6 Types of Profitable Real Estate Investments to Explore

Investors in Nigerian real estate engage in the acquisition, ownership, management, leasing, and disposition of properties, either through direct ownership or indirect investment avenues, with the aim of generating income and/or capital appreciation over the long term. Regardless of the specific type of real estate investment pursued, such investments serve to diversify one’s portfolio, thereby mitigating overall investment risk and making it a profitable investment.

Certainly, the most suitable locations for real estate investment in Nigeria hinge upon factors such as individual risk appetite, investment objectives, as well as the available resources in terms of time and capital. Here are six profitable real estate investments to explore if you’re contemplating investment opportunities in Nigerian real estate.

1. Residential real estate

Residential real estate is all about properties meant to live in. When you invest in this kind of property, it’s usually hands-on. Which means, you’re putting in a good chunk of both money and time to make sure you’re pulling in some decent cash flow and profits. It is indeed profitable, and there are a few popular ways people get into residential real estate, they include: long-term rentals, short-term rentals like Airbnb, vacation homes, or even trying your hand at flipping houses.

Long-term rental property

A long-term rental property typically comes in various forms, like a standalone family home, a duplex, a townhouse, or even a condo. Your earnings primarily come from the rental income generated by tenants—and there’s also the potential for property appreciation if you opt to sell it down the line.

Short-let Apartments

One of the keys to thriving in the Nigerian real estate market often lies in strategic locations, particularly, in areas bustling with tourist activity such as waterfront, accessibility, and proximity to important places. Investing in and overseeing a short-let property demands more hands-on effort compared to long-term rentals, but the potential returns are often greater—and who knows, your short-let apartment could even evolve into your retirement home down the line.

House flipping

In Nigeria, house flipping is an avenue to profit from real estate investment. This process revolves around buying an old or distress property, then putting in the work to renovate and spruce it up, and selling it off for a tidy profit. Certainly, it might not be as flashy and flambouyant as the houses you see on TV shows, but with the right approach, it can be a very profitable real estate investment.

Finding success in house flipping boils down to a few key factors. First, you have to scout out the perfect property – one that has the potential to pop with some little renovation. Next, setting a practical budget is crucial. Overspending can easily turn your profit margins sour. Then comes the labourious work of renovations and repairs, which means bringing in skilled contractors you can trust to get the job done right and on schedule.

And let’s not forget the importance of having a savvy real estate agent by your side. They’re the ones who can help you navigate the market, spot promising opportunities, and ultimately seal the deal. So, while house flipping in Nigeria isn’t a walk in the park, with careful planning and the right team in place, it can definitely lead to some serious financial gains.

Benefits of residential real estate:

• Enjoy a steady stream of income through positive cash flow.
• Experience growth in the value of your property over time, known as capital appreciation.
• Benefit from potential tax advantages that come with real estate investments.

Drawbacks of residential real estate:

• Initial investment is necessary upfront.
• Real estate investments can be demanding in terms of time and effort.
• Reselling your property might not be as easy or quick due to limited liquidity in the market.

Also read: how to avoid land scams in Lagos

2. Commercial real estate

In Nigeria, when we talk about commercial real estate, we’re referring to properties that serve business purposes. These could be apartment buildings, office spaces, retail shopping centers, or warehouses. In this dynamic sector, tenants, often not only pay rent, but also, take care of property taxes, insurance, repairs, and maintenance, as per their lease agreements.

Let’s delve into some specific types of commercial real estate:

Office Space:

These can range from sleek high-rises in bustling central business areas to more modest mid- to low-rise buildings in suburban areas.

Retail Space:

Think of banks, big-box stores, cozy boutiques, high-traffic grocery stores, big restaurants, and the convenience of strip malls – they’re all part of the vibrant retail real estate scene.

Multifamily Projects:

From charming duplexes to towering apartment complexes with hundreds of units, multifamily properties cater to the diverse housing needs of Nigeria’s population.

What are the pros and cons of commercial real estate?

Pros:

• High Income Potential: Commercial real estate typically offers lucrative returns.
• Lower Vacancy Rates: Compared to other real estate types, commercial properties often have fewer periods of vacancy.
• Longer Leases: This stability can provide a steady income stream for landlords.
• Tenant May Cover Expenses: Depending on the agreement, tenants might handle some property expenses, lightening the landlord’s load.

Cons:

• Large Initial Investment: Getting into commercial real estate often requires a substantial upfront investment.
• Time-Intensive: Managing commercial properties demands time and effort.
• Property Management Expenses: Hiring professionals for property management incurs additional costs.
• Increased Risk and Liability: With greater investment comes greater risk and liability, making thorough risk management essential.

3. Real estate investment trusts (REITs)

Investing in Nigerian real estate through a Real Estate Investment Trust (REIT) can be a smart move if you’re seeking exposure to the property market without the headaches of direct ownership and management. REITs in Nigeria typically come in three flavors: equity REITs, mortgage REITs (often known as mREITs), and hybrid REITs.

Equity REITs are the most common type. These publicly-traded entities own or manage income-generating real estate assets such as residential apartments, hotels, shopping centers, and warehouses. They rake in revenue through rent collection and eventual property sales, with the bulk of profits distributed to shareholders as dividends.

On the other hand, mortgage REITs, or mREITs, don’t deal with real estate ownership directly. Instead, they focus on providing financial support for income-producing properties by purchasing or originating mortgages and mortgage-backed securities (MBS), earning interest income from these investments.

Then there are hybrid REITs, which blend the investment strategies of equity REITs and mREITs, holding both properties and mortgage loans in their portfolios.

Most Nigerian REITs are registered with regulatory bodies like the Securities and Exchange Commission (SEC) and are traded on stock exchanges, much like stocks. Investors can also opt for REIT mutual funds or exchange-traded funds (ETFs). Less common are public non-listed REITs, which are SEC-registered but not publicly traded, and private REITs accessible only to accredited investors.

Here’s a breakdown of the pros and cons:

Pros:

• Easy Real Estate Access: Provides a straightforward route into the real estate market.
• Diversification: Offers diversification by spreading investments across various properties.
• Dividends: Regular dividend payouts can provide a steady income stream.
• Liquidity: Shares can be bought and sold easily on stock exchanges.

Cons:

• Tax Implications: Dividends are typically taxed as ordinary income.
• Interest Rate Sensitivity: Vulnerable to interest rate fluctuations.
• Market Volatility: Prices can be subject to market swings.
• Fee Consideration: Some REITs may come with high fees that eat into returns.

In summary, Nigerian REITs provide an accessible and diversified way to tap into the real estate market, but investors should weigh the tax implications, market risks, and fees before diving in.

4. Real estate crowdfunding

Have you heard about online real estate crowdfunding platforms? They’re like a team effort for investing in real estate. You team up with other investors to buy into real estate projects or investments. It’s kind of like buying stocks in a group, but instead of stocks, you’re buying a piece of real estate.

Just like REITs (Real Estate Investment Trusts), crowdfunding opens up the real estate market to smaller investors who might not have the cash to buy properties on their own or deal with all the hassles of managing them. These platforms typically invest in both REITs and physical properties.

Now, let’s break it down:

REITs:

Most crowdfunding platforms offer their own version of REITs, but they’re not the same as the ones you find on the stock market. These are usually non-listed and private REITs. Take RealtyMogul, for instance. They’ve got two types: one that pays out monthly income to investors and another that focuses on long-term growth.

Physical Properties:

Aside from REITs, these platforms often give you the chance to invest directly in private residential and commercial properties, which they might call private placements. Yieldstreet, for example, has opportunities for investing in multifamily properties (like apartment complexes) and residential land.

Now, the good stuff:

Pros:

• It’s an easy way to dip your toes into the real estate market.
• You get to spread your investments out, which is great for reducing risk (diversification).
• The returns can be quite attractive.
• You don’t need a huge pile of cash to get started.

Cons:

• You’ll usually have to pay management and advisory fees.
• Your money might be tied up for a while (it’s not easy to cash out quickly).
• Because it’s a relatively new way of investing, there might not be a long history to look back on.
• Some platforms might only let accredited investors join in, which could leave out regular folks who want to get involved.

5. Land Investing

When we talk about raw land in Nigeria, we’re referring to untouched parcels of land, devoid of any development like public utilities, roads, or buildings. This type of land is generally cheaper to purchase and upkeep compared to developed properties. One of its major attractions is its potential for appreciation; its value tends to increase over time due to a limited supply and growing demand. Plus, raw land offers investors a clean slate, providing various avenues for generating income.

Here are a few strategies investors often consider:

1. Development: Raw land investing can be transformed into commercial or residential properties that can be rented out or sold for profit.
2. Subdivision and Sale: Another approach is to divide the land into smaller plots and sell them individually, often at higher prices than the original parcel.
3. Buy and Hold: Opting to purchase and hold onto the land can be a smart long-term move since its value typically appreciates over time.

See genuine and trusted land investment properties in Lagos with high ROIs

Pros:

• Lower initial costs and maintenance expenses.
• Less competition compared to developed properties.
• Diverse investment opportunities, from development to subdivision.

Cons:

• Land investing has limited tax advantages compared to other real estate investments.
• land investing requires a long-term commitment to see substantial returns.
• Dealing with complex zoning laws and land use regulations can be challenging during land investing.

In Nigeria, where real estate is a dynamic market with vast potential, raw land presents a promising opportunity for investors willing to navigate its complexities for long-term gains.

6. Real estate investment groups

Have you heard about real estate investment groups in Nigeria? They’re like exclusive clubs where private investors come together, pool their funds, and join forces to acquire and manage income-generating properties. These groups, known as REIGs, offer a smart opportunity for those looking to dive into bigger real estate ventures without necessarily being accredited investors. Plus, they provide a platform to learn from seasoned investors and tap into their expertise.

In Nigeria, REIG portfolios boast a diverse range of properties, from cozy single-family homes to bustling commercial spaces. One lucrative avenue these groups explore is rental properties. By investing in residential real estate like standalone houses, townhouses, or condos, they can rake in steady rental income, fueling their cash flow.

But that’s not all; REIGs in Nigeria also have their sights set on property appreciation. They know that factors like prime location, economic stability, and strategic enhancements can significantly boost a property’s value over time. So, they keep their eyes peeled for opportunities in thriving urban centers, sought-after residential neighborhoods, and burgeoning commercial districts.

Now, let’s weigh the pros and cons of joining a real estate investment group in Nigeria:

Pros:

1. Risk Mitigation: Sharing the investment burden across the group helps minimize individual risks and costs associated with property ownership.
2. Learning Opportunities: Being part of a REIG means tapping into the collective wisdom of fellow investors, offering a valuable chance to learn and grow in the real estate game.
3. Shared Responsibilities: From property management to decision-making, responsibilities are distributed among group members, lightening the load for everyone.
4. Income and Appreciation: REIGs offer the dual benefit of steady rental income and potential property appreciation, ensuring a balanced return on investment.

Cons:

1. Membership Fees: While joining a REIG opens doors to lucrative opportunities, membership fees can eat into potential returns.
2. Dependency on Group Members: The success of your investment largely hinges on the competence and commitment of other members in the group.
3. Exit Challenges: Exiting a REIG investment can be tricky, especially if disagreements arise among members or if market conditions aren’t favorable.
4. Potential for Conflict: With diverse opinions and interests at play, clashes or disagreements among group members are not uncommon.

In a nutshell, real estate investment groups offer a promising avenue for savvy investors in Nigeria, providing a platform to pool resources, share expertise, and unlock the potential of the country’s dynamic real estate market.

Which type of real estate investment is profitable for you?

When it comes to diving into Nigerian real estate, finding the perfect investment hinges on a variety of factors tailored to you. Your budget, how much risk you’re comfortable with, your goals in the game, how long you’re planning to stay invested, and what you already know about the market all play a big role.

Let’s say you’re just starting out or working with a smaller budget, Real Estate Investment Trusts (REITs) could be a real gem for you. They offer a way to get into the real estate game without needing a huge upfront investment or extensive experience.

But if you’re ready to roll up your sleeves, invest a hefty chunk of money, and really get your hands dirty, commercial real estate might be more your speed. It demands significant time, money, and expertise, but the potential rewards can be substantial. It’s all about finding what matches your style, resources, and ambitions in the dynamic Nigerian real estate scene.

Things to think about before delving into real estate investment

If you’re considering investing in estate in Nigeria, the initial choice you’ll face is between indirect investment avenues. Opting for a strategy like Real Estate Investment Trusts (REITs)? Understand the details of each company’s stability, history of dividends, and the range of properties they own.

But if owning properties is your preference there are additional factors to ponder. Are you inclined towards residential properties? Are you aiming for the profits of a short-term flip or the stable returns of a long-term hold? Once you’ve clarified that it’s time to identify your desired location, analyze market trends and crunch those numbers. Consider property values, projected cash flows, and where the profit potentials lie.

Remember, whether you choose indirect routes, your investment should align with your status, goals, risk tolerance, time frame and expertise. Ensuring this synchronization enhances your chances of an investment journey.

Navigating Nigerian Real Estate; Critical Components for Achieving a Profitable Real Estate Investment

Venturing into real estate in Nigeria can be transformative, but remember, it’s not about speed; it’s about endurance. It requires time, dedication, connections, and a good deal of learning to reach your investment goals. Therefore, prepare yourself for years of work, networking with local individuals in the industry, practicing patience, and gaining insights from both your successes and setbacks.

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