Real estate investing is arguably the best investment decisions anyone can make at the moment especially if we want an investment that can help us gain serious financial stability and wealth.
Although, building wealth with real estate takes time, hardwork and steadfastness but it is still ahead and better than other forms of investment because it affords investors the opportunity to leverage on their investment in so many ways and of course the immense control investors have over their investment to improve or make necessary alteration in order to increase or maximize income generation which is not possible with investment in stocks and other forms of investments.
Real estate investing also gives investors the opportunity of using their investment as shelter which gives some level of confidence to strategize how best to continue to build wealth.
However, all these opportunities and advantages in real estate investing does not come cheap because there are many hurdles to scale and challenges to confront for any investor to have a successful real estate investing experience.
Many investors fail investing in real estate primarily because of lack of knowledge, poor networking and lack of purpose, insight and strategies or plan.
Besides all these reasons for failure, there are other more serious challenges investors may not have control over but can be managed or rather be optimistic that things will get better especially if the challenges have something to do with economic recession or government policies.
The real estate investing challenges and how to successful manage them that i will be discussing in this post are general but some are perculiar to the African region. I suggest you get yourself a cup of coffee because the post is not just a broad brush but in detail and I hope you wont be dissappointed.
We shall be discussing these challenges and how to successfully manage them one after the other.
1.Land Allocation and Registration Bureaucracy
The government owns and control land and all land issues, no thanks to the land use act law of 1979 that converted all land to state land, making the state governor the caretaker of the management of this land on behalf of the people. This makes land acquisition process slow, difficult, burdensome and above all makes granting of title papers and deed of assignment registration very expensive.
In addition, land registration cost real estate investors close to twenty one percent of the real property value and the process consist twelve procedures which may take six to twenty four months to process because the governor’s consent is required for any change of ownership or assignment. After successfully acquiring the land investors factor in the cost of processing the land in the price of the real property to enable them make profit from the resale of the real property which makes real estate investing very expensive for developers and investors.
The truth about real estate investing is that government policies, laws and regulations creating a sought of bureaucractic bottleneck is completely out of and beyond the control of real estate investors and developers, they can only hope for the best for government to concentrate on easing, initiating and making better policies.
The government can make great impact in the real estate sector by relaxing the bureaucractic processes and reduces cost and charges on land allocation and registration process by introducing development plans to streamline the regulatory environment, encouraging and providing incentives for developers and investors with verifiable track record. The government can also institute land registration e-approval system for development permit that will make the process of acquiring land easily, faster and affordable.
2.Land Tenure By Inheritance
This is connected to issues associated with or problems caused by the “omo oniles” in Nigeria. This group of people often make real estate investing very difficult, unattractive and sometimes regretable to real estate developers and investors.
We have seen and heard cases of omo onile selling parcel of land they don’t own or collecting money meant for payment of a parcel of land from different investors and absconding after selling the same land to four to five different people. Investors must be wary of omo onile’s dubious activities which can cause an unimaginable increase in the cost of investing in real estate from the purchase of land to the completion of the building project.
The omo onile levy every stage of the building project, from the foundation, fencing, lintel, roofing and plastering stage. Contractors and conveyance of building materials to site are also levied which increase the labour cost and cost of building material.
As an investor you must do the needful before investing your money in real property, if you want to purchase a real property you must first research the person selling to determine previous and current owners of the property and whose name is on the document. Also take your time to find out what liability exist on the property.
The next step is to verify from the state government bureau of land if there is any pending litigation or other issues that can hinder smooth transfer of ownership such as if the property is within government acquired property or not.
Finally, file all documents of the new purchase with the state government to legally make you the new owner of the real property, then you can now commence the processing of a certificate of occupancy.
It is advisable to engage the services of a solicitor to handle complex issues relating to the purchase of the real property such as exchange of contract and completion of contract.
3. Limited Source Of Funding /Financiers
Many real estate investors find it difficult sourcing for fund to finance real estate property purchase because of inefficient and ineffective mortgage system we have, aimed at not solving the housing needs of the people. In many developed countries of the world, the United State for instance, real estate investors have access to so many mortgage financing options such as the conventional investment and personal mortgage facility that only requires 20% to 25% downpayment with interest rate between 6% to 8% for 25 or 30 years.
There is Federal Housing Administration, FHA mortgage facility for primary residence, with just 3.5% downpayment you can access this mortgage facility. Another mortgage facility is the Home Path Investment mortgage that allows real estate investors a 10% downpayment with other benefits. The best we get here is mortgage facility with very high interest rate of about 18% to 23% over a period of 30 years and before you can qualify for this mortgage facility you must go through a burdensome and frustrating approval and disbursement process.
The National Housing Fund current loan ceiling is at #15,000,000 at 6% interest rate for a period of 30 years which we know is difficult or not accessible to the average Nigerian. To make positive impact in solving the housing needs of the people and also to enable investors and developers build more housing units to meet the housing needs. government must relax the conditions in mortgage financing and review upward the current loan ceiling of #15,000,000 of the National Housing Fund to enable civil servants, middle and low income earners enjoy the benefits of owning a real estate property.
Investors looking for alternative means of sourcing for fund may consider some of these options :
a. OPM or Private Money
This simply refers to Other People’s Money, this real estate investing idea involves using private money in financing your real estate investment. All that is required is the ability to convince your relatives, friends, neighbour and other people to lend you their excess fund lying fallow in their bank account generating little or no interest to invest in real estate.
This is one of the best way of financing real estate investment because it is free of the bank frustrating and burdensome approval and disbursement protocols and processes in financing your acquisition.This can be achieved with a properly written well researched business plan and feasibility study that must show that their money is secured and can generate much more than having it in a bank account.
Getting a business loan is worth considering because there are many financial institutions with several loan programs tailored to assist small businesses that can assure and prove to them that their money is secure if they finance their business. Again a well researched and properly analyzed feasibility study will do the magic.
c. Wholelife Insurance
It is worthy of note that individuals and real estate investors can actually invest in real estate by taking loan against their wholelife insurance but many don’t know this. Stop by at your insurance company to find out more on this.
Real estate professionals must also commit to promoting excellent real estate initiatives that can help create many real estate financing options by asking government to introduce mortgage financing policies that allow investors and individuals to use their retirement plan account provided by financial institutions to finance their real estate property investment. It must also allow them to purchase or make downpayment for property using line of credit based on their home equity provided they have significant equity on their propert
4.Exorbitant Cost Of Property Development
The exorbitant cost of developing properties has discouraged many investors and developers. Developers are no longer able to provide affordable homes for the people because of high cost of building materials, high cost of hiring competent real estate professionals and contractors and also the cost associated with some of the real estate challenges such as land acquisition and registration, taxes and poor infrastructures which add up as much as 30% to the cost of real estate development.
As an investor you can greatly reduce the cost of property development by adopting a cost effective resource and project management strategies and techniques which consist all key elements of resource and project management and planning. This must contain the breakdown structure of the building project from the beginning to the end. It is wise to purchase, allocate resources by yourself and also provide on site supervision of the building project to minimize waste caused by mismanagement of resources that can lead to project failure, overtime, budget overages and other unfortunate events.
5.Havoc Done By Unskilled Contractors
Many real estate investors and developers can’t afford to engage the services of experience and competent professionals and contractors which is very expensive. In order to cut cost they prefer using quacks, unskilled and incompetent professionals to execute their building projects. It is sad to know that this practices is responsible for most building collapse we have experienced so far in this country accounting for the untimely death of close to 500 people.
Real estate investors can put an end to this incessant building collapse if they focus on contracting competent professionals and workforce that will not compromise professional building code of ethics in executing building projects to save lifes and properties.
6. Devaluation Of Currency
This is a well intended policy which allows a country, especially developing countries to delibrately reduce the value of their currency to encourage exportation and discourage importation of goods and services across their borders.
The devaluation of the naira we experienced recently in Nigeria greatly affected the real estate industry, construction and building section in particular which largely depend on imported raw materials and equipments for construction. The devaluation of the naira makes foreign imported goods very expensive which brings about a corresponding increase in the cost of building raw materials and equipments.
It also accounted for high exchange rate, high cost of imported goods, high rate of unemployment and low wages and salaries for civil servants. All of these have negative impact on real estate investing but the good side of devaluation is that foreign countries are enticed to import from the country and also importers are compelled to buy locally produced products which in the long run will increase the value of the naira because of the volume or high rate of exportation that would be recorded and low importation of foreign products to the country.
This is the reason why organizations like the European Union EU, International Monetary Fund IMF, and the world bank advice and encourage third world countries to devalue their currency before they are granted loans to embark on capital projects or infrastructural development programs to help grow their economy. The truth is that most third world countries don’t have the capacity or the volume of trade required for devaluation to work.
If you understand this challenge as an investor, you can easily adjust and restrategise to enable you make business and investment informed decisions in your real estate investing adventures.
7. Multiple Taxation
Government foreclosed and resold many real estate investors properties due to non payment of taxes such as income tax on property, property tax, land use tax in some cases remodeling tax for investors considering remodeling of their property. Real estate investors must also pay building plan approval and development levy which make real estate investing very expensive for the average citizen.
This multiple taxation and other government policies, laws and regulations that hinder growth in real estate are beyond the control of the real estate investors but investors and real estate professionals can help promote innovations and initiatives that will create avenues for free tax benefits and also streamline the activities of the Federal Inland Revenue Service, FIRS as we have in developed countries of the world.
In the United State for instance, there is 1031 Exchanges in sales of real estate property that allows real estate investors to reinvest all profit made in property sales into another real property investment tax free. Investors are encouraged to take advantage of this 1031 Exchanges tax free opportunity to reinvest their profit from sales of real estate property.
Moreover, the United State IRS, Internal Revenue Service also allow real estate investors a tax free sale of primary residence every two years. Many investors maximize their income by taking advantage of this tax free real estate sales transactions by investing in property, make capital improvements, add value and resell every two years.
8. Lack Of Infrastructures
Provision of good and essential infrastructural facilities or social ammenities increase the social, economic and commercial activities of a community. The absence of these basic or poor infrastructures such as good roads network, electricity, drainage system, water and other social ammenities that can boost and increase socialeconomic and commercial activities could add up as much as 30% to the cost of real estate development.
This can discourage real estate developers and investors in building affordable homes for the people. The government can ensure an enabling environment by providing basic infrastructures to enhance development in the real estate sector.
As an investor you can target and take advantage of investing in areas or communities where government is having massive infrastructural projects in progress such as electricity, roads network, drainage system or where multinationals situate their companies to begin operation. This social ammenities increase the value of properties in such communities once the projects are completed.
Real estate investments are usually not easy to convert to cash like stocks that are traded on the stocks market daily. Investors of stocks can easily convert their investment to cash whenever they want to base on the market selling price and information available to them about the stock market.
However, we can’t say the same for real estate investment which can take months or years to convert to cash because of the huge amount of money involved in the transactions and the activities involved in preparing a real property for sale such as listing, advertising, inspecting, getting a good buyer and escrow.
Many real estate investors due to poor investing and exit strategies find it difficult to make real estate investment that can constantly generate positive cash flow that will ensure their investment’s liquid assets are increasing which will enable them pay debts and expenses, reinvest and possibly provide buffer against financial challenges.
As an investor you must equip yourself with great real estate investing and exit strategies prior to investing. This will enable you to swiftly switch from one plan to another if your initial plans fail or do not fit into current market or economic realities. An exit strategy allows you to convert your assets to cash in good time and still make some profit even if you have to sell during adverse or harsh economic downturn.
Here are some real estate investing and exit strategies you can adopt; fix and flip ; lease – purchase ; purchase and hold and finally if you decide to cut the losses incurred monthly on carrying cost then you can consider selling below the market price to another investor and still make some profit.
10. Bribery and Corruption
The act of offering, giving, receiving, or soliciting for any item of value to influence the recipient action or conduct to gain or enjoy some benefits while corruption is the abuse of position to gain illicit advantage.
Bribery and Corruption hinder growth in real estate industry, this is noticeable in real estate land allocation where qualified developers and investors are denied allocation of land while those that have not met or satisfied the precondition for allocation are granted.
In addition, tax bribes treated as deductables, secret commission received by agents without the knowledge of the principal agent and initial 10% deposit or partial payment in real estate transactions made between the buyer and the seller before the notary is a very good way to launder money. All of these practices are term bribery and corruption.
To curb this menace government must not only institute bribery and corruption preventive agencies and programs for employees and managers of government establishments in real estate designed to curb bribery and corruption but must also ensure its operations meet International standards of best practices and subject to external verification process to measure the effectiveness of bribery and corruption prevention programs and its consistency with International standards.
This will increase rate of development in real estate government agencies and establishments, its job processing time and also improve the quality of service.
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