Ways to reduce risks in real estate investment

Wednesday November 27 2019

Kitende Estates in Lubowa, Wakiso District. If

Kitende Estates in Lubowa, Wakiso District. If you invest in multi-family homes like these ones, you will still earn rent even when one of the units is vacant. Photo by Ismail Kezaala 

By Carolyne B. Atangaza

Some investors are strongly cautioned or turned away from real estate because it is deemed to be a highly risky industry. But as real estate developer, Hasheem Katongole says, every business is risky if you do not know what you are doing, not just real estate. Experienced investors know what to do to actively lay strategies that will mitigate risk in real estate investment.

“Of course, there are some risks that are hard to avoid such as future pricing, interest rates and inflation. And you will just stress yourself for nothing trying to worry about those. But there are other risks we can manage well and these are the ones experienced investors focus on,” Katongole shares.

Do your due diligence
Making profit in real estate heavily depends on getting the right facts and figures connected to the property, according to Katongole.
Uganda’s land policy is still fraught with gaps which unscrupulous people use to take advantage of investors and other buyers.

Article 56, 64 and 74 of the Land Act provides for the establishment of land tribunals, district land boards (DLBs) and Area land committees (ALCs). The ALCs determine, verify and make boundaries of customary land in their areas of jurisdiction; advising DLBs in matters relating to land, including ascertaining various categories of land rights of individuals, communities and institutions during the processes of transfer of land interests and registration of titles.

However, there are still challenges faced by these DLBs and ALCs such as inadequate functionality as a result of lack of funds, lack of technical staff and corruption. These generate a number of irregularities where most land is titled without inspection and recommendations.
Sometimes land titles are given to more than one person and titles maybe give to the illegal owner claiming to be real owner of the land in question.

This level of information is the most common source for risks and mistakes with real estate investing; a fully transparent exchange of information will eliminate the risks and mistakes of real estate transactions.


Diversify your interests
As a property investor, it is risky to rely on one industry. Abdurashid Mwanje, a real estate developer, recommends spreading your investments as wide as your capital can allow.

“This kind of business thrives on cash flow, for instance, if you invest in rentals only and the market turns, you will be left with less income and if the downturn persists, you may find yourself being forced to sell at a loss. Yet if you had multiple investments, you would still be earning from them as you wait for the rentals to turn around,” Mwanje notes.

To help protect yourself from market risk, try to invest in one or more industries that can perform well, independent of the real estate market.

Invest in what works
Read the times and trends before making investment decisions. One way to effectively do this is understanding the area of your interest. Take stock of the people, their incomes, the marital status, beliefs and tastes.

Mwanje notes the best areas to invest in are those where locals have high expendable incomes and are capable of investing themselves. This will increase and help keep the market prices stable. While it is prudent to court the affluent, the investor cautions against being blinded into building homes specifically for this kind of class.

“People’s incomes change so fast and so drastically. If you construct the kind of apartments that can only be lived in by the extremely wealthy, chances are you will end up with empty homes or worse litigations stemming from unpaid rent arrears. I have a property that was meant for middle income earners but every month, I either lose a tenant who can no longer afford the rent because they have been laid off or they made a loss in their business. The most consistent tenant has lived there for two years.

Most apartments remain vacant for months. These are not rentals I would advise anyone to invest in,” Mwanje cautions.
Instead invest in the kind of apartment that the person who leaves the plush home will not feel so bad to be found living in.

Likewise, if it is a prosperous time and everyone is employed they will comfortably live in those apartments.
It is also less risky to own multifamily properties than single family homes. With single family homes, if one unit is empty, you are not getting any rent.

On the other hand, if you own a four of them and one unit is empty, you are still covered by the other three until you find your next renter.
“Commercial properties and office space are also riskier than residential. Everyone needs a place to live not everyone needs and office or a shop therefore it is prudent to focus on providing housing, not commercial space,” Mwanje tips.

Invest in two bedroom homes because they are affordable but still have space for a family with one, two, or even three children.
It can work for a single person or a couple who wants an extra room for an office. It can house a single person and a roommate.

Long-term loans
If you are into real estate business, and would like to take loans to finance your venture, it is better to go for long-term loans, instead of short terms ones. A longer time affords you a less hectic pace while servicing the loan.
Long-term loans have terms of one to five years, and their interest rates are generally lower than those of short-term loans, typically in the 7-30% range. Because the time period on the loan is years rather than months, the loan amounts are usually larger, between and repayment is on a monthly basis instead of daily or weekly. You can secure long-term loans online or through a bank.

Long-term loans are often used to finance a specific, long-term project or strategic initiative for a company that is in a growth phase. And because these loans rarely have restrictions on how the money is used, they are ideal for meeting a variety of business needs—whether it is developing a new product, rolling out a marketing campaign, or opening a second store location. With the long term loan, you can always choose to pay it off in less time. And it also preserves your flexibility to not pay it back in sooner if there is a downturn or something happens that lowers you monthly income. The flexibility that comes with a long term loan instead of a short term one is risk mitigation.
Adapted from allbusiness.com