I stumbled on a video on social media where a popular Nigerian preacher analyzed four scenarios;
- Build houses for rent
- Build shops for rent
- Build a house to sell
- Buy land and wait for a bank to offer you a fat cheque so they can build a facility on it.
After a quick mental Mathematics, he concluded that, “Building houses for rent is a useless investment.” Well, religious leaders are not Investment Professionals and they may always get it wrong when they delve deep into other areas of expertise that are not their calling.
- Building for rent is a long term investment.
Buying land and building apartments or shops on it for rent is not done for you to recoup your money immediately. Although building shops for rent may pay you faster than building apartments, you need to understand that not every location is a commercial area. If you are still in the working class and you can afford to build for rent, you are welcome to the club of passive income.
2. Building for rent generates positive cash flow
The house where I was born is a twin building with over 40 face-me-I-face-you rooms in it. The landlord wakes up every morning to receive rental payments. He uses these payments to service his financial needs and enjoy good food. Cash was flowing to him till his last days.
For your retirement, you need a positive cash flow. Don’t wait till your gratuity is paid. Start from the cheapest area that you can afford the purchase of the land and build with a minimum of 100 blocks per month or 3 months depending on your income.
Howbeit, the theory of the value of money favours building a house for sale because cash now is worth more than cash in the future.
3. Building for inheritance
After the demise of my landlord, his children took over the house. They became the new landlord receiving credit alerts. The death of a parent should not make the deceased miserable and back to poverty. Building a house for tenants is an inheritance for your children.
This is why you should choose a house design that will still be relevant across generations. Your children will financially benefit from the houses you built for rent. They will keep increasing the rent to flow with the current economic trend.
4. Build-to-rent is valuable as collateral
Building a house for rent could serve as collateral security if you want to take a loan for other businesses or even buy more land. Nevertheless, properties that may be accepted as collateral must have all the necessary documents.
5. You enjoy two-dimensional profit
If it costs you ₦50 million to build 4 blocks of 3-bedroom flat in Ibadan. And each block is rented for ₦600,000. It means you will be getting ₦2.4 million annually. You may decide to increase the rent and renovate your house every 5 years or 10 years. Your capital is the land and it keeps appreciating. Landlords are responsible for making major repairs to the house. Your profit is the rent minus the cost of maintenance and insurance.
Going by this scenario, you may think that it will cost you about 20 years to recover your ₦50 million capital. No! Calculating rent to raise capital is a WRONG Calculation. Although you are being paid rent, you still own the house. The rent is a bonus. If you decide the sell the house after 20 years, you will most likely sell it for ₦100 million. That is an additional profit for you. When you add the rents earned within that period to the new value of the property, you will see that it is indeed a profitable investment.
6. Your capital is at a low risk.
If you invest in other assets, your capital is at risk. If you are not smart, you may lose everything in a day. Unlike building a house for rent, whenever you need it, you can serve your tenants with quit notice and sell your house. The only risk on your capital is building on land that is not government-approved. Your land may be marked for demolition without compensation. You lose your capital!
7. Residential buildings are not restrictive
When I was house-hunting, the agents took me to some locations where I never believed people could live there. Interestingly, the cost of rent in these locations is almost the same as in other similar locations.
Property investment is not a one-size-fits-all. The value of land in a particular area determines the amount of house rent paid. The land area, standard of building and the finishing determine the amount you give it out for rent.
8. Every building needs maintenance
Many first-time home buyers believe the physical characteristics of a house will lead to increased property value. But in reality, a property’s physical structure tends to depreciate over time, while the land it sits on typically appreciates. Land appreciates because it is in limited supply.
No one is producing any more land. Consequently, as the population increases, so does the demand for land, driving its price up over time. Whether you are building a shop or an apartment, the only way land appreciation can offset the depreciation of a home is by maintaining it as it ages.
9. Build with a business mindset
When building for rent or sale, know that you are not just a landlord, you are a business person. Doing business in Nigeria is tough. In business, you don’t always win. If a tenant moves out and you don’t have a replacement, you are losing out on income.
The first thing you need is the knowledge of the risk, law and market that you want to operate in. If you approach building from a business point of view, you will keep records that will help you make smart pricing decisions.
Whether you are building to sell or building to rent, you must have your tenants and buyers in mind. Doing business with a tenant is different from doing business with a buyer. Whether you are building a shop or apartment, some tenants can be difficult to deal with. The best way to deal with bad tenants is to avoid them. The second-best way is to have a very solid legal agreement that can be activated upon breach of contract.
10. Built-to-rent are in higher demand than built-to-sell
So many people are so busy that they will never have the time to walk the sites to monitor the nitty gritty of constructing houses. They will prefer to buy a ready-made house and move in. How many people can read and interpret a building plan with all its jargon? How many people know the difference between a column and a beam? These people will just love to buy rather than go through the rigours of building it themselves.
However, from personal observation, it is faster to get a tenant than to get a buyer. Houses are generally illiquid. You cannot build today and sell tomorrow. The biggest drawback in selling ready-made houses is the sitting period. Sitting period is the time between when you complete the house and when a buyer pays for it.
This can be a very frustrating period. Someone may walk up to you and offer you half of the money you spent building the house. If you are building to sell, you have to be prepared to wait a while for the sale of your property.
You also need a good negotiation skill to source quality materials at a cheaper rate to give your buyers a superb home. On the other hand, before you finish building a house for rent, tenants are already waiting to rent your building.
11. Sell some, rent some; Rent now, sell later; Rent-to-own
Sometimes, you can sell some units of your house upfront and then maintain the rest of the property as rentals. The only problem with this sell-some-rent-some model is that you will be in a fractured ownership position.
In the rent-now-sell-later model, you can initially rent out some units of your house for some time before selling. After several years of cash flow from rents, the property is then sold at a profit reflecting the increased value.
You can also engage in a rent-to-own agreement where the tenant will place a down payment on the house and make lease payments to you for a specified period. After the lease is up, then the tenant has the option to purchase the home. During the time they are making lease payments, a portion of those payments will go toward the final price of the house.
12. Personal choice matters
Deciding whether to build to rent or build to sell also requires careful evaluation of your financial situation, your lifestyle and the housing market. A house is one of the biggest assets you can own. Instead of selling your house because you want to japa or temporarily relocate, why not rent it out? You may decide to keep your house if you have a strong emotional attachment to it based on personal reasons.
For some people, becoming a landlord gives them a sense of achievement. However, managing a rental property is time-consuming and often challenging. It is ok if you don’t want to be a landlord. If you don’t want to manage the property or the house needs lots of work before it will be rental-ready, it is better to sell it.
© Kingsley Ndimele
Your Reliable Consultant