REAL ESTATE INVESTMENT - MAKING MONEY WITH INFLATION

By Dr. Fred Msemwa

Deciding to own a property be it residential or commercial is one of the major decisions that a family or an individual can make. Owning a property entails investing a significant amount of money and obviously a big opportunity cost to the investor.

But this cost goes with good returns given a myriad of advantages to the owner that go beyond the security that one feels. It gives the owner, several inherent advantages ranging from hedging one’s wealth against inflation, flexibility in transferring wealth and building wealth for relatively less efforts.

Of course these advantages come with challenges too. For the sake of today’s discussion lets dwell on advantages. You only hate inflation if you don’t have an asset that is inflating.

If you own a residential or commercial building, an oil field, a private university, and an organic farm, a gold mine, or a rental property, you are likely to be smiling as you see inflation in action!

Inflation is increasing the prices of your assets hopefully faster than the input costs and the costs to operate your asset. You think rents and prices are expensive now, but I promise you they’ll look cheaper ten years from now.

Owning real estate is a business of making money with inflation. If there so happens to be hyperinflation, your cash is devaluing rapidly as your real assets start surging in nominal value.

Economic tightness will return sooner or later, causing another surge in property and rental prices. Real estate simplifies the process of transferring your hard-earned wealth to your next generation.

You can pass on property from generation to generation, conceivably making their lives a little bit better than the toughness you passed through. Think about the youth nowadays who are complaining that they will never be able to afford a home like their parents due to exorbitant prices.

Now think how much worse it will be for their children if their parents didn’t dare to invest in buying homes. If your parents happen to just give you one of their properties, life becomes much less stressful as you don’t need to pay rent anymore!

Investment in real estate say in residential real estate enables you to use less efforts to build your wealth. The most effort comes from researching the property you want to buy and finding the right tenants to pay your mortgage.

The property you select should be on the best location and good neighbourhood to increase chances for high occupancy. Once you’ve run various scenario analysis for projected rental income and screened your applicants, you can basically set it and forget it.

In addition to this, your property gives you an imaginable security too. Unlike cash, which serves no utility function, property addresses a fundamental human need, the shelter.

If our financial position goes astray, at least you will have a tangible asset you can actually fall back on. Real estate enables you to track your wealth as the asset you own can be easily traced and you become accountable for your own real estate empire.

When you invest in a private equity, or even public equity, you are taking massive confidence and faith on management and pray that other exogenous variables behave in line with your wishes not to crush your returns.

With real estate, you pretty much know what you’re going to get if you follow the rules. Owning assets whose value is verifiable and appreciate over time gives you a good capital base from which you can employ to generate more wealth.

In economies such as ours, possession of immovable assets such as real estate gives you a stronger case to argue with bank officers as you negotiate for a better interest rate for your loan or eligibility for accessing more finance.

In our context, it is no wonder that houses are number one class of collaterals preferred by lenders as security against loans.

For a mortgage loan, you know that after you finish paying off you rental property mortgage, your property will be around a certain value over and above the amount you have paid to acquire it given the prevailing market trend.

In connection with this, there’s something nobody really tells you when you finally purchase your own home. Perhaps because that something is unquantifiable. Even though you likely won’t own the house outright in the beginning, it feels wonderful not to pay someone else rent at the end of the month.

It’s an amazing feeling to be the king or queen of your own castle where you can do what pleases you most. Despite what seems to be a temporarily liquidity squeeze in the market, real estate is still a favourite asset class to own for many.

For those who are under hardship, don’t give up hope because everything eventually comes back. Very few other assets require so little work and allow for so much outside funding to create so much value over time thank real estate.

For those who don’t have the down payment, don’t know whether you plan to live in one city for more than five years, or don’t want to go through the hassle of managing tenants, consider investing in collective investment schemes such as Watumishi Housing Company REIT that invest primarily in real estate.

Renting has some benefits too but mostly the flexibility it gives. However, renting itself does not build any wealth. If you are considering investing your money that’s sitting in low yielding accounts, consider investing in real estate.

It may be a tough slog the first two years, but in ten years, you’ll probably wish you had bought more and started a bit earlier!

Dr. Fred Msemwa is the CEO of Watumishi Housing Company REIT, responsible for management of collective investment schemes and provision of affordable homes in Tanzania.