Done right, real estate investing has vast potential to create wealth and financial security for the diligent investor. Despite the reintroduction of capital gains tax in this market, an unpredictable interest regime and the daunting prospects for anyone seeking to finance real estate projects, the market is still rife with opportunity. The opportunity to acquire property assets that steadily generate both cashflows and capital gains abound. There are 4 Keys to Successful Real Estate Investing in Kenya including market intelligence, strategy, planning and execution. In this market, another skill – tied into market intelligence – that all investors must learn is how to avoid getting blindsided by hysteria and marketplace scams!
Keys To Successful Real Estate Investing in Kenya
Real estate investing is becoming increasingly popular in this market. However, even with the myriad financial and property advisors offering investing knowledge and creating an awareness of this investing avenue, success stories outside of the major financial institutions, SACCOs, land-buying companies and a few investment groups and individuals remain paltry.
Outlined below are the Keys to Successful Real Estate Investing – four basic tools to unlock vast wealth out of real estate:
#1. Market Intelligence: Develop your Knowledge and Understanding of the Market
To clearly evaluate anything, you must begin with your knowledge and understanding of how it works. You can glean this from both observation and publicly accessible information. Successful Real Estate Investing requires an informed perspective of the marketplace. This will allow you to assess property offers and make sound investment decisions. Some of the questions you need to ask include:
- What can you immediately ascertain about the property – the neighbourhood, the infrastructure, the residents and other property owners, amenities and facilities, security?
- What are the economic trends around the neighbourhood? Is the population growth and settlement around the neighbourhood expanding? What are the likely levels of household income of the residents? What are the primary developments in the neighbourhood? etc.
- What are the market comparables? What are other properties fetching in the same market and why?
- If the property is for cashflow purposes, you will want to observe what the predominant “theme” of the property market in that neighbourhood is. Is the area largely owner-occupied or tenant-occupied? What is the nature of the neighbourhood – lower-income, middle-income, upper-income? What is the nature of tenant-occupancy in the market – are rentals short-term, monthly? What are the average yields for similar properties in the neighbourhood? Between residential and commercial properties, which perform better? Is the property under consideration structurally-sound, well maintained, serviced?
- What is the state of security in the neighbourhood?
- Is the provision of mains services available (power, water, sewerage)?
Assembling as much relevant information as you possibly can will not only help you make a reasonable analysis of what to expect should you acquire the property, but will also give you the advantage of local knowledge to guide any subsequent investments.
Successful Real Estate Investing requires the development of market intelligence – in-depth knowledge of the market, combined with analytical skills that will be honed with experience and over a period of time.
The market is dynamic and in due course, with active participation in it, investors can build up a comprehensive body of knowledge that will serve them well.
#2. Find Your Niche and Develop Your Own Strategy
There is no one-size-fits-all approach to real estate investing. To each his own! The” herd mentality” will, more often than not, work against you. Doing what everyone else is doing is an instinctive, non-rational response, driven more by the desire to belong and be accepted (fitting in), mental laziness and the fear of missing out.
It is also a counter-intuitive proposition that assumes all individuals harbour similar considerations for their individual investment requirements, have similar tastes or preferences, or even equal purchasing power or economic status.
Successful Real Estate Investing requires that your strategy and acquisitions are aligned to your unique set of financial circumstances and goals, and that the same is reviewed over time to adapt to any variations to the overall plan. Besides market intelligence, your strategy should also incorporate the following:
- Your investment niche(s): Real estate investing is broad and the opportunities are vast. Decide early the particular niches you want to engage in and to what end. This could be based on the principle of “low-hanging” fruit, your competencies and skills, the time-frame between entry and exit from the investment (exit strategy) and even the purpose for which the investment was made (capital gains and/or cashflows). For example, a property acquired at public auction may fetch a significantly higher price at the open market than at auction and can be quickly disposed to grow investment capital. Vacant land purchased in a rapidly-developing area may take three to five years to achieve your desired rate of return and may only be disposed of at the term of your exit plan. The niche(s) you choose should also be considered against the need to balance between the investor’s long-term and short-term requirements.
- Yields and required rate of return: Benchmarking returns on investments gives each investor firm criteria on which to take on investments. To decide on your desired rate of return, the best place to start is to make a comparison with the returns offered on other forms of investment in the market and what the acceptable industry standard returns would be for the particular property under consideration. The other criteria you will want to consider are your investment goals, your cashflow considerations and liquidity requirements over the lifetime of the investment within your portfolio. Ultimately, the basis for evaluating whether or not an investment is satisfactory is whether the return it offers is competitive and represents the best value for your investment prospects.
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#3. Make Your Plan and Stick With It
Successful Real Estate Investing requires clear and thoughtful planning and execution based on market intelligence and guided by the input of professionals.
Real estate investments are one of the building blocks within the context of your overall financial and wealth-creation plan and success requires the operation of each of those blocks in tandem with your financial goals.
Execute your plans and review as required over time. Discipline, commitment, and focus will deter the commission of costly mistakes. Some pointers:
- Seek professional guidance: Build a reliable team of trusted professionals who you can consult with in the course of your real estate investment plans.
- Crunch the numbers: In determining the profitability of an investment portfolio, the costs incidental to their acquisition and, in the case of rental (income) properties, chargeable costs of operation should be factored. It is prudent to bear in mind the lifecycle of operable investments and adjust operation costs on the basis of the age and general condition of the property.
- Avoid speculation: It is not uncommon to hear the phrase “good for speculation” in reference to property offers in this marketplace. In her book Cracking the Intuition Code, Dr Gail Fergusson makes the argument that human beings are intuitive – possessing the ability to somehow attain direct knowledge of something without any evident rational thought. It is invariably referred to as “gut-feeling” or “sixth sense”. It may be arguable that many people would still somehow, even in the face of evidence to the contrary, bank on their futures based on sentiment and gut feelings. Resources for investing in real estate are often significant and to fritter them away on speculation can be very costly.
- Does it add value: Develop criteria to guide all acquisitions rather than ad hoc, rushed or unplanned acquisitions. It is best to walk away from offers that don’t match with your investment criteria or where information is scant or unavailable.
- Comparables and alternatives: Before settling on an acquisition it would be good to establish whether the offer provides immediate equity based on the capital outlay. As a diversification measure, investors may also want to consider publicly traded securities such as REITs available on the local securities exchange market. Depending on the investor’s financial goals, time-share property developments may also be considered to further diversify real estate portfolios enabling fractional ownership in private commercial developments without injecting such large capital investments.
- Always have an exit plan. This will inform you of the ideal time to offload an investment. The decision may be informed by an upcoming liquidity requirement that the investor may have, the need to diversify the portfolio or raise cash to expand into new opportunities. The benefit of an exit plan is that the investor can assess the market ahead of time to either explore new opportunities or simply plan ahead of time for new commitments/engagements that they may have.
#4. Avoid the Blindside (Hype and Sensational Offers)
There are people and schemes that can blindside you in this market! Getting caught up in the hysterics and sensation of get-rich-quick schemes and other outright scams that have been carefully orchestrated to manipulate naïve, unsuspecting buyers can seriously derail your strategy.
With limited familiarity or understanding of the marketplace, it is difficult, if not impossible, to discern between observable trends and facts on the one hand; and myths and hyperbole loosely couched in a semblance of truth on the other.
A friend who recently bought into one of those “greenhouse” schemes is today scratching her head to find a way out of the “investment” because it was not as promised. And yet another spent a small fortune on the outskirts of Nairobi acquiring five quarter-acre plots that were sold in an off-plan scheme with the revolutionary promise of grand lifestyle in a gated community which included luxury hotels and a golf course. Eight years on and with the dream going nowhere, he is unable to unload of the investment even at the prices he paid for them.
And who can forget the much-hyped Konza Technocity which set off a frenzied “gold-rush” and saw property prices explode around the land where the highly-touted techno-city of the future was going to be built. Or, even more recently, the Simple Homes scam – a too-good-to-be-true homeownership plan that never churned a single housing unit but still managed to defraud millions from an unsuspecting population by simply putting out glitzy social media campaigns?
The savviest real estate investors understand that the game is a marathon and not a sprint – schemes and wiles notwithstanding. Down the road though, the greater concern for any real estate investor in this market should be on gathering the market intelligence that will assist in discerning of hype, myth, and innuendo from fact and real opportunities to maximize returns on current and future investments.
Successful Real Estate Investing will require you to avoid being blindsided by closely examining offers and undertaking proper due diligence. A comparables report, physical site visits and engagement with professional advisors is critical in this endeavour. Assess each opportunity as described in our blog post Transfer and Registration of Property in Kenya – PART 2.
Never pay to acquire any property until you have reasonably assured yourself that the opportunity is authentic.