kelechi 
Money Tips: Saving Money In The Bank Versus Buying Property in Ikeja. Is real estate investment better than savings?
Things to be aware of to safely increase your money
In this article, we will explain the difference between savings and investment, as well as the safety and benefits of real estate investment financed by financial institutions.
Saving Money In The Bank Versus Buying Property in Ikeja
What is the Royal Road know-how to avoid failure in real estate investment?
1. Why real estate investment is better than savings
In this era of low interest rates and inflation, cash is an asset that not only generates little return but is actually losing value.
Real estate investment is characterized by being highly profitable and resistant to inflation.
If you are thinking about building up your assets, we will explain why it is more beneficial to start investing in real estate than to save money.
1) Saving only makes up a small amount of money
When comparing savings and investments, savings is a safer way to build assets.
However, interest rates are currently very low, with ordinary savings accounts offering interest rates of just 0.001%.
If you deposit 5 million naira in a financial institution for 10 years, the amount you will receive after 10 years will be 5,003,990 naira.
Over 10 years, you will only earn 399 naira in interest.
Considering the rising cost of living over a 10-year period, the value of 5 million naira may have decreased in 10 years.
Therefore, it can be said that investments, which have higher profitability than savings, are a recommended means of building assets.
However, investing involves risks.
Since the prices of stocks and bonds fluctuate depending on economic conditions and interest rate differentials with other countries, there is a non-zero chance of losing your principal.
2) Why real estate investment is relatively safe
There are many types of investments that are highly profitable but also carry risks, including stock investments, investment trusts, foreign exchange investments, and cryptocurrencies.
Of these, real estate investment can be started by obtaining a loan from a financial institution.
In other words, real estate investment is an investment in which financial institutions recognize that the real estate itself has value.
Even in times of economic downturn, the value of real estate is unlikely to fall, and market prices do not fluctuate daily like stocks.
No special skills are required for operation, and the risks are lower than when starting a new business.
For this reason, financial institutions are the only ones that provide loans for real estate investment among the many other types of investment.
Another reason why real estate investment is considered to be safe is that risks can be controlled.
[Related Article] Risks of Real Estate Investment in Lagos Nigeria: Interesting Ways to Avoid Them That Beginners Should Know
The biggest risk in real estate is natural disasters, but there is also a wide range of insurance available to prepare for earthquakes and floods.
Risks in running a property include vacant rooms and unpaid rent, but these can be avoided by using a management company or guarantor company.
Real estate investment has low risk compared to other investments but can offer greater returns than savings, life insurance, foreign currency deposits, etc.
Depending on the property you manage, you may be able to generate more profits than stock investments, ETFs, or REITs.
3) In the end, which is better: saving or investing?
As mentioned above, savings rarely generate any return.
However, it is risky to invest all of your savings.
The important thing is to find a balance between savings and investment.
As a guideline, you should set aside enough savings to last you for about six months.
The ratio of savings to investment varies between individuals and households.
There is no telling when illness, injury, layoffs, or natural disasters will occur.
Whatever the reason, if your income has decreased or disappeared, if you can get by for a while, you can find time to liquidate the assets you had invested.
4) It is important to diversify your investment risk
When starting to invest, it is important to keep in mind the perspective of “risk diversification.”
For example, combining real estate investment with stock investment.
We invest in real estate by owning both one-room apartments for single people and apartments for families.
It looks something like this.
Also, from a broader perspective, starting to both save and invest is one way to diversify risk.
If you continue to build your assets by converting them into various forms, you will be able to retain a certain amount of assets even if changes occur in the global situation or economic situation.
2. Benefits of real estate investment
Real estate investment is an investment method that can be started by obtaining a loan from a financial institution.
In addition to the high asset value and safety, there are other benefits such as:
1) A leverage effect can be expected by taking out a loan
Real estate investment typically involves obtaining a loan from a financial institution to acquire a property.
When screening for a real estate investment loan, not only the investor’s attributes but also the profitability of the property are examined.
If you can successfully obtain a loan, another benefit is that you can take advantage of the “leverage effect” and start investing.
The leverage effect refers to the principle of leverage, which allows you to get a large investment effect with a small amount of capital.
By taking out a loan, you can expect to make a large profit that you would not be able to achieve with your own funds alone.
For example, a property that can be purchased with 5 million naira of your own money will not generate a very high return due to its age and location.
However, if you are able to obtain a loan of 15 million naira and purchase a property worth 20 million naira, you will be able to set the rent higher, which will allow you to make a greater profit than if you started investing with only your own funds.
This is the leverage effect.
2) It is an investment that is less affected by economic conditions.
Real estate investment involves purchasing a property and then renting it out to earn rental income.
Housing is one of the three necessities of life – food, clothing, and shelter – and demand for it will not disappear even during a recession.
In addition, rent for rental housing is unlikely to be greatly affected by economic conditions, unlike stock prices.
In other words, real estate investment is less affected by economic fluctuations than other investments and can be expected to have stable management.
3) It doesn’t take much time or effort.
When investing in real estate, it is possible to entrust the management of your property to a management company.
This means that the management company will take over recruiting tenants, dealing with any problems that may arise during the tenancy, and managing the building and facilities.
Therefore, unlike stock investment or FX investment, there is no need to check charts frequently throughout the day, so even company employees who have other jobs can continue investing without any hassle or time.
4) Earn monthly income and profits from sales
With real estate investment, you can earn rental income every month as long as you have tenants.
Profit is what’s left over after deducting real estate investment loans and running costs from rental income.
Furthermore, when you sell the property, you will earn a capital gain.
Therefore, one of the benefits of real estate investment is that you can earn both rental income and profits from sales.
5) It helps to hedge against inflation
Since the start of the coronavirus pandemic, inflation has been rising worldwide.
Although Nigeria is lagging behind Europe and the United States, you can probably feel the rise in prices of various things these days.
Inflation refers to the phenomenon of prices rising, which can also be said to mean that the value of cash decreases.
Remember that inflation will eat away at the cash you’ve saved.
On the other hand, what about real estate?
As prices rise, the asset value of a property purchased for 10 million naira will increase to 12 million naira, 15 million naira, and so on.
In fact, apartment prices have nearly doubled compared to 10 years ago.
If we assume that inflation will continue to rise in Nigeria in the future, owning real estate will be one way to protect your assets.
3. Example of a real estate investment simulation that takes into account savings balance
Here, we will simulate what would happen if a company employee with an annual income of 8 million naira (with 10 million naira in cash on hand) started investing in real estate.
The investment property is a one-room apartment, and of the 10 million naira in cash on hand, 60% of it, or 6 million naira, is invested.
If you use this to purchase a 20 million naira single-family apartment with a surface yield of 6%, the cash flow for one year will be as follows (assuming an interest rate of 2.0% and a loan period of 30 years):
Repayment amount: Approximately 620,000 naira
Rental income: 1.2 million naira
Management fees and property taxes: Approximately 270,000 naira
Remaining amount: Approximately 310,000 naira
It is said that purchase costs amount to around 7% of the property price, so, in this case, it costs about 1.4 million naira.
However, about 4% of the 7% miscellaneous expenses can be deducted as expenses.
Additionally, the cost of acquiring a property can also be depreciated as an expense.
Therefore, if you have a balance of this amount, you will not be subject to a large income tax.
This means that you will be able to save most of your remaining money each year or use it for other investments.
In reality, we must take into account vacancy rates and falling rents, but a simple calculation shows that we could earn a profit of about 3 million naira over a 10-year period.
The profits earned can be used for early repayment to increase the rate of return.
You can also diversify your risk by purchasing other real estate or investment products.
If inflation continues, you can also expect to make a profit on the sale.
Conclusion:
In today’s era of ultra-low interest rates and inflationary trends, it is difficult to increase assets through savings alone.
That said, savings have their merits, and investment has its merits.
You are more likely to increase your future assets if you save money that you may need immediately and invest money that you want to use in the future.
Rather than moving all of your assets from savings to investments, we recommend that you build your assets by combining savings and investments in a way that suits your current situation and life events.
Real estate investment is the only investment method that allows you to receive loans from financial institutions and is a highly safe investment method.
By taking out a loan, you can start investing with a high leverage effect even with little of your own capital, and it is possible to make a large profit.
As the first step towards moving from savings to investment, why not start with real estate investment?
For those who are wondering, “What is real estate investment really like?”
I’ve heard that real estate investment is a repeatable way to build assets, but have you ever wondered “Is real estate investment right for me?” because of the following?
・I’m studying, but there’s so much information, where do I start?
・Can I, a salaried worker, get a loan with favorable terms?
What is the difference between a good property and a bad one?
・I want to know about real estate investment that isn’t available on the Internet.
If you have any of the above concerns or are interested in real estate investment, please contact us.
