Why should you invest in the first place? The simple answer is: to have enough money to fall back on during active work or retirement. To put that money aside, however, we have to accumulate enough to offset inflation and the taxes that erode our savings. Currently, Nigerian inflation rate is @ 15.98%p.a so any fix deposit that gives you below this means you are wasting time keeping money in the bank because it gets devalued. For this purpose, real estate is an perfect solution.
The great thing about real estate is that even in recession, it will usually fare better than stocks. Land, after all, is a finite resource. People need a place to live, work, shop and play — so real estate will always appreciate.
What’s more, real estate will continue to appreciate despite occasional slow-downs in the economy. In fact, it’s proven to be the best way to create wealth, and an investor need not be a genius or a millionaire to succeed. Here are some tips, then, for entrepreneurs on getting started and succeeding in real estate investing:
1. Plan your financial goals.
Before you buy that first property, or do your first analysis, determine what you expect from your investments. What are your financial goals? I have a client who is retired from active last year at the age of 65. He has been investing in real estate since the age of 22 and has over 40 properties. What he does is, sell a property at the beginning of the year and used the proceed to enjoy life through the year with hiw wife. His kids are all grown and doing fine. If you are unsure exactly how to create financial goals, meeting with a financial advisor is an excellent first step.
2. Do — look at plenty of properties.
Don’t just grab the first property you look at. Too many investors buy properties because they “look nice,” or the investors don’t want to put the work in to look at what’s really out there. Remember, you won’t be living there, so don’t make your investment decision based on your personal preferences. While you shouldn’t fall into the trap of analysis paralysis, make sure you are thorough in looking through properties. Give yourself a wide range of options, then narrow them down based on the criteria (goals) you have set for yourself.
3. Don’t — postpone starting your investment program because you’re waiting for that perfect time.
A popular quote states “Dont wait to buy land, buy land and wait”. This is because the more you wait, the more you pay. Also, you stand the chance of missing the property because the property you inpected today and planning to pay for the next day is the same property someone inspected yesterday and planning to pay for today. Better to execute on a deal that meets most of your criteria than wait for another that may never come.
4. Do — a thorough financial analysis.
Be realistic. Look at different alternatives to determine which makes the most financial sense. And never buy property at a higher price or on less attractive terms than your analysis says made sense. Be wary of sellers that try to over-estimate the value of the property through pro-forma (estimated) data. While you can certainly use a pro-forma to start the conversation, make sure you know the real numbers before closing. Look at previous years’ tax returns, property-tax bills, maintenance records, etc. to get a good idea of the real income and expenses.
The most important figures you should know are:
- Net income (income/expenses)
- Cash flow (net income/debt financing payments)
- Return on investment (cash flow/investment)
- Cap rate (net income/property price)
- Cash-on-cash return (cash flow/investment)
- Total ROI (total return/investment)
In each case, “investment” refers to how much you invest in the property. “Debt financing” refers to any loans you may have to take out to buy the property. And “total return” refers to cash flow, equity accrual (i.e., equity gained from your tenants paying their rents), appreciation and taxes.
Once you have understood these figures, you should have enough information to determine whether or not acquiring the property fits with your financial goals.
5. Don’t — try to buy property that the seller is not motivated to sell.
If the seller is motivated to sell, you’re not likely to get the price best aligned with your financial goals. So, how do you know if a seller is motivated? Look at the asking price. For example, If the property has been on the market for a year for, say, #25,000,000, with little-to-no price reduction, the seller is clearly not very motivated to move the property. However, if that same property has been on the market for a year and has had its price moved down considerably, the seller most likely wants to do whatever it takes to get the property off his or her hands. Of course, this raises the question of how to find motivated sellers. There are many approaches, and not all of these will work for you, depending on what property you want. But a few trusted methods include:
- Attending open houses
- Looking for vacant/unattractive properties that are for sale
- Spreading the word about yourself and what properties you are looking for — truly
- Going the old-fashioned route and looking in the classifieds of your local paper
These are just a few ways to find sellers, but there are potentially dozens of other methods, depending on what type of property you’re looking for.
6. Do — know the difference between real estate investing and the business of real estate.
As an entrepreneur, you already have a business, and real estate investing is best used to support that business, not replace it — unless that’s your intention. In other words, don’t get so caught up in executing transactions that your core business falters. If that happens, you’ll be facing a bumpy road to get back to stability. Unless your business is itself real estate, or you’re looking to get into the business full-time, always remember that pursuing these deals is a means to an end, not an end unto itself.
So, if you’re interested in staying ahead of taxes and inflation while building security for the future, real estate investing may be for you. What are you waiting for?