Purchasing a house and land for sale is a significant decision that must be carefully considered because there are numerous variables at play. One of the riskiest kinds of investments in Nigeria is in real estate, particularly given the country’s murky regulatory environment. It takes a lot of time, money, and work to afford a piece of real estate, therefore getting conned should be avoided.
It may be the top investment pick, but is real estate investing really safe? Just like any investment, real estate investing has risks, and property owners can lose money. Here are seven real estate investment risks to watch out for when you’re thinking about buying an investment property.
1. Real Estate scam.
The country’s housing need has been estimated at 17 million units for many years. Various estimates have ranged between 20 million and 22 million in recent years. The Federal Mortgage Bank of Nigeria and the International Human Rights Commission’s most current estimate is 28 million units.
A small error could cost you your entire life’s savings or other hard-earned funds. But don’t worry; there are steps you can take to safeguard yourself from falling for a land scam.
It is crucial to do extensive research on potential investment partners. In fact, it should be your primary priority. Since thorough research will disclose many secrets about the real estate firm or family you are purchasing a property from, you can make a smarter selection armed with this knowledge.
2. Choosing a Bad Location
Location should always be your first consideration when buying an investment property. After all, you can’t move a house to a more desirable neighborhood—nor can you move a retail building out of an abandoned strip mall.
Location ultimately drives the factors that determine your ability to make a profit—the demand for rental properties, types of properties that are in the highest demand, tenant pool, rental rates, and the potential for appreciation. In general, the best location is the one that will generate the highest return on investment (ROI). However, you have to do some research to find the best locations.
3. Negative Cash Flows
Cash flows on a real estate investment refer to the money that’s left over after paying all expenses, taxes, insurance, and mortgage payments. Negative cash flows happen when the money coming in is less than the money going out—meaning that you’re losing money.
Some common reasons for negative cash flows include:
- High vacancy rates
- Too costly maintenance
- High financing costs on loans
- Not charging enough rent
- Not using the best rental strategy
The best way to reduce the risk of negative cash flow is to do your homework before buying. Take the time to accurately (and realistically) calculate your anticipated income and expenses—and do your due diligence to make sure that the property is in a good location.
4. High Vacancy Rates
Whether you own a single-family house or an office building, you need to fill those units with tenants to generate rental income. Unfortunately, there’s always the risk of a high vacancy rate in real estate investing. High vacancies are especially risky if you count on rental income to pay for the property’s mortgage, insurance, property taxes, maintenance, and the like.
The primary way to avoid the risk of high vacancy rates is to buy an investment property with high demand, in (you guessed it) a good location. You can also lower your vacancy risk if you:
- Price your rental rates within the market range for the area
- Advertise, market, and promote your property, being mindful of where your target tenant might look for property information (e.g., traditional methods? online?)
- Start looking for new tenants as soon as a current one gives notice that they are moving out
- Make sure your property is clean, tidy, and well-maintained
- Offer incentives and rewards to keep tenants happy
- List your property with a real estate professional
- Develop a reputation for being nice and renting quality properties (think: Airbnb reviews)
5. Problem Tenants
To avoid vacancy risk, you want to keep your investment properties filled with tenants. But that can create another risk: problem tenants. A bad tenant can end up being more of a financial drain (and a headache) than having no tenant at all. Common problems with tenants include those who:
- Don’t pay on time—or don’t pay at all (which could lead to a lengthy/costly eviction process)
- Trash the property
- Don’t report maintenance issues until it’s too late
- Host extra roommates (humans or animals)
- Ignore their tenant responsibilities
While it’s impossible to eliminate the risk of having a problem tenant, you can protect yourself by implementing a thorough tenant screening process. Be sure to run a credit check and criminal background check on every applicant. Also, contact each applicant’s previous landlords to look for red flags like late payments, property damage, and evictions.
It’s also recommended that you investigate a potential tenant’s work history. Make sure they have a steady salary that can reasonably cover rent and living expenses. It’s also a good idea to pay attention to scattered work history. An applicant who bounces from job to job may have trouble paying the rent and may be more likely to relocate in the middle of a lease.
Be sure that you and your investment properties are adequately insured against losses and liability.
6. Hidden Structural Problems
One sure way to lose money on an investment is to underestimate the costs of repairs and maintenance. For a typical single-family home, for example, you could be looking at as much as $12,000 to repair a foundation or $16,000 to fix the siding. Structural repairs, or remediation for mold or asbestos, could easily cost tens of thousands of dollars for commercial buildings.4
Thankfully, you can lower this risk if you thoroughly inspect the property before you buy it. Don’t skimp on hiring a qualified and reputable property inspector, contractor, mold inspector, and pest control specialist to “look under the hood” and uncover any hidden problems. If a problem is discovered, find out how much it will cost to fix and either work that cost into your deal or walk away if it would prevent you from making a reasonable profit.
7. Lack of Liquidity
If you own stocks, it’s easy to sell them if you need money or just want to cash out. That’s not usually the case with real estate investments. Because of the lack of liquidity, you could end up selling below market or at a loss if you need to unload your property quickly.
While there’s not much you can do to lower this risk, there are ways to tap into your property’s equity if you need cash. For example, you can take out a home equity loan (for residential rental properties), do a cash-out-refinance—or, for commercial properties, take out a commercial equity loan or equity line of credit.
POST SOURCE: Jean Folger “Is real estate investing safe?” https://www.investopedia.com/articles/investing/122415/why-real-estate-risky-investment.asp
POST SOURCE: Olumide Adesina “6 ways to avoid real estate scam” https://nairametrics.com/2022/08/29/best-ways-to-avoid-real-estate-scams-in-nigeria/