The real estate market has beenong was a niche which continues to grow. There are endless opportunities for smart innovative developers and investors are abundant. Real estate investments sector can come in a variety of kinds, such as investment properties, including land commercial, residential industrial, retail and mixed-use developments, publicly traded REITs (real property investments trusts (REITs) as well as companies that have real estate-related mutual funds and stocks.
On the Secrets to real estate investing blog, we discussed how investors can spot the investment opportunities that exist within the different real estate topics. In this post we look at the reasons real estate is an excellent investment, and the most important factors to think about before investing in real estate.
An Overview of the Real Estate Industry
The real estate market is continuing to grow locally. The industry recorded growth of 1.2 percentage point increase in the rate of growth, from 4.1 percent in the year 2018 to 5.3 percent in 2019, as per the Economic Survey 2020 report by Kenya National Bureau of Statistics (KNBS). The growth of the sector has been driven by: i) the rapid growth in population, that, according to the KNBS Census Report 2019 was 2.2 percent, 1.0% points higher than the average worldwide of 1.2 1.2%. This has led to a demand for more property and, ii) infrastructure improvements, opening new areas previously unexplored for development and development, third) changing preferences of customers and preferences as well as) an increasing middle class and the v) the constant entry of multinational companies that act as either competitors or clients and thus influencing the industry standards. If you have the most effective knowledge and advice on their investment strategy, the future is likely to be highly rewarding.With that in mind let us review a few strategies investors should consider prior to entering into real estate, in order to reduce risk and make the most of profits.
Important Factors to Take into Account before committing to real Estate
- Be Specific About your goals and the theme you intend to explore Theme you intend to venture into is essential to plan one’s resources appropriately and avoid unanticipated surprise by deciding which is the risk, return and time of investment you want to put into. Since the real estate sector being a broad business one must be precise about the area the investment plan is,
- Perform Market Research and Be Open to Continuing Learning Investors should try to understand the current performance is, as well as future outlooks and who the most important players are within the particular subject they want to put money into. This can be found by going to the websites as well as through studying research reports written by real estate professionals or attending real estate trade shows. Although research cannot guarantee the success of an endeavor but it does reduce the risk by educating the investor of possible obstacles,
- Conduct a Financial analysis and consider your cash flows –A real property investment is an inliquid asset that can take some time to pay back an initial investment. So, a prospective investor should take into account the cash flow and conduct an analysis of financials to assess the capital requirements of the venture and anticipated results. Through analysis of financials and projections of expenses to be paid, the expected return and the growth of investment funds can be determined and projected. This helps in making decisions about the best project and acts as a guideline to use by investors in fundraising.
- Conduct Due Diligence in relation to the prospective Investment Venture –Due to the non-structured nature of real property in Kenya and the asymmetry of information an investor must do due diligence in all aspects of the investment, including buyers, the parties or she will work with and laws and regulations regarding the development of the specific property or investing in a real estate company. This will ensure that the investment isn’t just profitable and accessible, but also legal, and the return is secured. To ensure due diligence, investors should consult an attorney registered to ensure efficiency,
- Create a team of Experts The work-intensive properties of the real estate industry make it challenging for an individual investor to invest and operate the business from beginning to end. It is therefore necessary to find professionals as contractors, developers, or consultants. A buyer should choose a real estate professional with a vast amount of experience with a track record and a valid registration with the appropriate body. This can reduce risk of investment and boost professionalism, ensuring that the development runs smoothly and that the investor receives their desired returns, and
- Strategy for exit –who is your target market and how do you present your product in relation to the market. Common exit strategies in real estate include: i) the buy-and-hold method that requires the holding of the property as a rental for a certain amount of time, where the property is paid for with rental income, generating cash to cover expenses, while also providing an annual profit for owners as well as the second) lease option in which an owner leases it to a tenant that is given a contract for the purchase of property. the third) wholesale, where wholesalers of real estate purchase properties that are marked down which they sell to investors who are looking at a modest profit, the fourth) renovating, which involves buying a home then renovating it, and then selling it at a price higher than the original investment cost (v) seller financing. In this method in which the buyer obtains financing for the home through a bank, and the seller gets the whole sale in a lump amount. The buyer makes the down amount directly to the vendor which will be the lender in this instance and also makes monthly mortgage payments throughout the term of the loan.
Advantages of Real Estate Investing
Conducting a thorough research and applying an analytical method that is logically based on financial aspects will assist you purchase the ideal property. A few of the advantages of a profitable real estate investment are:
- High Returns The sector has been consistently better than other asset classes in the past five years, with areas such as serviced office offering average rent yields of up to 12.3 percent per year. In Q1’2020, the average rent yields in commercial and residential office sectors increased slightly to 5.2 percent and 7.8 percent, respectively. from 5.0 percentage and 7.5 percent in Q4’2019.
- security of returns Unlike traditional investments, whose returns fluctuate in line with market performance the returns of real estate have very little variance. As the value rises in time, they are steady and steady returns.
- Inflation hedge Inflation can reduce the assets of investors as time passes. One of the main goals of investors is to safeguard their wealth from the negative impact of inflation, particularly for institutional investors who invest over a long period of time like pension funds. Real estate acts as an insurance against inflation since the value of assets rises in a manner that is higher or more than the rate of inflation. Rents are able to be adjusted according to fluctuations in inflation rates,
- leverage to build equity and Wealth Real estate can be leveraged to purchase various financial instruments or borrow capital, which allows one to purchase more properties and boost the flow of cash and wealth.
Conclusion
The investment in real estate needs an adequate amount of cash, and it is therefore essential to take additional steps to maximize the return on your investment or to avoid huge losses. The variety of properties and unique challenges associated with real estate, when properly planned, can result in a huge return for investors who are interested, either via the net operating profit, capital building up and capital appreciation.