Residential real estate investment - the intelligent mind
Residential Real Estate Investment (RREI) gives you the chance to be creative, to find a niche where competition does not have an edge over you in terms of knowledge, better contracts, strong ties or a deeper skill set. That being the case there is no one particular path to success that is applicable to everyone. That kind of thinking is false in a number of ways. First there is no single aspect of residential investment in which everybody can be a winner. To name just one example that has been quoted by a number of people in a number of “get rich-fast books” there are not enough cheap or forced sale deals on the market if everyone tries to specialise in buying repossessed properties.
Second, there are many different methods to get success. Though residential real estate is often considered a single market, it is in reality a very fragmented sector and this is reason for excitement. This fragmentation is spatial and sectoral in nature. In the case of Zimbabwe a residential investor may deliberately choose amongst the different cities and towns or they may pick on the basis of density levels - high density, medium or low density or may invest in flats as compared to free standing houses. My big take on this however is you just have to outline what you don’t want. As for me repossessed or foreclosed properties are not my type. I can’t imagine myself moving around and snapping up homes that were taken away from distressed families. No!
Actual life in RREI - consider the following:
- What are the milestones, pitfalls and rewards?
- How do I make an impact?
- Changes of challenges and opportunities over time · Turning your product (property) into a commodity (price) · When and how to add value?
The main theme of this article is that to succeed in RREI you must account for the three paramount factors: The people, The property and The deal or transaction or the PPD. The cardinal rule is to be involved in the process. After getting the details right adapt them to your current environment.
- THE PEOPLE
The people basically create the market. They are the ones who pay the rentals and determine how high they can be. They also are the potential purchasers when the time to exit comes. Consider their priorities – is it cluster or non-cluster, security or a particular locality. Their priorities will determine the kind of property you invest in, the features you put and finishings you develop. Segment your intended market’s into different and specific groups and profiling the different groups will present you information critical to your decision making.
Real estate investing is all about identifying and mitigating risk, thus it is crucial to surround oneself with knowledgeable experts for legal, market and technical due diligence. Quantity surveyors will set out every single potential cost that may arise during course of the deal, your own valuer will advise on actual market value, your own agent will assist with negotiations and use your own lawyer in the deal.
- THE PROPERTY
2.1 Location, location, location
This sounds like a chorus now but you can’t talk about a good property investment in residential property without mentioning it. Come to think of it all property investments are all about supply and demand. There are people out there who own properties in places that are cheaper and shoddy, serviced by run down road infrastructure, and experience serious power cuts, yet they make a good amount because they are cheaper and never are their properties empty. The critical element here is to avoid voids or periods where no rent is being earned. For example one is guaranteed a winner if they buy residential property in a location that sees constant demand but supply is limited e.g Harare’s avenues area has a limited supply because of sharing with commercial space and lack of space for new building. But like I said before we cannot all buy in town centres, so we look to areas that our budgets can afford. The critical issue is about taking it deal by deal, and step by step.
Some buyers may first look into an area they think has great potential and then pick up a property whilst others will consider the property and its offerings before the location. Either way the basic rule is that if there are aspects that you don’t like about the property, the person that you will try to rent to or sell the property to won’t like those aspects either. You definitely need to use good common sense and fundamental judgement power. Negative landmarks in close proximity, such as dumping sites, grave yards and noisy and busy roads must be avoided as they will put-off your potential buyers, or may be used by them as bargaining muscle.
This refers to the property’s state of repair. If general inspection is not satisfactory, then a structural survey may be called for in order to identify any structural weaknesses. Just the same way a mechanical inspection of an automobile may discover serious engine faults even when the vehicle’s body looks sexy, a structural survey may unearth serous issues like cracks, defective roofs and sub-standard engineering works. This is very important especially on multi-storey buildings. You also need to check on smaller issues like the age of electrical and plumbing fittings, how secure are the locks and all other issues that have got the potential to cost money down the line, which will chow into your cash-flow.
My advice is to go for a property that requires cosmetic touch-ups rather than serious renovations, unless it’s a major bargain you cannot afford to lose. Jason Lee defines cosmetic as improvements that can be done on a reasonable budget and completed in a short time so that income can be earned fast. Such include updating kitchens and bathrooms, laying new floors, installing new light fittings, painting and redecorating the interior and exterior walls and landscaping the garden. Major structural changes like pulling down walls and constructing new ones to increase room sizes may present a serious nightmare when the contractor gives his quotation and starts his job.
2.3 Research the Locality
Because you are sure that your tenants and potential buyers will eventually know how good or bad the area really is , you must be ahead of the game, as this knowledge will influence the type of profile of a tenant or a buyer to be secured, and hence your rental income or final exit price may be improved or compromised. Are those fewer amenities really amenities in that they give real benefit to the community? Always avoid over developing a property as the ultimate price or rental determination is the locality or area. Putting state-of the-art security and top dollar finishings in a high density property may not significantly alter or increase the rent to be earned hey. Diminishing returns to scale for sure.
Of importance, and especially now is to ascertain the position with regards to utility bills payment. Municipal rates and bills are not as serious issue where seller gets his or her cash after transfer because arrears will be paid from the selling prices. They however become an issue where purchase price is released before transfer. You will get a rude awakening to discover that there are huge bills owing when you have released purchase price to the seller and they become uncooperative. So you must always make sure previous owner clears his baggage in so far as electricity, municipal rates and other utility bills are concerned.
- THE DEAL
Seasoned property investors argue that most of the profit in property transactions is determined at purchase. Thus an investor’s best bet is an advantageous entry point.
3.1 Price, Terms and Conditions
This basically refers to the total money to be paid including all ancillary costs like transfer fees, and the mode of payment. Bargain as low as you can and make sure the terms are as favourable and do not break your back, especially in cash deals. But even where you have secured mortgage finance make sure you are using a profitable model strategy so that you avoid what all investors fear the most – repossession. If you are fortunate enough to have different financing options, make sure you are familiar with all the pros and cons. But first things first- never rely on what a seller or his agent tells you. They will always inflate the property’s value.
So this is what you do – research, research, research! Look at all the properties for sale around the one you like and make comparisons to get a general impression of the true market value. Never be hurried because if you miss a deal another is knocking, and knocking very loud.
One important thing is to look for a motivated seller like someone who needs to find a project or has lost a job and risk having the property repossessed. The more motivated your seller is the better for you as their motivation becomes your bargain. Although it is difficult, always try to find out the reason why they are selling. They might be in a tight spot and don’t forget you might actually be doing them a favour and relieving them a burden by purchasing their property.
3.2 Tax Efficiency
Before you plunge head-on, talk to residential property experts and find out about the tax implications of your potential investment. If you are entering the buy to let market, you must be aware that the rental you receive is taxable in line with your tax bands. Don’t forget capital gains tax which is due on any property outside your principal residence.
3.3 Exit Strategy
When you invest in any property, always remember that one day you might want out. If not properly planned, this may cost you time and money. Before you get in, determine how and when you may disinvest at a profit. Consider the future, the period you would want to hold on to the property and possible exit price. Try to predict the state of the economy, employment and interest rates as they can all affect your total monetary gains should you sale. For example when the market takes an upward shift, like now, it can improve your returns in some significant way. However the downside i.e. when the market takes a tumble, could leave you with serious exposure in light of huge debts.
In conclusion it must be noted that the Zimbabwean residential market is in for a brighter state than most widely believed both locally and internationally. Thanks to our cash economy that has been prevailing for the last decade, most of the homes are non-mortgaged as they were cash purchased. Since there have not been serious residential projects in the last ten years in Zimbabwe, rentals and selling prices have continued to steadily rise as people stampede for the old stock. This presents a very big opportunity for major residential project investors, both on the rental and capital front.
Welcome to the Zimbabwean residential sector. Happy and intelligent investment.