SLOW BUT SURE IS WRONG REAL ESTATE INVESTMENT ADVICE

I have stayed in the same neighborhood for the last eight years and in all this time, one thing has puzzled my mind. On the other side of the fence, someone has been building an apartment block ever since I moved in. I found the structure at roofing stage. At the time, I assumed that within a year or two, it would be ready for tenants. I was ready to reach out to my friends who were looking for apartments to sell them on the location. To my astonishment, up to now, the building has never been finished. It has been slow incremental phases of works ever since, and it is only last week that they started on internal paint and tiling. At the rate that they have been going, it is safe to assume that it will be another two years before the first tenant sets foot in the premises. Now, you might be asking, how is it any of my business, and why do I care?

First of all, with my quantity surveying background, costing of buildings comes easy. The first time I looked at the structure, I estimated a cool eight hundred million Uganda shillings already invested. With the additions that have been made thus far, I can estimate a total of 1.2 billion shillings spent. This money has not yielded a single return for all these years. Let’s do some simple maths. A rule of thumb is any good real estate investment should be able to return at least 1% of construction cost in monthly rent. At the end of the year, that would be 12%. Given a period of 8 years, that would be 96%. What this means is that for the past 8 years that this structure has remained unfinished, the owner has lost out on almost 100% return on his sunk capital. If he had gone for a structure whose total cost he could afford at the time, it would have already paid for itself from the rent he would be collecting over the eight year period. Why then do people approach real estate investment in such a manner that doesn’t maximize their benefit from the assets?

The main reason is a lack of guidance. Let’s face it, not everyone has the knowledge to make the right decisions when investing. Majority rely on real estate investment advice based on preconceived ideas from their parents or relatives who could have built rentals a long time ago. Ideas like “you build slowly with whatever you are able to save” Whereas this was good advice for people building small properties, it is not the case when it comes to investments worth billions of shillings. This gentleman has lost out on 1.2 billion in potential earnings by following that advice. That does not mean that he will not earn from the building when it is finally completed, but in finance, time is of essence. What could he have done differently to maximize the returns on his investment?

The first thing would have been to determine the overall cost of the project before kickoff. This can be obtained by engaging the services of a quantity surveyor to estimate the cost to completion. These people are trained to forecast costs so that you can take on a project with good knowledge of the budget. Now Let's Assume he had known the project budget, and he was aware that he didn’t have all the funds. In that case, the options would be limited to either seeking investment financing, or partnering with another person to pull off the project. Partnerships, although not very popular with Ugandans, can be a great way to take advantage of otherwise impossible opportunities. With advancement in the legal structures and judicial system in the country, it is now relatively easier to partner on a project without fear of future disagreements. The other option of seeking financing is also a great way to go about it, although you have to be careful to get a lender who can give you money at favorable terms.

With all this said about maximizing potential returns, seeking the guidance of a real estate investment manager would go a long way in ensuring that you do not make similar mistakes to my neighbor's while investing. Learn as much as you can before committing your hard earned cash into real estate. To know 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