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1. Investing In Real Estate
Prepared by Liz Consulting
lizconsulting.ke

2. 2
● “I still think buying a home is the best investment any individual can make.” - John Paulson,
billionaire
● “Every person who invests in well-selected real estate in a growing section of a prosperous
community adopts the surest and safest method of becoming independent, for real estate
is the basis of wealth.” - Theodore Roosevelt, former American President
● “The best investment on Earth is earth.” - Louis Glickman, Real Estate Investor and
Philanthropist
● “Buy land, they aren’t making anymore of it.” – Mark Twain, Author

3. Overview of the Real Estate Market

4. Overview of the Real Estate Market
4
• The Real Estate Market is defined by certain unique characteristics:
i. The asset class is largely localized.
ii. It is characterized by a heterogeneous product.
iii. Most transactions are private, with few to no records in the public domain.
iv. It has many unsophisticated investors.
v. It is highly unorganized.

5. Introduction to Real Estate
5
Forms of Real Estate
Investments into real estate can be categorized into public and private market
investments:
Private Public
• Ownership usually involves direct
investments like purchasing property or
lending money to a purchaser
• Ownership involves securities that serve as
claims on the underlying asset
• Direct investments can be solely owned or
indirectly owned through partnerships or
commingled real estate funds
• Includes ownership in a real estate
investment trust (REIT), a real estate
operating company (REOP)

6. Introduction to Real Estate
6
Residential Non-residential
• Single-family homes
• Multi-family properties
• Offices
• Industrial/warehouse
developments
• Retail
• Hospitality
• Mixed-use developments
Real Estate

7. Why Invest In Real Estate?

8. Why Invest In Real Estate?
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1. Home ownership:
Home ownership helps and provides one with a sense comfort and belonging. In the
long run the property appreciates in value and if huge enough can be sublet for
income. The key challenge is that this is a huge long-term commitment and all the
property costs are to be met by the homeowner.

9. Why Invest In Real Estate?
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2. Investment purposes – as the saying goes, the best investment on earth is earth. By
investing in Real Estate, one gets to benefit through:
a) Wealth Creation
b) Security of Capital
c) High Operating Yield
d) Leverage (ability to use it for access to credit)
e) Tax Shelter
f) Capital Appreciation
g) Portfolio Diversification

10. Ways of Investing in Real Estate

11. Ways of Investing in Real Estate
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There are a number of ways that one can tap into the real estate market. These
include:
1. Purchase of undeveloped land.
2. Development of property.
3. Purchase of already developed building
4. Purchase of property and subsequent improvement
5. Indirect investments in RE through property funds and REITs
6. Buying or building a house to live in (own residential)

12. Types of Returns in Real Estate
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These can be categorized in two:
1. Monetary/Financial Returns
These mainly fall into two categories: i.e. rental income from rental properties as
well as capital appreciation (increase in the value of the Real Estate held)
2. Non-financial Returns
These include peace of mind as well as a sense of home and belonging.
“The ache for home lives in all of us, the safe place where we can go as we are and not
be questioned.” — Maya Angelou

13. Determinants of Real Estate Returns
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There are a number of factors that influence real estate market returns. These are:
a) Location
b) Rental rates
c) Occupancy rates
d) The purchase price
e) Economic cycles
f) Taxes
g) Property management costs

14. Factors to Consider When Investing in
Real Estate

15. What to Consider when Investing
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1. Risk Vs Reward - Any kind of investment would involve a certain degree of risk.
What’s important is that you take on calculated risk and stick to a risk/reward ratio
suitable for your risk appetite.
2. Individual Risk Appetite – Identify how much risk you are willing to take.
3. Investment Capital - The amount of investment capital you have can also affect your
choice of investment.
4. Time Horizon - The investment horizon will determine your income requirements and
desired risk exposure.

16. Real Estate Investment Process

17. Key Steps in RE Acquisition
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1. Identification of the location: In real estate location plays the most significant part.
Some of the things to consider while selection a location include:
i. The amenities
ii. The infrastructure
iii. Current and projected land and property prices
iv. Proximity to your work place and other amenities, in the case of residential
properties
Getting real estate research reports can help guide you in decent the location that
makes sense
2. Selecting the selling agents to help you get the property you want. One need to
ensure that they are dealing with reputable companies or individuals

18. Key Steps in RE Acquisition…cont’d
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3. Do Your Due Diligence: before getting to any purchase process one should do a
complete due diligence on the ownership of the land and any possible challenges, as
well as the reputation of the selling company
4. Negotiate the transaction terms and drafting of the sale documents – To get the
best terms one needs to ensure that they understand what they want and have the
transactional advisors/ selling agents negotiate. This includes things like deposit
required, value and no. of instalments, which can be either time-based or milestone-
based.
5. Closure of the purchase transaction and getting all the title documents

19. RE Development Process
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If one is developing a real estate project, some of the key things that they need to work out is:
1. Develop a feasibility study - This is to help you determine the best use of the land that
you have.
2. Create a business plan – This will outline things like:
i. The Development costs
ii. The financing strategy
iii. Cashflow projections
iv. The exit strategy
3. Get the most compelling concept for the said development
4. Put together a competent construction team including the architect, engineers, QS,
contractors among other contractors.

20. RE Development Process…cont’d
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NB: When working on a development and you are not able to supervise the process ensure you have
a competent aligned team to ensure there are no necessary time and cost overruns.
Projects need to be done on time, within budget and should be of high quality

21. Market Research and Financial
Modelling for Real Estate

22. RE Market Research - Overview
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● A real estate market analysis, also known as a comparative market analysis, is an
analysis of current market values of properties, comparable to a property you are
looking to buy or sell.
● A real estate market analysis should always be done, whether buying or selling a
property, as it will help to understand the current market, how much similar
properties are worth, if it is an investment property, how much you can charge for
rent, etc.
● The information gathered through a real estate market survey helps the seller
choose a listing price and helps buyers see if the asking price is too high, low or
reasonable.

23. Importance of RE Market Research
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There are several reasons to do this type of study, the main one is to have information
that allows you to invest and buy safely. Other reasons also include:
i. To know if you should invest in one area instead of another.
ii. To identify which elements hinder investment in certain places.
iii. To know demographic aspects that affect the area where you want to invest.
iv. To have information about investment projects in certain areas and to know if in the future
they will have a development that will increase the value of the properties.
v. By knowing the housing market prices, you will always have the opportunity to negotiate a
lower price and avoid overpaying the market value of a property.

24. How to Conduct Effective Market
Research
24

25. RE Financial Modelling – Overview
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Financial modeling is the task of building an abstract representation (a model) of a real world
financial situation. A model is supposed to represent the performance of a real estate project
and is characterized by performing calculations and making recommendations based on that
information.
The primary software tool used to do this is the Excel spreadsheet. A model is used in concept
development and also as a means of forecasting. It contains the following elements:
i. Project Introduction/ Assumptions
ii. Budgeting
iii. Cash flows
iv. Sales projections
v. Returns calculation
The model’s data is usually fed by market research done and project management estimates

26. RE Financial Modelling - Assumptions
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i. Timeline Assumptions showing the project start date, construction start date and
DLP (defects liability period) start and end dates
ii. Land Use Assumptions. We are able to establish the allowable built up area in an
area based on Local Zoning Regulations
iii. Concept Assumptions. Contains the development mix and bring out the proposed
theme such as residential, retail, commercial and MUD (mixed use developments)
iv. Revenue Assumptions. These are derived from expected means of exit such as
through sales
v. Construction costs. The cost per sqm is dictated by the building type and location
of the development. High end buildings will cost more than low end ones.
vi. Project Funding Assumptions. A project can be financed through various
instruments as listed below. The commercial terms of each is established at project
introduction.

27. RE Financial Modelling - Budget
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A budget is used to show expected expenditure, mode of financing the expenditure and
the residue thereafter. A budget typically summarizes the project costs, including:
● Components of project costs include:
● Land Cost
● Construction costs
● Licenses, surveys and approvals
● Professional fees
● Disbursements
● Legal Charges
● Marketing and Sales
● Site personnel
● Project Management fees
● Financing costs

28. RE Financial Modelling– Cashflow &
Returns
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● A cash flow shows the inflows and outflow of cash revenues and expenditures over
the assumed period of time.
● The budget component amounts are incurred or expended over the project’s
assumed timelines.
● Once the cashflow has been done, the returns are then calculated, by netting all
projected costs from the projected revenue.

29. Returns
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• The basic for evaluating any investment in considering the input (amount investment) vs
output ( returns).
Rules
● The returns should be actual cash inflows, i.e. actual received or expected.
● The return should have a relative measure i.e. as a % of money invested.
● All return measures must however consider the period of investment the investment
lasted to have a fair bench mark to analyze different investments with different investment
periods.
● Must include the Time Value of Money element. This is done by discounting future
cashflows to the present. When we do all this the result is called IRR- Internal Rate of
Return.
NB: One must be able to clearly communicate the Rate of Return from any investment.

30. Risks
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Besides returns the second most important thing the investor wants to know in any
investment is risk. Risk is the probability that the desired returns wont be achieved.
Risk in real estate can be measured using Scenario and Sensitivity Analysis
i. Sensitivity Analysis - It’s a technique used to measure the impact of independent
variables to the dependent variables. The more impact an independent variable has the
more sensitive and hence risky.
ii. Scenario Analysis - This technique is used to evaluate the outcome if one or a number of
independent variables change. The more the adverse effect from a small change in the
independent variables the more the loss.
NB: Investors are interested to know which is/are the most sensitive independent variables
and what is the range of returns expected if that variable(s) change.

31. Real Estate Funding

32. Financing for Real Estate
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Investing in Real Estate calls for a huge capital outlay, and thus, proper funding
planning is important. Some of the key sources of funds to invest in Real Estate
include:
i. Personal savings
ii. Bank and Sacco loans
iii. Partnerships and joint ventures etc.

33. Financing for Real Estate
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● When determining the type funding to go for key considerations include:
1. Amounts required
2. The pricing of the capital
3. The time horizon and possible moratoriums given
4. The controls and level of involvement
5. Any other additional advantages other than capital
●Getting the right capital structure to maximize returns is important and also getting
the right partner also plays a significant role

34. Mistakes People Make When Investing
in Real Estate

35. Mistakes People Make When Investing
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1. Not doing the proper due diligence on the land and the counter party.
2. Underestimating the costs, especially the acquisition costs
3. Cost and time overruns
4. Speculation and tying ones cash
5. Not managing the stakeholders e.g. neighbors
6. Wrong financing models
7. Poor cashflow management
8. Not involving professionals in the investment, development and exit process

36. Conclusion

37. Conclusion
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● Investing in real estate is a long-term commitment that is not easily
reversible. It therefore good to ensure you plan well before putting in
the money.
● Involve various professional and make the best judgement call after
weighing all their inputs.

38. Thank you