Real Estate Investing 101: A Beginner’s Guide to Building Wealth

What is Real Estate?

Real estate means the property consisting of land or buildings, which also includes the natural resources of the land, including uncultivated flora and fauna, farmed crops and livestock, water, minerals, and, simply speaking, any improvements on it. Tenants and leaseholders may have the right to occupy or make use of anything that is within the dominion of the rented area, depending on the terms and conditions set by the landlords.

However, when we hear the words “real estate,” we often refer to the “real estate market” from the perspective of residential living. This is grouped into three categories based on its use. It can either be residential, which is used for living purposes; commercial, which is used in commerce; or industrial, which is used in the manufacture or production of goods. Residential properties include undeveloped land, houses, condominiums, and townhomes. Commercial are office buildings, warehouses and retails store buildings and examples of industrial are factories, mines and farms.

BREAKING DOWN Real Estate

Real estate is a special instance of real property. Real property, a broader term, includes land, buildings and other improvements – plus the rights of use and enjoyment of that land and all its improvements. Renters and leaseholders may have rights to inhabit land or buildings that are considered a part of their personal estate, but are not considered real estate.

Personal property includes intangible assets like stocks, bonds and other investments; it also includes chattels, like computers, furniture and clothes, as well as fixtures like a dishwasher, even if you are renting a home (provided you bought and installed it with the lessor’s permission).

Residential Real Estate or Home Ownership

Home ownership, also known as owner-occupancy, is the most common type of real estate investment in Nigeria, roughly two-thirds of residents own their home. Often, they have financed the purchase by taking out a particular type of loan known as a mortgage, in which the property acts as collateral for the debt.

Individuals shopping for a mortgage to invest in real estate in the form of an owner-occupied home are faced with a variety of options. Mortgages can either be fixed-rate or variable-rate. Fixed-rate mortgages generally have higher interest rates than variable-rate mortgages, which can make them more expensive in the short run. Fixed-rate loans cost more in the short-term because they are protected from future interest rate increases.

Commercial Real Estate

Commercial real estate is used for commerce and includes anything from strip malls and free-standing restaurants to office buildings and skyscrapers. It is often distinguished from industrial real estate, which is practical space used in the manufacturing of products. Buying or leasing real estate for commercial purposes is very different from buying a home or even buying residential real estate as an investment. Commercial leases are generally longer than residential leases. Commercial real estate returns are based on their profitability per square foot, unlike structures intended to be private residences. Moreover, lenders may require more money for a down payment on a mortgage for commercial real estate than for a residence.

Commercial leases are mostly longer than residential and lenders may ask for higher down payment on a mortgage for commercial than home loan since generally residential real estate is usually less expensive so it is more affordable for small investor

Generally, this is affected by the primary condition to where the property is located. Profits or losses come through revenue from rent and appreciation of the estate’s value. There is also risk of tenant turnover especially if the business model is in bad condition, product is unattractive, or poor management and many more. So landlords, lessees has to make sure all is well set before lending the area/place.

Investing in Real Estate

Unlike other investments, real estate is dramatically affected by its surroundings and immediate geographic area; hence the well-known real-estate maxim “location, location, location.” With the exception of a severe national recession or depression, residential real estate values in particular are affected primarily by local factors, such as the area’s employment rate, economy, crime rates, transportation facilities, quality of schools and other municipal services, and property taxes.

There are key differences in residential and commercial real estate investments. On the one hand, residential real estate is usually less expensive and smaller than commercial real estate and so it is more affordable for the small investor.

On the other hand, commercial real estate is often more valuable per square foot and its leases are longer, which theoretically ensures a more predictable income stream. With greater revenue comes greater responsibility; however, commercial rental real estate is more heavily regulated than residential real estate and these regulations can differ not only from country to country and state by state, but also by county and city. Even within cities, zoning regulations add a layer of unwanted complexity to commercial real estate investments.

There is also increased risk of tenant turnover in commercial rental agreements. If the lessee’s business model is bad, their product is unattractive or they are simply poor managers, they might declare bankruptcy, which can abruptly stop expensive real estate from generating revenue. Moreover, just as land can appreciate in value, it can also depreciate. Once-hot retail locations have been known to decay into rotten shopping centers and dead malls.

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