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How to Invest in Real Estate in Nigeria Even With Little Money. You don’t need all the millions upon millions of naira to invest in real estate. You can do it with much less money, and without buying a property directly.
At a time when most traditional investments offer limited returns, real estate presents itself as an attractive solution for many investors to diversify their portfolios and circumvent the corrosive impact of high inflation.
If you are considering investing in this sector, you should know that you do not need tens or hundreds of thousands of Naira available to invest directly in the acquisition of real estate. You can invest in this sector, even with little money, through solutions such as funds or crowdfunding platforms.
In this article, we have gathered the main alternatives.
Invest In Real Estate In Nigeria Even With Little Money
Buying a property to sell
Purchasing a house or apartment to sell later at a higher price is one way to invest in real estate. In this case, the profitability of the business is essentially related to the capital gain, that is, the difference between the purchase and sale price, which will constitute the “return” for the investor.
To maximize this advantage, it is important to look for properties that need renovation so that they can be put back on the market at a higher price. – Only by “adding value” will you be able to get a future buyer to pay more money for it. In addition, location is a fundamental factor. Restrict your search to locations with a network of services and shops, good access, and evidence of liquidity in purchasing for personal use.
When choosing a property, you should also take into account the most popular types of properties in each location, as well as the existence of outdoor spaces such as balconies, backyards, and terraces, which have become even more valued by buyers since the COVID-19 pandemic. In short, find out about market trends, look for areas with potential for appreciation, and find properties with features that meet the needs of potential buyers.
To make the purchase of a property profitable, calculate all costs involved in the purchase, renovation, and later sale.
Before going ahead with the purchase of a property, carefully calculate all the costs involved, not only in the purchase but also in the renovation of the property and its subsequent sale, to be able to assess whether the deal will actually be profitable.
As a buyer, you will be subject to payment of IMT (Municipal Property Transfer Tax), Stamp Duty, and IMI, a tax levied annually on property owners and which is levied on the taxable property value of properties. If you need to take out a mortgage to purchase the property, you will also have to pay other charges, including bank fees, stamp duty, and mandatory insurance, such as life and multi-risk insurance.
To these costs, you will need to add the amounts estimated, through budgeting, for the renovation works, in addition to the costs you will incur later on when selling the property. Here you will need to take into account the capital gains tax, the commission to the real estate agency (if you hire the services of a real estate agency to sell the house), and the costs related to the early repayment of the mortgage (if you used bank financing to purchase the property).
Also read: How to Know the 3 Major Property Taxes in Nigeria
Buying a property to rent out
When buying a property, from an investment perspective, you can opt to generate income instead of capital gains. In this case, you buy a house or apartment to rent out, thus generating a monthly income.
The search for properties should focus on locations with high demand for rentals, typically in urban centers, areas well served by commerce, services, and transport, with good access, and close to schools and universities if the objective is to rent to students.
In addition to the location, it is necessary to take into account the type and general condition of the property, as a large investment in renovation work could make the investment much less profitable.
To assess this profitability, you must take into account all the costs associated with purchasing the property – such as IMT (Municipal Tax on Onerous Property Transfers), Stamp Duty, and IMI, as well as the costs you will subsequently incur with renting the property.
For each lease agreement signed, you must pay Stamp Duty, which corresponds to 10% of the value of the rent, in addition to the tax on the rent you receive monthly, which varies depending on the duration of the agreement:
Less than 2 years: 28%;
From 2 to 5 years: 26%;
From 5 to 10 years: 23%;
10 to 20 years: 14%;
Over 20 years: 10%.
You will also have to consider other costs, such as condominium fees, insurance, property maintenance work, and commissions to the real estate agency if you use the services of professionals to facilitate the rental process.
Also read: 7 Effective Strategies For Managing Risk in Real Estate
Housing loan for rent
If you do not have your own capital and need to apply for a mortgage, bear in mind that the conditions offered by the bank will not be as advantageous as those you would have if you were purchasing your own permanent home. Since this is a loan for a second home, the bank will likely offer you a higher spread and will likely finance less than 90% of the property’s appraised value.
If you use bank financing, you will have to add the costs related to the housing loan to the costs mentioned above to see if the rent you will receive from future tenants is enough to cover the costs and still make a profit.
Houses in Lagos
Real estate investment funds
If you don’t have hundreds of thousands of naira to spend on buying a property, there are alternatives to investing in this sector with much less money. In some cases, just tens of Naira are enough.
One of the options is real estate investment funds, which work like common investment funds, but invest only in real estate assets, in segments as diverse as housing, hotels, offices, or shopping centers.
Think of a piggy bank where several investors put their savings. Everyone’s money is then invested in real estate, with the profits being distributed in proportion to the amounts invested. This is the logic behind an investment fund, which also offers advantages through diversification: less profitable investments are offset by others with higher returns.
In this case, the investor buys the so-called “participation units” in the fund, without having to worry about choosing the properties, all the costs involved in buying, selling, and renting the properties, as well as the costs of preserving or maintaining the properties in the portfolio.
All of this management is handled by the fund management company, which aims to maximize the investment and profits obtained, acting in the exclusive interest of the participants. In addition to income taxation, you will only have to consider the costs of subscription and management fees, as well as possible redemption fees. To do this, it is essential that you read the fund prospectus and understand all of the conditions.
In investment funds, profitability is not guaranteed and there is no capital guarantee, which means that you can lose the money you invested.
Real estate crowdfunding
Another alternative to direct investment in the purchase of real estate is so-called real estate crowdfunding, or collaborative financing.
As the name suggests, crowdfunding occurs when a group of people come together to finance a project, an investment, or even a new business. This capital raising is done through electronic platforms accessible via the Internet, which must be registered with the Securities Market Commission (CMVM), and are supervised by this entity.
There are several types of crowdfunding platforms, including those dedicated exclusively to real estate investments, which in most cases accept investments starting from 500,000 Naira. Of course, the larger the investment, the greater the potential return.
Both operate using the collaborative financing method through loans, where remuneration is made through the payment of interest, the value of which is fixed at the time of raising funds.
Since it is an investment without guaranteed capital, the interest rates are more attractive when compared to other conventional products, where the lower level of risk is accompanied by a lower return.
