The Life Cycle of an Estate

Some estate life cycles turn up very quickly, so that few years or even months separate the initial building and the final phase. In other cases, an estate may remain for several centuries in a single stage of its life cycle. It is impossible to indicate the average period for an estate life cycle to complete its revolution, but in the case of ordinary domestic buildings of traditional construction, a term of 60-100 years is usual. There are signs of, however, that with the increased pace of technological development, this period will tend to be shortened.

In the center of our older towns, there are many examples of estates which have passed through a series of life cycles, and successive buildings have been erected and later replaced, but more common is the estate which is now in some stages of its first cycle. A building reaches complete obsolescence or dies either when it is physically exhausted or when it is no longer economically worthwhile to keep it in use. In practice, the latter is usually the determining factor as the pace of physical obsolescence can be controlled by repairs and improvements, provided the economic incentive to carry the cost is present. A special case is that of a building of outstanding historical interest which may be preserved as a living fossil long after it might have been expected to perish.

While it is not possible to describe in detail the pattern of an estate’s life cycle, it is easy enough to indicate the main stages experienced by most estates that pass from initial development to renewal, and to describe the principal estate management problems relevant to each stage as follows

1) The pre-development stage.

2) The newly developed stage.

3) The middle life stage.

4) The old age stage.

5) The total obsolescence stage.

The Pre-development stage

The site available for development may either be one never previously built upon or cleared of its previous building. Land in this stage of expectancy tends to become neglected as the owner restricts expenditure on its existing use, whatever this may be, such as agriculture, market, gardening, car park, it must be noted that any investment on improvement must be written off as soon as development takes place. Consequently, sites awaiting development are often prey to nuisance and even when well fenced, may be subject to rubbish dumping, trespass, fly-posting and other similar afflictions. Where the pre-development stage is short, these difficulties are not serious, but when the length of this period is uncertain, effective management and use of the land may become impossible.

The Newly Development stage

When an estate is newly developed, it should fit its use in every aspect and so be unaffected by obsolescence. In practice, however, very few buildings even when new, meet this standard. For instance, imperfect planning, external changes that take place between the planning and construction stages and perhaps, slight defects in construction, all may introduce elements of obsolescence. Nevertheless, the utility of a building when new is usually greater than at any subsequent time. In the early years of life, obsolescence is likely to take place at a higher and regular rate as the advantages of being new and modern are lost. This will be determined, to a large extent by the speed by which comparable new and more modern buildings are erected, which force higher standards through competition. Occasionally, as in the case of speculative development that does not find an occupier, a new building may be obsolete as soon as it is completed.

The middle life stage

This is normally the longest stage in the life cycle and can be extended to last almost permanently. It begins as soon as the advantages of being new and up-to-date in the initial development stage have disappeared and the building settles down to its long term level of utility and value. Where the value of new buildings tends to be very much greater than that of older properties, however, the inducement to increase the pace of renewal can lead to a shortening in the average period of middle life. During middle life stage, physical decay is normally kept in check by proper maintenance and the annual decline in value due to modifications, extensions, improvements and perhaps, conversions which may be sufficiently major as to constitute virtual replacement and a recommencement of the whole life cycle.

The old age stage

The end of middle life is marked when the property begins to sink rapidly in status. It shows the outward signs of obsolescence like physical deterioration, adaptation to some poorer class of use than that which it it was designed, out of date fittings and equipment, and its remaining life becomes predictable. The problems of management at this stage are dominated by the short life remaining, which is usually less than fifteen (15) years. Fresh investments in order to improve the premises or even to maintain them in an efficient state for use becomes more difficult as the increase in an annual value likely to result is insufficient to provide a reasonable return on capital and sinking fund to replace the capital sum by the end of the investment life. In consequence, improvements and adaptations needed to maintain the estate are first limited and then neglected altogether. When this stage is reached, it is often the policy of an estate to restrict all expenditure to a minimum and to run down existing assets awaiting development. Where premises are leased, there is also the need to limit the grant of new tenancies so that the duration of their terms does not run beyond the date when development is contemplated. Tenants holding short interests pending development will usually have little incentive to maintain the property beyond the lowest standards of repair and physical condition, and may give rise to other management problems relating to its use and care.

Total Obsolescence

Firstly, the stage of complete obsolescence is reached when the old buildings and layout have little or no value as they stand. If all goes well, clearance and redevelopment follow quickly but there may be factors that prevent this. The first is that the site may have insufficient value to justify demolition of the old structures and its replacement by something new. In order words, the economic pressure may not be enough to propel renewal. Secondly the pattern of redevelopment may require changes in the size and shape of the site that cannot be secured at ones. This arises where comprehensive renewal is needed to meet modern traffic conditions and the existing small units of development have to be amalgamated for rebuilding purposes. In these circumstances, it is often necessary for individual obsolescent building to remain until the whole areas are capable of total clearance. Thirdly it happens that a building is totally worn out and judged by contemporary standard, is no longer fit for occupation. But because of the shortage of accommodation, it continues to command a use and income. It retains therefore, a value, sometimes, a high one, and is not strictly obsolete from an economic point of view, although it may be so regarded in social terms.

5 Essential Features That Make Real Estate Investing Profitable

Every now and then persons trying to make up their minds where to put their money ask me if real estate ventures are more or less profitable, compared to other businesses opportunities around.

My response is always that apart from its potential for yielding significant profits, investing in real estate often confers long terms benefits.

I discuss five such advantages below:

1. You Can Refurbish (to Enhance the Value of) Real Estate

After you buy a stock, you hold it for a period of time and hopefully sell it for a profit. The success of the stock depends on company management and their corporate success, which is out of your control.

Unlike other conventional investment instruments, like stocks, for instance, whose rate of returns, depend on third parties (e.g. company management), real estate investments are directly under your control.

Even though you will not be able to control changes that may occur in demographic and economic aspects, or impact of nature induced changes, there are many other aspects that you can control, to boost the returns on your investment in it.

Examples include aspects relating to adding repairs, or improvements/enhancements to the physical property and tenants you allow to live in it.

If you do it right, the value of your investment will grow, resulting in increased wealth for you.

2. Real Estate Investing, When Done Right, is Proven to be Profitable Even During a Recession (like the one we’re in right now)

It has on several occasions, been used to effect a bail out, from financial setbacks, such as those that many have experienced during the economic downturn happening in Nigeria today.

A considerable number of clients have confided in me that due to the present economic situation, they are not sure of profitable channels to invest their money. Some of them are done with bonds and treasury bills, but are in dire need of a new investment.

We had extensive discussions, and based on my expertise as a real estate consultant, I recommended landed property investment, as the most suitable and secure alternative channel of investment.

This is because, even if all businesses crumble, land will always appreciate greatly. Then to drive my point home, I ended by sharing the following apt quote, by a former American president:

“Real estate can’t be lost, nor carried away, managed with reasonable care, it’s about the safest investment in the world” – Franklin Roosevelt.

Not surprisingly, the client chose to take my advice – and signed up: it was the obvious, common sense thing to do!

3. Real Estate Investments Are Immune to Inflation

In other words, investing your money in ownership of viable real estate can protect you from the harsh effects that inflation usually has on other conventional investments.

This is because the value of real estate generally tends to rise in positive correlation with inflationary pressures. This is why property values and rental rates go up with rising inflation.

The nature of real estate, therefore affords owners the unique advantage of being able to adjust the rates they offer, to match inflation.

Monthly rents for example can be raised to compensate for inflation – thus providing a cushion effect against inflation induced losses that other monetary investments suffer.

4. Real Estate is Uniquely for Being Universally Acceptable as Collateral, Towards Securing Funding from Banks

Today, real estate in form of either building or lands, with proper titles (i.e. Certificate of Occupancy – aka “C of O”) is the most recognized and accepted form of collateral in Nigeria – and some other parts of the world.

It has the unique feature of being able to protect the interests of both the borrower and the bank (that’s doing the lending), so that funds can be released i.e. after due verification, and terms and conditions are agreed.

This is one of the key advantages a private C of O has over the global C of O, because the former (i.e. private C of O) is what will be needed by the intending borrower, in the event of any future financial dealings with bank in Nigeria.

5. Real Estate Investing Allows Use of Other People’s Money

In other words, you can do it even if you do not have enough money. You just need to know how.

This is possible because real estate is physical property or what is called a hard asset. That is an attribute that makes it attractive to financiers i.e. people with money to invest.

This is why many times real estate products are bought with debt – unlike conventional investment products like stocks which are NOT tangible, and therefore perceived as being more risky to invest in.

So real estate investment can be done using cash or mortgage financing. In the latter case, payments can be so arranged to allow payment of low initial sums, provided by you or a willing third party.

Those payments will be happening on landed property which will continue increasing in value throughout the duration of such payments – and indeed beyond. That further inspires confidence in the minds of those financing the acquisition, that their investment is safe.

Little wonder that real estate investing has continued to prosper for so long!

[A WORD OF CAUTION] The listed benefits notwithstanding, I still tell prospective investors that due diligence is a crucial requirement for succeeding.

Whether you do everything yourself or use industry professionals like me, it is imperative that you exercise caution and arm yourself with relevant information and education.

This is something I advice my clients to do all the time, so they can make good decisions in investing.

The importance of the above cannot be overstated, especially in Lagos where quite a number of individuals, have had their fingers badly burnt, because they failed to take the needed precautions.

My purpose is to help clients avoid having such horrible experiences, by bringing my years of experience in this field to bear in serving them.

References/Related Article:

[You can read about more advantages of real estate investing, in this excellent article I found at: http://realestate4investing.com/articles/real-estate-investments/10-advantages-disadvantages-real-estate-investments ]

Learn From Real Estate History: Markets Are Cyclical: 5 Important Factors

If we learn from the past, in a meaningful way, we would better understand, the history of real estate, should teach us, the housing markets, are, often, cyclical! There are up – markets, and down, ones, as well as periods, with a greater degree of balance, between these two. Most have heard references to buyers markets, as well as sellers markets, yet, it seems, people continue to over – react, to changing conditions, etc. It would, therefore, be beneficial, to better understand, some of the reasons, and driving forces, involved, in what makes these cycles, occur. With that in mind, this article will attempt to, briefly, consider, examine, review, and discuss, 5 important factors, and some of the potential impacts and ramifications, involved.

1. Interest rates: One of the driving forces, in the housing markets, is interest rates. These may be, market – driven, based on economic conditions, manipulated (for political purposes, etc), or, specific, to mortgage rates. After all, when one pays lower rates, for a mortgage, we generally witness, greater buyer demand, because, it’s possible, to get, more bang – for – the – buck! Lower rates mean, one gains the ability to buy more house, for his dollars, because the costs of his monthly carrying charges, is reduced. However, throughout history, these have lowered, and raised, and, often, dramatically impact the overall industry!

2. Overall economy: A good economy brings about a greater degree of confidence, because people, seem to believe, it’s a good time to buy! On the other hand, when there is economic concern, it affects the real estate industry, in a negative manner!

3. Consumer/ job confidence: The better the overall, job security, and consumer confidence, the better the housing market, responds. On the other hand, many people are cautious and concerned, during, either, actual, or perceived, down – turns, or, even, potential ones, and take a break, from looking for a house. The laws of supply, and demand, will either raise or lower prices, when either, sellers, or buyers, are in larger supply!

4. Pricing/ affordability: There’s often a point of diminishing return, when it comes to rising prices! When these rise too quickly (or perceived as, houses costing too much), many people perceive them, as unaffordable, and stay away, from the housing market. Obviously, that will bring about a price correction!

5. Real estate taxes: Areas with higher real estate taxes, often, have the greatest market swings, because, especially, since the tax legislation, enacted in 2017, which capped deductions, to $10,000, these houses, become more challenging to market, and sell!

The more you understand, and learn from the past, the better you will be prepared for future fluctuations! Will you become a smart home buyer?