Cytonn Blog

Dos and Don'ts of Investing In Real Estate

Joseph Muriithi Nov 24, 2016 13:11 0 comment(s)

Currently, most individuals are seeking to invest in the real estate business. This can be attributed to the rise in the number of middle-level income individuals. In their venture in real estate business, they are faced with major challenges due to poor judgment which result to poor decision making. Real estate investors should be aware of several missteps when investing in real estate

1.    Don’t fail to plan before a purchase of the property; most Individuals purchase real estate properties without a clear plan. In most cases, they do it just because the deal is nice or there is a wave for property purchase amongst their peers. This can be attributed to individual’s perception that purchase of real estate is a transaction rather than an investment strategy. It is wrong to work backward; it is advisable to pick your investment model then seek the property. Give an easy example of a workable investment strategy

2.    Don’t’ be a lone Wolf. Most individuals tend to purchase properties by themselves without incorporating other professionals. They end up making poor decisions and may be conned off their money. Individuals should have a competent team of professionals specialise in performing land searches, valuation of the property and doing survey work.

3.    Don’t buy overpriced properties especially if it is not backed by real estate research. Most investors do not make profit in their ventures due to purchase of overpriced properties. In most cases they are surprised after the purchase of the property that they paid too much for the property due to poor analysis. They find themselves in a difficult position when they try to resell the property due to lack of willing buyers at the overrated price, forcing them to sell it below their buying price or at the buying price.

4.    Do perform due diligence. Most investors are very quick to close their deals in real estate without performing a little bit of research on the property they are acquiring. At times they don’t visit the property they are buying or check the details of the contract.  This may result to an investor spending all his personal savings on property repair and at extreme cases failing to resell it. Investors should not just buy property just because they think it will appreciate, they should look for information to substantiate that. What about due diligence on buying property that’s off plan

5.    Pay attention to cash flow. Investors whose strategy is to buy, hold and rent properties should ensure that they have the right cash flow in order to cater for the maintenance cost. From the revenue obtained from rent one should set aside at least 10 % in order to facilitate these expenses. Failure to do so may lead to depreciation of the property at a very high rate leading to loss of income in the long term due to decrease in rent value. Include off plan as most of our projects are such

6.    Plan for the worst. Investor should hope for the best but expect the worst. In most cases investors do not plan for worst scenarios which might include during the property development life cycle. Most of them are overconfident that they will meet all the deadlines and be within the budget. Investors should double the time for property development and also the cost in order to cater for any anomaly.

To derive maximum returns from real estate investment an investor should have clear goals they intend to achieve. Professionals should be allowed to do their job in order to provide the best advice which ensures that due diligence is performed and that financial viability of the project is established.

Article By:    Purity Chepkemoi
                    Private Equity Market Research Assistant - Energy

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