When you want to consider investing in an apartment building, there are fundamental factors which you need to consider before you invest a single coin. The end results and returns thereof which largely depend on how well you addressed those factors. As a property developer, it’s our business to help investors make the right decisions before investing any money in a real estate property.
Here are the factors to consider when investing in a real estate property like an apartment.
1. Cash Flow
Will the property bring net positive cash flow? Simply put; will I make a profit from this investment? This is very important to ask so that you assess the market critically.
What will help you make a good judgement here depends on these factors;
• The demand in the local market for units
If there is a huge demand in the market, you will not experience a long vacancy period. This will ensure you start getting returns immediately the property is completed and even when a tenant gets out, the time it takes to bring in another tenant will be a short one.
• The type of market you want to invest in
The type of market will dictate the amount you can charge as rent. If you operate outside the expected range, you will miss out on tenants. Therefore the market will impact directly on what you can receive as rental income. There is estate were a two bedroom unit in an apartment attract monthly rental income of between Ksh.20, 000 and Ksh30, 000. The same two bedroom unit if moved to another estate will attract a maximum of Ksh15, 000.
• The cost of financing
If the cost of capital or finance is high, the return will be reduced. If you secure financing at an interest rate of less than 10%, then you stand a chance of making a good return from the investment than if you secure funding at an interest rate of 13% or more.
• The amount of your down payment
The amount of deposit you make will reduce the funding required hence the cost of financing. If you place a deposit of 40% of the cost of the project, then you will only look for the financing of 60%. If another person places a deposit of 20%, the remaining 80% will be financed by debt capital hence more interest expense.
Once you have looked at all these points, you then need to ask whether you will make money by investing in the property you have in mind? If you don’t have a clear answer, look for a property developer who offers consultancy or financial analyst.
You need to ask yourself whether the place you want to invest as the good potential of appreciation of property value and rental over a period of time. You need to invest in a place where rental income is likely to go up and not down over a period of time.
If you buy in an estate where rental income or property value rarely appreciates, then you are putting your money into a high-risk area. If the value does not appreciate, there is a high chance that the value will come down over the same period of analysis.
The risk is something to plan for. It’s said that you expect the best but you prepare for the worst. You need to ask yourself what happens if all your assumptions were wrong. If you expected the units to be fully occupied or at least 70% occupied and now you only attain 35% occupancy? You expected the value of the property to go up so that you secure funding but now the value has dipped?
When you plan well for the risk, you are adequately prepared for any outcome. Before investing in any property development project, assess the risks involved and see if you will still make money if the risk occurs.