Topical Feature: Property Flipping – The Dynamics of Real Estate Trading
Real Estate traders specifically buy properties for a short period of time i.e. for 3 to 6 months thereafter hoping to sell them for a profit. The term that is normally associated with real estate trading is that of “flipping”. Flipping properties entails buying property that is considered undervalued or property that is considered to be in a hot market zone and then selling the property within the same calendar year.
There are two types of flippers worth noting – the pure flippers and the value flippers. The difference between these two different flippers is based on what they do with the property once it is purchased.
Pure flippers will not put any money into a property for renovations. This just means that the property is intrinsically undervalued and in a short period of time its value is expected to draw closer to its true value thus the flippers are able to realize a profit.
Value flippers identify opportunities in properties that can be added value through renovation. They spend time and energy on making the renovations to the property and through the value add to the property they hope to sell the property on the market at a profit.
Benefits to Flipping:
Profit attraction – one of the most obvious reasons to flip property is to make profit. The attraction to flipping is making profit relatively quickly as compared to waiting a long period of time.
Experience – flippers most certainly gain a wealth of knowledge on the real estate market. The value flippers especially gain knowledge on the tastes of potential buyers during the renovation process. Generally, since flippers want to make returns quickly, time management is important and these skills go a long way in identifying future flips and how long it would take to turn them around and make a profit. Other valuable skills gained are task delegation, negotiation skills (make the best profit at the lowest cost) and budgeting which can be used in all types of businesses.
Risks to flipping:
It’s a gamble – every potential reward is subject to some risk. As stated earlier, flipping can potentially make you a lot of money, fast, but it can also lose you a lot of money equally as fast. What normally happens in flipping is that most flippers purchase properties through auctions and foreclosures. This means that they did not have adequate time to go through the property and identify potential problem areas. Once the property is purchased, unanticipated expenses may be incurred as more attention is placed on it. These expenses could lower the potential good profit expected.
Property offloading – as a flipper if you are unable to offload the property quickly then you will incur holding costs. For a flipper, it normally makes sense to use pure cash when purchasing property but not everyone has large amounts of readily available cash – so most flippers take up a mortgage. This means that the flipper will continue paying the mortgage whilst they hold a property that is ready for sale and as such will be losing money.
Habits of Highly Profitable Flippers:
Global Trends
Commercial Real Estate Technology Companies
A new trend in real estate is the Commercial Real Estate (CRE) tech companies that have changed the way people invest and fundraise. This has brought about renewed enthusiasm in real estate investors especially those in real estate trading. CRE companies are set to have an impact on four major areas in real estate investing:
- Leasing data and workflow platforms
- “Open source” data exchanges
- Advanced analytics platforms
- Online marketplace solutions
The immediate impact of CRE tech companies is apparent as there is an evident shift from outdated systems – such as the archaic tools of real estate trade and simple excel sheets – improving efficiency and boosting competition in the market. How this will benefit the real estate market is that there will be a greater emphasis on the use of better tools to analyze real estate data, improved visibility of the market and also increased mobility of resources. Technology advancement will also improve on the CRE professional’s ability to make effective, quick and timely decisions in their real estate business.
The growth of the CRE tech industry is apparent as seen by the more than doubling of the amount fundraised by these tech companies over the past 2 years (First half of 2014 and 2015). At this point, CRE tech companies are the next big thing in the real estate market and we should expect a strong performance in 2016.
Below is a list of the current largest Commercial Real Estate Companies and their major investors.
Crowdfunded Real Estate
This is a trend that is hot right now, especially in the US after there was a change in federal laws in May 2016 which opened up the concept of getting money back into crowdfunded investments. Before the federal law changed in May 2016, only accredited investors (who earn at least $200,000 a year) could participate. However, it has now opened it up to investors who can put up an investment capital of as little as $1,000 towards a real estate project.
Crowdfunded investments are still in its infancy globally but it is already having a huge impact on the way individuals find and invest in properties. Based on sourced data in 2014, North America continues to hold the largest share of the crowdfunding real estate market. Residential real estate crowdfunding projects dominate the market in line with the real estate market meeting the expected significant global population growth.
How crowdfunding works is that it allows investors to invest a minimal amount of money into a real estate project and the investors will get an agreed upon amount of money back from their investments or a percentage of the profits if the projects are successful. Some crowdfunded real estate sites boast 8% to 14% return on investment capital of as little as $1,000. However, it should be noted that crowdfunded real estate investments are a new and risky area that people should only enter into only if they are willing and able to risk losing their entire investment.
Kenya Trends
Diaspora remittances to drive the real estate market
The duly released data on diaspora remittances showcased a steady increase in diaspora remittances into the country.
Remittance inflows grew by 2.3% in May 2016 up from a growth of 1.7% in April 2016. The important connection between this growth and the real estate market growth is that a good portion of these remittances are invested in the real estate market. Specifically, property between Ksh 5 million to Ksh 15 million is a star attraction for Kenyans in the diaspora who are looking to eventually relocate back into the country.
Diversification into the real estate market set to drive supply
Kenya’s Sameer Africa group is looking to launch a real estate arm by using its land holdings to build several real estate projects such as a modern office block, shopping mall and a hotel.
Logistics Company, Express Kenya in May 2016 announced that they will spend close to Ksh 2 billion to construct its first phase of housing projects in Nairobi’s Industrial Area. The first phase of the project is expected to be completed in 2 years and will boast 224 apartments on 3.5 acres. At the end of this phase, the company should have constructed close to 1,200 residential units on a total of 15.75 acres in the Industrial Area.
This is a signal that non-real estate companies are looking to diversify into the real estate business and exploit the apparent opportunities. Currently, two other non-real estate companies – Car & General and Eveready Kenya – have diversified into real estate so as to supplement earnings from their main business.
Statistics on the Kenyan Real Estate Market
According to popular real estate site Lamudi, these are the current trends in Nairobi over the past two weeks:
Interest Rate Watch
T-bills rates have had an upward trend over the past 3 weeks following the announcement of Brexit late June 2016. It has also been noted that there was a decline in T-bill yields as subscription rates stagnate at around 50% due to lack of demand.
An increase in T-bill rates is normally followed with an increase in mortgage rates which could limit the demand for real estate in the market as most investors purchase property with a mortgage.
Market Data (Weekly Average)
