OUR BLOG

How to Finance a Real Estate Project in the Nigerian Market

Admin

There are different methods of financing property development, and I will discuss some of them, particularly taking a look at their advantages and disadvantages. I have a table below that quickly compares different ways of financing real estate projects, but let’s learn a bit more about the different ways first.

Investors know that real estate is a safe and reliable investment, but because developing a property and investing in real estate requires significant amounts of money compared to other forms of investment a lot of people are often at a loss when it comes to getting finance. I will share a couple of methods people use to finance real estate, and hopefully, you will find them useful.

Self-financed Property Development

Self-finance is one way of financing property development, you use your money to start the building from scratch to completion. It could be a long process if you don’t have all the money at once. You start by buying land in the location of your choice that you can afford, getting the building plans and structural design prepared, followed by laying of the foundation, building the walls, roofing, etc. It might take months or some years before you complete your building.

Here are some advantages of self-finance

  • It saves you the stress of going through the bank loan approval process and other stress of providing the necessary legal documents
  • It eliminates all extra charges such as legal fee, insurance fee, and interest rates which can be as high as 23% in Nigeria.
  • The fear of being in mortgage debt for as long as 20 years won’t be there, you will not also worry about losing your home in case you are unable to make your mortgage payments.
  • With Self-finance, one also enjoys immediate and full ownership of the property.
  • You also avoid paying back any interest that has been compounded on your loan due to interest charged on previous interest plus principal.

Notwithstanding, self-finance comes with its own disadvantages. One of the disadvantages of using your personal saving is that you will be spending a lot of money, and also houses are not easily converted to cash, and it usually takes time to pull cash from them.

Using your own money to finance a building project may put a financial strain on your family and personal life. This can affect your cost of living; you should try to set aside an emergency fund; in case you need extra money to get through a difficult period.

Getting a Mortgage to build Real Estate

A mortgage is used either by purchasers of real property to raise funds to buy real estate, or alternatively by existing property owners to raise funds for any purpose while putting a hold on the property being mortgaged.

There are different types of Mortgages. Basically, the borrower pays interest on the amount borrowed. It could be a fixed rate mortgage where monthly principal and interest payment never change from the first mortgage payment to the last or it could be a variable rate mortgage. There are many institutions in Nigeria that offer mortgage loan, National Housing Fund (NHF), commercial banks, mortgage banks, Federal mortgage bank. Here are the benefits of mortgage loan

  • You become a landlord easily; With a mortgage, you can easily become a house owner because payment for the house is spread over a number of years
  • Although you might be paying a bit more for the mortgage, it is better than renting a house because you will become the owner of the house eventually.

Mortgages also have disadvantages and here are a few.

  • Because interest rates in Nigeria are very high (double-digit, unlike single digit interest rates in Europe or the United States) you pay almost 3 times more than you borrowed as the principal amount.
  • You pay extra charges in addition to the principal amount and the interest to be paid back, there are other fees that may look insignificant at the beginning, but add up to be quite a lot.
  • If the mortgage loan interest rate is variable, the rate and amount to be paid back become unpredictable if market rates keep increasing.

Joint Venture partnerships for Property Development

A joint venture is a strategic alliance in which different parties draw their resources together to complement one another in order to achieve more than what would have been achieved singly.

In a real estate transaction, it could be a synergy with the agreement that the financier would own the building for a stated period (within which he is supposed to recover his investment with a profit). After this period, ownership reverts to the landowner. This is called build operate and transfer model. Another instance is when the real estate development is shared by the partners for life (in a percentage commensurate with the value of their individual contributions).

Using a joint venture to finance real estate deals is a great way of achieving your goal when you are short of cash resources for a mortgage down payment or struggling to qualify for financing. However, one needs to carefully consider a joint venture option to make sure it is right for you.

This table compares different methods of financing property development.

Comparison of Different Methods of Financing Real Estate Development

  Nigeria Housing Society (NHF) Commercial Banks Mortgage Banks Self-Finance Joint Venture
Equity Contribution 30% 25%

20%

 

0% You contribute what to have e.g. Land, finance etc
Loan Tenor 30 Years 20 years 10 Years NA Get Immediate Value once the project is complete
Interest Rate 6% P. A 26% P.A 23% P.A. NA No interest but some part of the property has to be shared with the JV Partner based on an agreement

What is the Best Option?

All these methods are good ways of financing property development. They all have their good sides and shortcomings and the appropriate method would also be determined by the individual’s personal circumstances and goals.

Self-finance is great if you are sure you have enough savings to build the house of your dreams within a relatively short period of time, without turning it into an abandoned project.

A mortgage loan makes you become a quick landowner, but you have to pay back more than you borrowed plus extra charges. You could also lose your property if you run into financial problems and can’t make your mortgage payment.

At JV Pulse, our personal favourite is joint ventures. You use your available resources, thus you are not strained beyond your capacity. You are not burdened with interest payments, although you will have to give up a part of the property. With a partnership, you are able to achieve more within a short period of time.

We think Joint Ventures are great and hope you do the same. Let us know what you think

 

Photo credit: <a href="https://visualhunt.com/author/25a2ae">nattu</a> on <a href="https://visualhunt.com/re/a127bd">Visualhunt</a> / <a href="http://creativecommons.org/licenses/by/2.0/"> CC BY</a>

Photo credit: <a href="https://visualhunt.com/author/7e50a1">nikcname</a> on <a href="https://visualhunt.com/re/9e89d4">VisualHunt.com</a> / <a href="http://creativecommons.org/licenses/by/2.0/"> CC BY</a>

Photo on <a href="https://visualhunt.com/re/9e89d4">VisualHunt</a>

Photo credit: <a href="https://visualhunt.com/author/843719">jeffdjevdet</a> on <a href="https://visualhunt.com/re/a127bd">Visual hunt</a> / <a href="http://creativecommons.org/licenses/by/2.0/"> CC BY</a>