Would you have invested in buying land in Abuja in 1980?
Imagine if you bought two plots beside the hotel in 1980 and sold in 2015, what return would you have made?….(the picture below shows Maitama and surrounding areas in Abuja FCT)
Land is a recommended asset class. Although land may offer no current income, they allow an investor trap in significant capital appreciation potential.
There are two ways to invest in land, buying to hold to capture capital appreciation in future and buying land to sell or flip to capture current capital appreciation.
To flip land, means you buy land in a choice area, with good demand, then sell it. Land flipping is great when the economy is booming and demand is strong. If you buy land in a choice area and its value is high but you cannot convert that value to cash, then that investment is illiquid. You want to ensure you stay liquid in a weak economy.
With buying land to hold, you are betting that a piece of land will be worth more tomorrow than today. Maybe the government will develop infrastructure near your land or population growth will push land prices up, thus your buying future appreciation today. In essence your investing in this asset “off plan” i.e. discounted value, in the hope that the value will rise in future to reward your invested capital. it’s important you factor in opportunity cost of tying down your cash for a long period.
With buying to hold the profit is made on the purchase price, i.e. the lower your purchase price, the larger your potential margin for profit.
When buying land, be careful what source of cash to use.
Don’t borrow cash to invest in land being purchased to hold. This is because your using an interest bearing liability to buy a non-interest generating asset. It’s advisable to negotiate an installment payment where you debit your discretionary cash and invest in the land. This allow you build up a nice portfolio with real estate at the base, but with no interest cost.
If you want to flip land, consider asking the seller for a time option to buy the land, then try to sell the land before paying for the land. Thus don’t acquire land with debt without securing a buyer, if your intention is to sell the land. You may end up wiping your potential profits by holding that land and paying interest.
Remember as always, the value of land is always location, but title as well. Ensure you get a lawyer to verify all land titles BEFORE you invest in land.
(Photo Credit Abuja Facts)