Phewwww!!! So many of you that read the previous article have come for my jugular because you were looking for the solution right away. I feel your anxiety – I was like that too when I started my real estate journey, and learnt the hard way; thus you don’t have to learn like that too.
So, unfortunately, and just as with life – it is a process and you are going to need to go through that process as well as learn to enjoy it as you go along.
Welcome to Step 2 of ‘How to create the capital you need to invest in real estate” known as ‘The wealth is in the numbers”
A while ago, I was consulted by one of my social media followers and our discussion ended with her asking for an investment plan with a sizeable budget (let’s tag it at N200m) and that she wanted the property for investment purposes that will create wealth for herself.
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To create wealth and not just earn rental income? I reconfirmed
And for a minute she seemed confused at my question, but replied in the affirmative still – Yes!
I controlled my excitement from bursting, as in that moment, it knew no bounds and I was thrilled that a lady and an online follower whom I had never met before; had opted to create wealth through her real estate investments and not just earn from it. And she had chosen me to do this with her!
Before I continue that line of gist, let me explain first why I asked for the clarification and got so excited in the moment.
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When you own real estate, you can be earning income from your investments but if you truly do the mathematics behind the logic and actions you take, you just might find that you are not creating wealth but just earning income. And this is another reason why some people beat down on how their money could have made more for them in other investment classes.
Earning income = making some more money as a result of your investment
Creating wealth = making a multiple of the amount that you could earn from as a result of the investment that you made. (i.e. making more money)
Her request is a typical example, thus I am sharing it with now, let’s go back to the story of my client. For all intents and purposes, I will call her Anne.
So I got to work on Anne’s request and instead of planning with the single unit of a luxury serviced apartment that she had actually seen on my listings and liked, I offered her 3 units of 2-bed Maisonettes in Lekki Phase 1 currently selling for Fifty-five million naira each.
My biggest reason for this switch was in the need to upscale her status from a property buyer/owner to an actual investor. There is a difference between a property buyer who uses their property for investment purposes and an investor who buys property to add to their investment portfolio. This difference is most evident in how they think – less sentiment and more logic; aka the mindset
A successful investment portfolio is acquired and built with a different mindset and set of goals.
- Yes they are for other people to live in
- Yes, the people will also need to see value to pay what you deserve (or desire as the case might be)
- Yes, you need to be able to earn property value appreciation for the property
But most importantly, there are more people who are looking and in need of standard, decent and slightly luxurious property that will pay you what you need to be paid to create the wealth you want
These were my other reasons:
- The need to optimize the income potential of her investment: Acquiring a single property is putting your entire capital at a 100% investment risk of not yielding, in a worst case scenario. If no one rents that single unit, she is not earning any income or cash flow.
It is a near impossible potential for 2 or 3 units to not be rented when they are in different areas and of different specifications.
It is also easier to get three people to pay you 80k – 100k per night over 150k – 180k per night
- The need to increase her opportunity for asset value appreciation: Asset values are surely on the rise but why gain value on one when you can gain on more than one? Gaining a 20% asset appreciation on a single unit of property valued at 200m will give your new property value of 240m but a portfolio of two units of property in two locations totaling 200m could give you 20 & 30% respectively thus an average portfolio growth of 25% instead of 20%.
That extra value of 10m could be the reason you get approved for an equity release of 80m instead of 65m when you need cash for another venture.
- Legacy distribution for the kids: Anne has 3 beautiful kids, why should they need to share of one property when each of them could own one? Even if they decide to pool the assets to keep them earning income for them via a trust fund, they will be richer together than apart – with the three units.
- Total cost of investment: If your budget to invest in a property for investment purposes is 200m then why are you spending the entire budget on just the cost of the property?
Where is the budget for purchase fees and to furnish it going to come from?
This reminder is a key reason that property buyers might get stuck in the process of putting their units to work immediately after they are purchased.
When you have blown your budget to buy the asset, you will need to raise more money to get it ready and thus further increase your total cost of acquisition. A higher cost of investment will require you to increase the rate of rental/sale to enable you balance ROI numbers in a similar timeframe.
- Help her to keep a cache that will serve as her Net Operating Income (NOI): Vey few property buyers account for this in their projections. The most common attitude seen is that they will spend their budget buying the property, stretch a little more to set it up and then start pushing for sales to come in immediately.
Newsflash: It doesn’t work like that. You will need some operating income to kick start the rental business with marketing collateral like photos & videography at the very least. The extent of what should be your marketing budget would rely on your choice for how you intend to manage the property.
Because that is a whole new kettle of fish.
What are your thoughts on this strategy? I would really like to hear from you too.
If you would like to get a copy of this for yourself then tell me where to send it here