BUYING A CONDOMINIUM APARTMENT FOR AIRBNB? HERE’S HOW TO MAKE REAL ESTATE INVESTMENT DECISIONS.

Many people would like to one day own a piece of real estate. In Uganda, individuals always consider real estate when making long-term investment plans. Ranging from plots of land, condominiums, and rental units, to commercial buildings, Investors dream of the day they finally receive the title to real estate property. They are not wrong. In a society where only a handful of alternatives exist, real estate has been the most viable investment for a person planning for a steady passive income. But how exactly should one decide on purchasing a property?

We all have different motivations for the choices we make. The most important element of investment decision-making is to be clear about what you aim to achieve with your allocation. The success of any investment is judged solely based on its ability to fulfill the investors’ goals.

One time, a friend came to me with this amazing idea of purchasing an apartment in one of the upscale residences in the city. She said she was quite convinced that this would be a great investment. This was because she could use the apartment for Airbnb business. She exuded an aura of excitement as she described how much research had gone into this decision. She even mentioned that even if no one around her believed it was a good investment, she was determined to go ahead and prove them wrong. Investing in condominiums for Airbnb has been a trend in the Ugandan real estate market. Many have flocked to the industry with the hope of earning a good return on investment, only to realize that there is more to be considered.

My question to this friend was simple. Are you judging the investment based on the fact that you can run a business on the premises? Or are you judging it based on its strengths against investment principles such as rate of return, risk parity, and diversification?

Let’s examine her decision-making process.

One thing for which I applauded her, was the fact that she had done her homework on the soundness of the deal. She had researched about the developer’s reputation in the market, visited previous sites, hired lawyers to do all the legal checks, Engineers to review building plans, and other professionals whose contribution was necessary to make the purchasing decision.  She seemed quite confident in her market research on apartment prices in the area, rental amounts, and business possibilities for Airbnb.

The one area where I had concerns, was her justification for the investment. She seemed to be convinced that her intent to do business on the premises was enough reason for her to commit such a large sum of money to the condo. The investment’s success seemed to be hinged on the success of the business, with little regard for the possibility of the business failing. I asked her if the investment would still make sense if the Airbnb business failed, to which her answer was, “It won’t fail”

For all I know about business, there is no such thing as it won’t fail. Everyone who goes in with the risk of failure. This is okay. However, when it comes to investment, risk management is something that has to be at the forefront of the decision-making process. You often cannot ignore the damage of just one thing going wrong with your investment.

In my friend’s situation, I advised that if her goal was to be in the Airbnb business, many other alternative approaches could get her to it without forking out thousands of dollars. Renting, for example until she proved that her business concept was viable, and warranted such an investment. Otherwise, imagine after investing that money, she opened the business only to realize it is not as profitable as she imagined, or the area is not suited for the business. With just a rent investment, she can easily pull out of the business. However, with the purchase of the apartment, she would be stuck with a property whose returns would be way below her expected returns. At that point, she would remember the more sound investment appraisal methods that she ignored, such as rental collection vs Cost of the property.

Meanwhile, upon further probing, I discovered that she had not even done enough research on how to run an Airbnb business. She didn’t even have a plan on how she was going to implement the idea. How does one go into such a major investment blindly? For such an investment to make sense, the first thing one needs to establish is a business plan detailing how income will be generated from the operation. Before you even consider whether to buy or rent the premises. This is because, in this scenario, the target income from Airbnb would be the main criteria for how to make real estate investment decisions.

I am not saying she was wrong with her decision, all I’m saying is that to avoid unnecessary disappointment, She should have considered judging the property solely based on its ability to generate returns as an independent investment, and then any additional benefits of being able to run a profitable Airbnb business in the premises would be considered a bonus.

If the investment passed the first criteria of appraisal, she would have a winner on her hands. However, if it can not succeed without the success of the Airbnb business, she will be forced to re-evaluate her investment to determine whether it is a good investment. Unfortunately, there will be very little to do at that stage to reverse the situation.

Real estate investments are highly illiquid, and therefore getting out of the investment can be very difficult, sometimes resulting in selling the property at less than the purchase price. One has to be mindful of why they take on the asset.

The next time you are faced with such a challenge, make sure you are clear about your goals for the investment, and that the goals are directly linked with your investment strategy.  This will help you get the results you set out to achieve.

To learn more about investing in Uganda’s Real Estate industry, visit https://www.barosgroupltd.com/

About the author;

Benard Sonko is a real estate investment manager and founder of Baros Group Limited. For comments and inquiries, you can reach him on +256742140251 or info@barosgroupltd.com