12 April 2012

Zimbabwe: Making Real Estate Deals Profitable


MANY writers on real estate investments concur on the universal factors that allow most properties to become profitable.

These factors vary in particular properties, however, where they are present, there is certainty in the potential return of investment on the property.

The first issue to consider when investing is the potential of the property to generate cash.

This in essence is the property's ability to provide cash for the investor through rentals.

Where rental income is the crux for the investment, an investigation of current policy on rentals on such property is a good start in the due diligence process.

This investigation is not intended to be a deterrent, but to allow the investor to use accurate figures in the cash flow projection phase.

A general knowledge on the rental cap in targeted investment localities is a prerequisite.

Avoiding properties that have high vacancy periods or tenant turnover will ensure that return and profit on investment is achieved at recommended period.

When measuring cash flow one must not ignore the expenses that particular property may incur.

These expenses may be maintenance costs, council or service charges and or interest payments on mortgages or loans.

A calculation that takes into account these factors will save investor from chasing after fantasies.

The second factor is to identify a property that has sufficient equity in it already.

By this the investor makes profit at purchase. This can be a rundown property which by the mere fact of dilapidation offers the potential investor sufficient leverage to negotiate for a reduction in price.

The commonly sought-after equity investment is a discounted property prompted by the seller's desire to dispose of the property quickly.

These properties in most cases offer the buyer a return on investment without the need for further improvements.

The equity may also be in its conversion potential, it is advisable to first carry out an investigation on the likelihood of conversion approval from the local authorities on particular property before one invests.

A good start will be to investigate on other properties in the same location that managed to acquire similar conversion rights.

The third factor is to identify new developments that might have quick appreciation rates.

These may be in contiguous locations to well developed areas thereby benefiting as associate areas.

As people can quickly identify with the developed area, it allows the associate area to exponentially appreciate according to its standard up to or above the average value of the developed areas.

The developed area's value is important for speculative purposes of what price value new development properties might attain.

The development does not have to be in close proximity to well developed areas to allow investor to benefit from exponential appreciation.

Each development is to be judged by its own merit. Property development can be a slow and tedious process making new developments susceptible to varying stages of on the ground individual property development.

Although one can speculate with new developments mainly with undeveloped stand prices, investing in new housing developments should be viewed as a 10-20-year process before the properties are all complete and average prices can be meticulously calculated.

The fourth factor is the most important, which is the calculation of risk in the investment.

It is trite in some investments that the higher the risk the higher the return, however, one must also ascertain that a sustainable fall back option is available in case the first option does not yield the projected returns.

Such fall back options may include rental options on the property or minimum disposal amounts that can allow one to break even.


The after tax equity reversion (ATER) refers to the net sales proceeds resulting from the sale of a property, after deducting taxes that may be due on any capital gains taxes that may result from the sale.

Vengai Madzima is a property investment consultant and analyst with Wisdom Properties.

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