Many people believe that investing in real estate is a very low risk investment. the truth is that, depending on the timing, the type of real estate project, and other factors Real estate can either be low, medium or
even a high risk investment scheme.
Today, we will focus to a specific segment of the market, a very popular type of real estate investment, Commercial Properties. Investing in commercial real estate is considered to be a “high risk” and “high reward” venture. There is no doubt.
There’s lots of money to be made in this sector but it takes more than just money to see your money grow. A great example are all those people who had the courage and foresight to acquire income producing properties in US or other countries just after the Big Recession a few years ago. Properties that were bought at bargain basement prices have more than doubled or even tripled in value just in a few years. On the other side, investors who owned overpriced and over leveraged properties prior to the recession had to face great losses and got stuck in a market where liquidating property was almost impossible. That was the reason many of these properties ended up going back to the lender and for many investors to file for bankruptcy when their properties with vacancies rising stopped producing cash flow. It can go both ways: High risk and high reward.
At this point we need to under- stand something very important. there is no way you can invest with zero risk. Investing and risk go together. Still there are things that an investor can do, to signifi- cantly reduce the risk of real estate investing. I repeat we will never be able to eliminate the risk, but it can be reduced to a manageable level. there are no magic tricks or secrets to help you mitigate your risk, but there are some basic man- datory steps that you need to follow in order to maximize your chances for a successful property investment.
before you start spending you money, you need to make sure that
you have the right people with you,
the correct team of advisors.
each of these advisors will bring their unique expertise to the transac- tion enhancing your chances that all the potential issues will be identified upfront with a proposed course of action taken to mitigate the risk. You have to make sure that you have covered every possible aspect of the transaction in advance and you have everything under control without possible future surprises.
A professional advisory team should have at least one engineer, commercial real estate agent, a real estate Lawyer, a Property manage- ment company and a general con- tractor property inspector. these are some and not the limited number of people you could have to assist you.
Knowing what is happening in the area that you are planning to invest, as well what is happening to the city and even the country is critical. Get to know the macroeconomics of the metropolitan area you’re investing in. More importantly know which neighborhoods are better than oth- ers. Do some research in order to understand the long term growth patterns. Look for available data from the land registry or the avail- able statistics. try to identify which neighborhoods are going to be the up and coming areas of the city over the next ten years. real estate is a medium to long term investment you need to be able to “read” the future trends.
Real market value
It is vital to determine the worthi- ness of buying a property and you need to use objective criteria to do that. At this point using the correct method and the correct numbers is
critical. Whether you use a cash- on cash analysis, Internal rate of return, Net Present Value or any other method the results you get should be those to guide you.
Never let anybody else’s meth- od to determine the value of an investment. Under no circumstances should you use a subjective crite- rion that has no rational basis to it. buying a property because you always liked the neighborhood since you were kids but is so overpriced should not be an option. this is an investment the only thing that mat- ters is if it can be profitable or not. So, use whatever object criteria make sense to you and then stick to it. If you do not have the knowledge to determine the value of the property yourselves then you should include a specialist in your team of con- sultants that will provide you this important information.
rumors will not bring money in your account. You either are going to invest as a professional or do not invest at all. rushing into property investments simply because everyone else is doing it is the biggest mistake amateurs do, falling into the trap of professional real estate people who create the market conditions and spread the rumors in order to manipulate the public to buy or sell against their interest. take your time, do your research, forget the rumors, use the actual numbers and the data. Asking prices and big headlines most of the times have nothing to do with the real market conditions. Use your team do research decide under no pressure.
Potential to add value.
Kenya’s real estate market especially in the big cities has being growing for several years .We need to be realistic and accept the fact that at this moment in the real estate cycle properties for sale are overvalued. In a few words, if you are buying a property today, you are buying a property close to the top of the mar- ket. When we are buying property during a period like this we need to clearly understand that we have lim- ited options to see any profit
there are only two ways to make money on commercial real estate at today’s prices, either: a) have a long term hold strategy (10 years or lon- ger), or b: find properties that have the potential to add value. Generally these are properties that have some type of “hair” on them. Solve the issue and you’ll be rewarded with a substantial increase in the property’s value. So it is not any property that will create wealth. In contrary you need to search very well to find the one that under conditions could turn to be a lucrative opportunity
Hands free investment.
Many investors believe that buying a property and hiring a management company is all you need to do to keep making money. but your prop- erty is your asset.
You transformed your hard worked money into a commercial property that someone else is using and someone else is managing. You need to remember, you get what you inspect, not what you expect. If you think that owning commercial real estate is a passive investment you are wrong. If you want to maximize your chances of getting a good return on your commercial real estate, you must be proactive in overseeing your properties.
It is imperative that you regu- larly inspect your property to make sure something is not being over- looked. A property that is not well maintained will eventually requires a large sum of money in order to ren- ovate it. the more money you need to spend the less your profits will be. So make sure that your property is well taken care and spend something small to maintain than spe nding large amounts to renovate.
I believe we all understand that the above are just some basic principles that will help you minimize sev- eral risks of any commercial proper- ty investment.
they are not going to extinguish completely the risks involved.
I highly recommend to always follow up with the markets, never investing money that you might need for anything else or money that you planned to use in the future for a specific reason. Investing is risking and the only way to stay safe from risk is if even the worst case scenario of losing big will not affect our lives. You need to invest to add something extra in your family budget and for that you must not risk your family’s future for any reason. Take your time and be ready to say no to a bad deal. There is always another deal waiting for us.
Kosta Kioleoglou – REV Civil Engineer Msc/DBM RMD for APC