Real estate crowdfunding in Nigeria
Wow! “Deborah, look what I found” Tommy hands his phone to the love of his life.
“What have you found?” she replies,
Do you know that my old course mate that I introduced you to at Dominos the other day?
“Yesss, what about him?”
He just purchased 2 duplexes close to the Lekki free trade zone. That’s not the amazing thing, the head-bursting part is that he didn’t make the purchase with his money 100% and he’s not owing!
How do you mean my dear? Deborah asks her hubby, with a twist of confusion, inscribed on her forehead.
“When I asked him how come, he let me in on the secret and do you know what it is? Crowdfunding, real estate crowdfunding?”
“you mean that thing works?” Deborah asks with an air of surprise.
Sure, it did for Kene, my guy!
“This one that you’re excited like this hope you’re not planning to be a copy-cat,” said Deborah, with a knowing look.
She has lived with her sweetheart for 5 years now in their house-hacked duplex in VGC and she knows when her husband is scratching for another investment.
“What else do you expect dear? Tommy continues, with all seriousness on his face. Look, our 3 children are now in secondary school and you can testify to how our house hacking investment paid off. It’s time we increased our income before our expenses swallow us up.
A few days later, Tommy stumbles on an article from Property Lagos, on real estate crowdfunding and it informed his actions in the long run.
Yes, this is what he stumbled upon and if you want to know what Tommy did, read till the end as he did. Because in this article you are going to learn about real estate crowdfunding, as applied to Nigeria and 5 Criteria to consider before venturing.
Before we look at the big 5 let’s examine briefly,
What is Real Estate Crowdfunding?
Real estate crowdfunding falls under the equity type of crowdfunding. It involves the recognition of a lucrative real estate investment by an experienced realtor who is not able to, or doesn’t desire to fund the investment by himself, but opens up the opportunity to individual investors to invest in the capital. This enables them to raise enough money for the execution of the project.
Crowdfunding is a fast-growing industry worldwide. And according to the World bank, by 2025, the crowdfunding industry will be worth $93 billion. Meanwhile, at the end of 2017, the real estate crowdfunding reached $5.5 billion. Thus, from the foregoing, we can speculate that by 2025, more than 10% of the worth of crowdfunding will come from real estate. Lucrative, isn’t it?
Why is Real Estate Crowdfunding Important?
Why should you care?
Now, because real estate crowdfunding is done online, you have access to deals you wouldn’t get by normally. Either on a website or a social media channel. Also, starting doesn’t involve an extreme amount of capital, unlike traditional means of getting investors. In addition, you choose what kind of risk investment you can handle. Furthermore, you get to choose the number and type of properties you want to invest in. Check out this good read from Realty Mogul.
Having seen the importance of real estate crowdfunding, what must you watch out for before going into it, especially in Nigeria?
5 Necessities You Must Know Before Choosing a Real Estate Crowdfunding Service
Good knowledge of the local market
Okay, you might have seen what worked for somebody you know, you may not. But before putting money into the project, try researching the local market about the property. So as to avoid stories that touch the heart, don’t be too excited that you put the cart before the horse when the cart should be right behind the horse.
Consult another real estate agent. Do the work so you don’t get to lose the reward of your work because of the hype around a promising investment. 10 members of Forbes real estate council reveals how to do this meticulously. The importance of doing this can’t be over flogged as what obtains in a particular neighborhood differs from another in a city well known for luxury.
The holding period
It is necessary to have a clear understanding of the holding period in your real estate crowdfunding investment. Make no mistakes at all in this. The holding period is the space of time your investments liquidates. Investopedia reports on what your holding period should look like.
However, it is advisable that you make sure you are investing in an illiquid asset and that you use money you don’t need in the short term.
The profitability potential
Likewise, must be considered seriously. Your investment must carry positive potential, such that you know what exactly your ROI is going to be. Whether in the form of rental income or sales from landed properties.
This helps your expectancy rate. because you are also able to decipher the expense incurred in relation to your expected profits over time. So what do you do to discover the profitability potential of the investment? Calculate, yes, calculate it. Millionacres’ guide should do.
The metrics for the best deals
Whether it is IRR (Internal rate of return) or cash on cash target, discovering the best deal to invest in is another necessity. Some investors do not like to go for the cash on cash method of evaluating real estate investment performance. Even though it is the easiest to do because properties can be evaluated in time. However, it has its cons too. Evaluation for cash on cash is limited to a year.
On the contrary, IRR is not as easy for evaluating real estate investment performance as cash on cash. However, IRR is more effective. For instance, if a property is to be rented for 10 years, the price for the rent grows per year for ten years.
In the same vein, each of them has its pros and cons. To learn how to evaluate this properly see Mashvisors’ post.
Other things to consider
The management and administrative fees, sudden call for additional investment along the way and other evaluation metrics such as the exit capitalization rate and the equity multiple. Shouldn’t be overlooked in the long run.
From the foregoing, we can observe closely that a lot of research, calculations, and evaluations are necessary before taking a dip into real estate crowdfunding in Nigeria. Especially In Nigeria where there is no solid legal backing.
Tommy didn’t make a mistake. He took his time and after some months, he took the dip, and there were no regrets.