One of the first pieces of advice that any financial planner will give you is to spread your investments over a range of options so that all of your eggs are not kept within the one basket. This is to prevent an unforeseen event – such as the demise of a bank – wiping out all of your investments in one go.
A real estate investment is certainly worth considering as one of your options as long as there is a good understanding of risk and returns within the sector. Real estate can be a good vehicle for longer term investment and there are several different routes to consider.
For example, if you own a business that rents office or commercial space, you may consider taking a long term loan and buying premises to operate from. If the loan repayment instalments are more or less the same as the rent over the term, then you will gain from owning the property at the end of the loan term.
Although loan repayments may be higher at the start, unlike rent costs they will not rise incrementally each year as a matter of course and they may be less expensive than rent in future years. This route to savings is relatively risk free as you have a reliable long term tenant that you trust (yourself) and you are in control of your own destiny. As retirement or succession planning nears you will be secure in the knowledge that you will enjoy a rental income from your property after you stop working.
It is quite common for high net worth individuals to own a number of houses as part of their investment portfolio and there is a wide range of options to consider ahead of embarking on this route. Do you want all your houses to be close to each other? If houses are grouped together they are easier to manage but there could be a concentration risk.
What is your target market? Student accommodation can be cheap and cheerful but if you pile them high they return good margins. NGO’s and high end occupiers can pay strong rents but they are very demanding tenants and rental voids of high end properties are costly. While there is a strong market for low cost apartments, rent collection can be a challenge and there is often a high turnover rate meaning you spend too much time looking for reliable tenants.
House rentals at Greenpark Estate Athi River, for example, provide investors with an average annual return of around 6pc, which on the face of it is not particularly attractive. However, when capital appreciation is factored in it is a different and more interesting story because a house which sold for Sh8 million in 2011 is now selling for more than Sh18 million and this has added a further 17pc return on investment to give a total of 23pc.
As an alternative to hands-on real estate investment, there are specialist companies who will manage your funds for a relatively small commission. This option is ideal for investors who do not want the hassle of managing their real estate investments. Real estate can be a viable investment option – but remember to spread your assets around a mixed investment portfolio.
(Henderson is the Managing Director, Superior Homes Ltd)