Whenever you hear real estate equity investing am pretty sure that what automatically comes to your mind is buying and owning a piece of real estate and making money either from capital appreciation or cash flow.
That is ownership real estate. This is why the only investors in Nigeria real estate market are 98% Nigerians either abroad or at based here at home because to invest in Nigeria real estate, you must own the real estate property.
But there is another way to invest in real estate and make returns without buying and owning any property be it land or houses. Without taking physical possession of any piece of real estate.
That is equity real estate investing.
Equi-what? What’s equity and what does it have to do with real estate investing?
Sit back, relax and get yourself in a more comfortable position, put your feet up and let’s discuss equity real estate investing.
Now, what’s equity real estate investing?
To answer this question please come with me let’s go to the desk of the most successful investor of all time, Warren Buffet. In 1988 Warren Buffet invested over $1 billion in Coca-Cola. He started acquiring shares of Coca Cola.
Today he owns over 400 million shares of Coca Cola and this his initial $1 billion investment, more or less, is now worth about $24 billion but that is not all. This year 2024, Warren Buffet is set to get $775 million in dividends from his investment in Coca Cola.
What does all these have to do with my topic?
You see when Warren Buffet invested in Coca Cola, he didn’t buy the whole company, he bought shares of the company. He bought equity. Which is a fancy way of saying that he bought a piece of the company.
He doesn’t own the whole company. He isn’t a staff of the company. He isn’t the CEO. When he bought those shares of Coca-Cola, nothing changed in the way or operations of the company. The staffs went to work as usual and did their job as usual.
Today with a couple thousand dollars you yourself can buy shares of a publicly traded company like Facebook, Tesla, Zenith bank, Access bank. When you buy those shares, you own a piece of these companies.
The staffs don’t know you. The CEO don’t know you. The company will continue operating as it has always operated, yet you own a piece of it. The price of these shares you own can appreciate in value tomorrow and as well depreciate in value.
In the same vein, tomorrow after the price of these shares you acquired have appreciated, you can sell them and walk away with your profits without any challenge or hassle.
That’s exactly what equity real estate investing is all about. The only difference is that instead of investing and buying pieces of publicly traded companies and businesses you are buying pieces (equities) of a real estate property.
So to simplify and summarize, real estate equity investing means that you invest in a property not by buying and owning the house or land outright but by owning a piece of it.
So for example if a plot of land is ₦20 million and you invest ₦10 million into it you own 50% equity in that plot of land. Other investors might own 10% equity each.
Tomorrow when this land is sold for let’s say ₦100 million, ₦50 million is automatically yours while your co-investors who invested and own 10% equity each will get ₦10 million. Each.
That is equity real estate investment.
Let’s say that the real estate property is a fully detached 4 bedroom duplex in Lekki Phase 1 and cost ₦300 million Naira, and the annual rental income is ₦30 million per annum.
So you buy 40% equity in this property for ₦120 million. This simply means that you own 40% of the house and every year, out of the ₦30 million per annum realized as rent in that property, you will receive ₦12 million which is a 40% dividend.
If tomorrow you and your co-investors decide to sell that house, whatever amount it is sold for, you will get 40% of it because you own 40% equity in the property.
Are my explanations so far making sense to you? Are you following me?
That is real estate equity investing.
You are investing, buying a piece of real estate and getting returns without owing all the property outright.
Whenever you want to exit that investment you don’t need to sell the property, you sell your own shares, your own equity of that property.
Real Estate Equity Investing in Nigeria
The beauty of real estate equity investment is that it can enable people who are not necessarily Nigerians to invest in Nigerian real estate. Same way people all over the world can invest in American companies and business by buying their shares.
So real estate equity investment in Nigeria when done right can and will bring so much money into the Nigerian real estate market because without the need to totally own these real estate properties, which in turn eliminates the need to take physical possession, an American business man can buy shares of a real estate property in Nigeria and earn dividends while his investments appreciates.
Same for a housewife in France, an oil business man in Saudi Arabia, an auto dealer in London, a business tycoon in Russia, a seasoned real estate investor in Dubai and on and on. You get the picture, anyone can invest in the Nigerian real estate market.
Apart from enabling foreign investors to invest in Nigerian real estate market and make healthy returns, real estate equity investing can help less financially capable Nigerians to invest in Nigerian real estate.
For example, a salary earner who wants to invest in cash flow real estate in Lekki Phase 1 but doesn’t have the ₦200 million or whatever big amount that is needed to buy and own that property can bring their ₦1 million or ₦2 million and buy equities of that cash flow real estate property, thus enabling them to own s piece of that property along with other investors and get dividends while making capital gains.
Another scenario is a house wife who wants to invest in real estate by buying land properties in Ibeju-Lekki but doesn’t have the ₦30 million to buy a plot of land in Ibeju-Lekki. What she has is just ₦6 million in savings.
However she has 4 other friends who each have ₦6 million and are interested in investing in real estate, they can pull their ₦6 million together and buy that ₦30 million land property in Ibeju-lekki. Each will own a 20% equity in that land
This is the power of real estate equity investing when done right in Nigeria. It will open up Nigerian real estate, and provide much needed cash for real estate developers to start and deliver projects. Enabling both foreign investment and stimulating local investments.
It is the best way to finance massive real estate projects.
Recently some real estate companies and developers have been doing what they call, ‘real estate buy back schemes’, or ‘real estate cash back schemes’.
Whereby they encourage investors to invest their money with the company at the promise of returning the capital plus a “guaranteed” 50% ROI in 12 months or 18 months. This is not real estate equity investing.
I repeat, this is not real estate equity investing.
One of the challenges of investing in real estate for certain types of real estate investors is that real estate investments is not easy to liquidate unlike say a crypto investments or even shares in a company.
This particular challenge has kept these certain type of investors who love and prefer flexible and easy to liquidate investments out.
Real estate is a very cash intensive business so companies and some developers to raise funds for new projects, have started going to and enticing these investors with buy back and cash back schemes.
When you invest in these buy back schemes, your investment is not backed or secured by any real estate property. You are not buying any legally recognized equity in the company’s project. No!
You are just giving the company your money to do business with it on the promise that in 12 months time you will get your capital plus a 50% return.
Does this sound familiar? Have you by any chance heard of a certain fraudulent business practice called ponzi scheme?
You know how it works? You take new money from new investors to pay back old investors while praying fervently to whatever God you serve, ( and i hope it is not the God of Abraham which I serve because He is against all kinds of lies and deception and won’t heed your prayers) that new investors keep coming with new money so that the jig doesn’t end and your house of cards don’t crumble.
Am i saying that buy back and cash back schemes are a Ponzi?
To be honest with you I can’t conclusively say that because am not with these companies balance sheets and thus can conclusively say anything as that would be a claim and i don’t make claims but what I can tell you for free is whatever you do, avoid it. Flee from anyone telling you to come and do cash back scheme.
I don’t care the returns they are promising you. I don’t care the things they are throwing into the deal to sweeten it. I don’t care the languages, and emotional plays they are using to make you feel safe. Run!
Flee!
The only time you should be considering any cash back or buy back scheme is when it is backed by a real estate property that will automatically become yours should the developer or real estate company fail to pay back your money after the stipulated time period.
This arrangement should be in your contract with the company you are dealing with and be legally binding, anything else is just fugazi. Fake.
Sadly the buy back and cash back schemes i have seen so far from all the different real estate companies currently doing them are not backed by any real estate property which increases your risk.
So avoid them.
Real estate equity investing is very powerful and can revolutinise the Nigerian real estate industry, when done right. I repeat, when done right. As of now, no one, no company is doing that and i will advise you to wait till someone gets it right.
Till that time comes, avoid cash buy and buy back schemes or whatever name they give their schemes.
Stay safe and wise.
I am Ugo.
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