Owning your own home

November 26, 2012 by ‘Nimi Akinkugbe (nakinkugbe@punchng.com) 

Nimi Akinkugbe
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An investment in real estate is likely to be one of the most significant financial decisions you will ever make in your life. A tremendous sense of pride, fulfilment, stability and security comes with owning your own property, especially your own home.

Increasing property prices and the demand for quality rental accommodation mean that, with a carefully selected and well managed rental property, landlords can enjoy a steady income stream. Such passive income supplements current income and can be a wonderful boost in retirement. Even where there are downturns in property values, in general, rental properties will continue to rent and often without a corresponding decrease in rental income.

Most people have to borrow to buy a property. Before you buy a property, be sure that you can afford it and are able to service interest and repay the loan over time. Spending more than you can afford can cause a huge strain on your finances; if you default on your mortgage, you could lose the property through foreclosure.

The greatest return on investment will typically come from capital appreciation. As the value of your property increases, so too does the equity you own in it. Such equity is usually accessed at the point of selling the property, but an investor can also take out equity loans for further investing or other necessary expenses. Be aware though, that as you dip into your equity, you are converting it into debt which must be serviced.

Apart from the actual purchase price of a property, which reflects its location, features, age and condition, there are other significant transaction costs to be taken into account including lenders fees, valuation and survey fees, estate agents fees, legal fees, transfer taxes, stamp duty and insurance cover. In addition, there are the maintenance and repair costs of holding the asset.

Don’t be tempted to keep up with the Jones’ by building a mansion that you cannot afford in your village or hamlet. As the old adage “location, location, location” suggests, the value of property is largely dependent upon its location. Neighbourhoods change; market conditions, community issues, the local economic and political environment, poor enforcement of regulatory policies; these can all affect an area adversely and diminish property values considerably and are critical to the success or failure of such an investment.

As far as possible, try to do some research on the areas current prospects as well as about plans for it over the coming years. This will help you to avoid buying a property that may not be in demand in future and is particularly important where your intention is to sell the property.

Every investment comes with some degree of risk and real estate is no different. Whilst many investors have made significant returns on their investments, many others have been badly burnt as things can go terribly wrong.

Real estate is illiquid and should not be viewed as a “get-rich-quick” investment outlet. It is risky to invest with a short-term view, as like stock market investing, real estate goes through up and down cycles. It can be hard to find a buyer if you need to sell the property quickly or are trying to hold out for the “right” price. Whilst there are boom periods in which one can re-sell quickly, have a long term outlook, as it usually takes time, patience and energy to reap the benefits from this investment class.

Unfortunately, the property market can be fraught with some unsavoury characters so be very careful with whom you are dealing. There are stories abound of landlords in Nigeria, who visited their property after a time only to find a building and inhabitants comfortably settled on their plot of land; it had been offered and sold to several different parties simultaneously.

Choose your real estate agent carefully; a tested, dependable, and responsive professional who comes recommended, has sound market knowledge and is aware of the current market trends. In a market where property prices appear to be softening, there may be opportunities to buy below market. Be wary of high pressure sales pitches and seminars with the hi-tech brochures and slides which can be very persuasive. A “once in a lifetime opportunity you cannot afford to miss” can turn out to be the worst investment you ever made.

The right tenant can be a joy, but the wrong tenant can make a landlord’s nightmare. Some tenants appear to be pleasant and civilised but you could end up with no rent and a property in a deplorable state. Request for references and do follow up on them. 

Whilst documentation requirements can be cumbersome and can make investing in real estate tedious, safeguard your investment by ensuring that all documentation reflecting the true title of the property is in place.

Real estate is a tested investment class that has proven its worth over centuries to be a stable and profitable investment. However, diversification across a range of asset classes including stocks, bonds and cash is necessary rather than focusing purely on the property market, as performance in one asset class will help offset any downturn in another, as economic and market conditions change over time.