General Advice for Alternative Investment

Jan / 06 / 2020

Pictures of Ghana by An Expat C-Level Executive

by Jorge Osorio

General Advice for Alternative Investment

Are you one of the many distressed customers of savings and loans companies and even banks?

Are you bored with your investments in bonds and treasury bills?

You should shift your investments to real estate. It’s solid as a rock.

I would like to share some helpful tips and a few cautions with you before you take that initial bold step. This information will also help you assess the value of your current investment, if you already own real estate.

First of all, it is important to realise that because real estate cannot be lost or stolen, it is acknowledged all over the world as one of the most reliable and time-tested avenues of wealth creation. This is why many billionaires and Fortune 500 companies, globally, invest in real estate. Ghana is also very fortunate to be one of the best places in the world to invest in real estate. How do I know this? Just consider all the large international companies and a large part of Ghanaians working abroad, who are currently investing in Ghana’s real estate market. Another indication is the increasing price of real estate due to a growing demand from Ghanaians as well as foreign investors. There is no better time to purchase real estate.

How to Invest in Real Estate

The easiest way to invest in real estate is through a “buy-to-let” acquisition. This simply means that you buy a nice apartment in a good area, from a reliable real estate developer, and find a tenant to rent the apartment from you.

With this kind of investment, you gain three different revenue streams:

  1. Rent Income
  2. Capital Appreciation
  3. Currency Appreciation

Let’s examine these three revenue streams individually:

  1. Rent Income

In general, you will receive rent on a quarterly, biannual or annual basis. The best part is that you will always receive payment in advance. To determine the return rate of your investment, multiply the monthly rent by a period of twelve months and divide that amount by the cost of your apartment. This return rate is also known as the real estate investment yield.

To illustrate, let’s assume that you receive rent of US$1,000 and your apartment cost you US$150,000 to purchase. Your yield will be calculated as follows:

US$1,000 X 12 months = US$12,000

US$12,000/US$150,000 = 0.08 = 8%

Your yield or return rate is 8%. You can compare this rate to that of other investments in order to get a better sense of your property’s value while bearing the associated risks of those investments in mind.

  1. Capital Appreciation

This is the natural increase in your property’s value. You are most likely to sell your property for more money than what it cost you. This is why it is said in real estate that “the best time to buy a property was some years ago, and the second-best time is now”.

I must point out that capital appreciation varies from property to property and from year to year, but is generally safe to assume that prime locations record consistently high rates of capital appreciation. You can expect a minimum capital appreciation of 2% or 3% per annum, depending on your property’s location and its maintenance.

To better appreciate this, say a piece of real estate you bought two years ago at a price of US$400,000 dollars presently has a market value of US$418,000. Its capital appreciation is calculated as follows:

Purchase price: US$400,000 (2 years ago)

Present value: US$418,000

Value appreciation: US$18,000

Capital appreciation = (US$18,000/US$400,000)/2 years = 0.025 or 2.25%

Your property has gained a capital appreciation of 4.5% in two years.

As investors say, “Don’t wait to buy real estate: buy real estate and wait!”

  1. Currency Appreciation

I am sure you noticed that the real estate purchase price and market price were stated in US Dollars as was the expected rent from your investment. This implies that as the dollar continues to appreciate in value, you can expect to receive more Ghana Cedis in the future for the same amount of dollars.

For example, rent of US$1,000 from an apartment on 1st January, 2016 was worth GHS3,800. The same rent of US$1,000 on 1st January, 2018 was worth GHS4,520. On 1st January, 2019 the same rent in US Dollars was worth GHS4,850. This historical data indicates that the US Dollar appreciated by 19% from 2016 to 2019. It also highlights the fact that the later you buy, the more expensive real estate is likely to cost; which means you can expect lower returns. However, your investment makes it possible for you to beat inflation because it has a residual effect in US Dollars and is therefore negligible. That’s wonderful, isn’t it? This is why landlords grow rich even in their sleep!

Now, allow me to call your attention to two very important variables, namely payback period and risk. With so much return on your investment, you are likely to regain your principal (that is, your apartment’s cost) within an average payback period of ten years. You will also have an apartment that has gained capital appreciation over the period. Nevertheless, you must understand the risk associated with choosing the wrong real estate developer and how that will impact your expected investment return. Doing business with the wrong developer can result in any or all of the following:

  • You receive a low-quality apartment.
  • You choose a location with no marked demand from tenants.
  • You receive your apartment late or do not receive it at all.

Choosing just any developer or choosing a cheap apartment is a huge risk, and I am sure you have neither the time nor money to waste on either.

I hope you are now convinced that investing in real estate is the best option for you, whether this is your first foray into investment or you wish to diversify your current investment portfolio. Investing in real estate offers you a secure, reliable source of income and allows you to do business in a thriving sector of Ghana’s economy.

Jorge Osorio is Sales and Marketing Director at Devtraco Group (www.DevtracoGroup.com)

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