%, respectively.
Security of Returns: Unlike traditional investments, which see returns that change based on how the market performs, real estate returns are more steady and constant as their value appreciates over time.
Hedging against inflation: Over time, inflation reduces investors’ wealth. Protecting wealth against the damaging consequences of inflation is one of investors’ main goals, particularly for long-term institutional investors like pension funds.Because the value of real estate increases at a pace that is either higher than or equal to inflation, it serves as a hedge against inflation. Rents can be modified over time to reflect changes in the rate of inflation, and,
Leverage to Create Equity and Wealth: By using real estate as collateral to purchase other financial instruments or borrowed funds, one may raise their cash flow and wealth by purchasing more properties.
In summary
Real estate investing demands a significant financial commitment, so it’s imperative to take additional precautions to guarantee a profit on your investment or, at the very least, protect yourself from catastrophic losses. If well-planned for, the diversified nature and special difficulties of real estate might yield substantial returns for any potential investment in the form of capital appreciation, equity build-up, or net operational income.
