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Why your “house” is not an investment

How should you see #investments? Can a #house be considered as one? Find out

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  • Generally, Nigerians regard all house owners as successful and rich people – a notion that is not likely to change anytime soon.
  • It is a common belief that your landed property is a major means of investment for you, but sadly, it isn’t always the case.
  • This article will inform you on the type of houses/buildings to be considered as viable sources of investments and those which are not.

An investment can be seen as money spent on capital goods and services which in turn yields profit over time. A house is a physical structure that is usually built for the purpose of providing comfort and shelter. In Nigeria, getting a house built is a herculean task that could take years to complete. Some, who are not that lucky, end up abandoning the building project. This may sound strange, but it is a fact that a housing property is not an investment. On the surface, it may seem to be one, but under close scrutiny, one will discover that it is not.

Let’s look at the various reasons for this fact.

Depreciation

DEPRECIATION IMAGE

A building loses value with time; this is known as depreciation. Same cannot be said for the land on which it is built. The depreciation is a result of the effects of age (wear and tear) on the structure. For example, a house built in the 80s can no longer retain the same value it had during construction.

[ALSO READ: 10 Actions That Can Make You a Successful Investor]

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Remember, there is what we call time value of money. If you built the house with the sum of N1.2 million then, that same house may be valued at say N4million now, but considering the value of money then, it should have been much higher.

What it means is that the house has depreciated in value due to the passage of time. The value of the naira has depreciated by more than 150% over the years. Moreover, if you sell your old house today, your selling point is the plot on which the house is built and not the actual building itself.

Income generation

is a house an investment?If you live in your own house presently, it will at best help you conserve some money due to the fact that you won’t be paying rent anymore. Though the cost of acquiring a house has comparative advantage over payment of rent, it does not mean that the house is a source of income generation.

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The truth is: it will take quite a couple of years for the total sum of money used in building a house to be recouped, and that by that time, the house must have depreciated in value. Considering that most of the rent collected in the house is used in maintenance and servicing loans acquired for building it, the house will not be termed as an income generator.

Input Recovery is Impossible

HOUSE AS INVESTMENTUnless you wish to sell off your house within a 10 year window, you will not be able to recover your input as long as you are the one living in it. This can be attributed to two major factors:

  • Depreciation of structure
  • Fall in the purchasing power of the currency (especially in Nigeria)

If you consider the twin issues of depreciating structure and fall in purchasing power of the naira, it will be very evident that houses built for self-purpose rather than for rent or business cannot be said to be an investment platform. They are simply for comfort or pleasure rather than a means of creating wealth over time.

One must not confuse investment and asset at this point in time. The land, on which the structure is built, is an asset, which appreciates over time, while the building can also be regarded as an asset, because it can be used in accessing loan facilities. Unfortunately, when it comes to the issue of investments, a house you built for the sole purpose of accommodating your family cannot be regarded as an investment.

Since the structure is not on rent, you will not recover the money you have used in building the house. Such money is classified under consumption and not investment. It is only in real estate, that money spent in erecting a structure is classified as an investment or input. The money spent in building industrial structures like banking houses, store houses, warehouses, hospitals and restaurants can be classified under capital investment, because when they begin operations, they are able to recover the total costs of erecting such structures.

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There is a whole lot of difference between these 2 types of structures – one is for personal use, while the other is for business purposes. The former is not an investment, while the latter is an investment that usually yields dividend over time depending on the nature of business it is being deployed for.

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Impact of location on value of a house

house as investment

The actual value of a house can be impacted negatively or positively depending on the location and type of land where the house is built upon. A house built on a water logged land that is located in the remote part of a town can never be termed as an investment; this is due to the negative impact such environmental factors will have on the face value of the house.

A house that is built on an erosion-prone area also has similar drawbacks and it is difficult to place such houses under the categories of investment portfolio. So many houses built in erosion-prone and flood-prone areas have been abandoned due to the deteriorating states of the houses which have become a hazard in itself and the safety of such individuals can no longer be guaranteed.

There have been numerous cases of houses that collapsed due to the negative impact of the land on which such houses were built and the location of such houses. In such cases, the houses cannot be termed as investments due to losses incurred.

[SEE: 10 quotes that would help you invest better]

ILLUSTRATION: A friend of mine bought a house in 2013 at the value of N6.3 million and immediately put it under the care of a real estate agent, who made an agreement with an oil servicing company to use it as a housing facility for their staff. They entered into a 2-year agreement and the contract sum for that tenure period was N5.2 million.

What it meant was that within a 4-year window, he would have recovered the cost of purchasing the structure and made sufficient profit to cover agent fees and maintenance cost. In this case, his house can be classified as an investment platform.

Other than this, majority of houses in Nigeria are simply not investment platforms, as they depreciate over time thereby creating an additional burden on their owners as they become an annual overhead cost item rather than a means of getting steady income.

From the above, one can say that a house can be clearly classified as an investment asset and a safety net depending on the circumstance but that term cannot be used for all houses. This is why, before you erect a building, you have to be sure what purpose the building will serve.

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[EXCLUSIVE: 10 Actions That Can Make You a Successful Investor]

BEWARE: This article was earlier published in 2017 and has purposefully been revamped for public education –on July, 2019.

Chacha Wabara-Ogbobine is a Legal practitioner with over 9years post call experience. A research Consultant, professional writer and a blogger at heart,owner of four thriving websites with well over 10years of experience. Totally in love with keeping fit and coaching weight loss enthusiasts. I love my quiet time, being with my kids, watching TV series for hours on end.

Companies

ABC Transport to raise N1.4 billion through rights issue

ABC Transport Plc has secured the approval of its shareholders to raise additional capital through a rights issue.

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The Board of Directors of ABC Transport Plc has secured the approval of its shareholders to raise additional capital through a rights issue from existing shareholders.

This disclosure was made by the board of ABC Transport in a notification issued by the Company’s Secretary, Onyekachukwu C. Chigbo, after announcing shareholders’ resolutions at its 27th Annual General Meeting (AGM), held on Friday 27th November 2020.

According to the information contained in the notification, the rights issue is N1.4billion, which could be raised via the issuance of shares and debt securities as determined by the Directors of the firm.

However, the rights issue is subject to the approval of regulatory authorities.

What this means

A rights issue is an invitation to existing shareholders to purchase additional new shares in the company. This type of issue gives existing shareholders the “rights” to purchase new shares at a discount to the market price on a stated future date.

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However, shareholders are not obligated to exercise this right.

In this regard, the company may decide to use the additional capital raised from these offerings to existing shareholders to acquire assets, make a take-over, repay debts or save itself from bankruptcy.

This is expected to strengthen the company’s balance sheet, free up capital for the management to execute revenue, and profit optimizing projects, plans, and strategies.

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What you should know

  • It is important to know that the board decided to raise additional capital after it had secured shareholders’ approval to increase the company’s authorized share capital from N1billion to N2.5billion by the creation of 3billion additional shares of 50 kobo each, ranking pari-passu in all respects with the existing shares in the Company’s equity.
  • In this regard, clause 6 of the Company’s Memorandum of Association and clause 5 of the Articles of Association respectively, will be amended to reflect the increase in the Authorized Share Capital.
  • This amendment will be done by deleting the words, “the authorized Share Capital of the Company is N1billion divided into 2billion ordinary shares of 50 kobo each,” and substituting therewith the words “the authorized Share Capital of the Company is N2.5billion divided into 5billion ordinary shares of 50 kobo each.”

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Stock Market

GTBank, Nigerian Breweries, CAP drop, investors lose N42 billion

The market breadth closed negative as AIICO led 19 Gainers as against 22 Losers topped by NNFM at the end of today’s session.

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Nigerian Breweries brings the Bears to party, Investors down N20.5 billion 

Nigerian bourse ended Wednesday’s trading session on a bearish note.

The All Share Index dipped lower by 0.26% to close at 35,056.82 points as against the 0.30% gain recorded yesterday. Its Year-to-Date (YTD) returns currently stands at +30.60%.

  • Nigerian Stock Exchange market capitalization now stands at N18.323 trillion. Investors lost N42 billion in the mid-week trading session.
  • Nigerian trading turnover at Wednesday’s trading session, however, printed positive as volume ticked by 19.72%, as against the 25.83% drop recorded on Tuesday.
  • ACCESS, FBNH, and ZENITHBANK were the most active to boost market turnover.
  • The market breadth closed negative as AIICO led 19 Gainers as against 22 Losers topped by NNFM at the end of today’s session – an unimproved performance when compared with the previous outlook.
  • CAP leads the list of active stocks that recorded an impressive volume spike at the end of today’s session.

Top gainers

  1. AIICO up 9.90% to close at N1.11
  2. CUTIX up 7.14% to close at N1.8
  3. UBA up 5.49% to close at N8.65
  4. STANBIC up 3.90% to close at N44
  5. MAYBAKER up 2.94% to close at N3.5

Top losers

  1. NNFM down 9.67% to close at N6.26
  2. NB down 7.05% to close at N56
  3. CAP down 6.98% to close at N20
  4. GUARANTY down 2.57% to close at N34.1
  5. FLOURMILL down 2.17% to close at N27

Outlook
Nigerian Stocks ended the third trading session for the week on a bearish note.

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  • Selling pressure was significantly seen in blue-chip stocks like GTBank, Nigerian Breweries, CAP, Flour mills, as investors began a significant amount of profit-taking across the market spectrum.
  • Nairametrics envisages cautious buying, as institutional investors reduce some of their long positions amid growing uncertainty playing out in Nigeria’s currency market.

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Currencies

New CBN Circular: CBN confirms only Banks can pay IMTO dollars

CBN issues update on how dollar transfers from friends and family living abroad should be paid

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Forex: U.S dollar gains strength, global geopolitical climate worsens

The Central Bank of Nigeria has issued an update to its recent circular on the management of remittances from diaspora Nigerians. In a circular posted on its website, the apex bank instructed banks to transfer all diaspora remittances to the domiciliary accounts of the beneficiaries or pay the customers in foreign currency.

On payment of foreign transfers

  • It also clarified that the choice of how the money should be paid, whether transfer or dollar cash withdrawal is the choice of the beneficiary of the remittance.
  • The circular also instructed the IMTOs to ensure the foreign currency is deposited into their corresponding deposit money bank accounts. It also confirmed banks are to pay the dollars to the beneficiaries either via transfers to domiciliary accounts or in cash.

In another circular seen by Nairametrics but issued to deposit money banks, the CBN closed all Naira ledger accounts opened specifically for the purpose of receiving IMTO (foreign transfers from diaspora Nigerians) with immediate effect.

What this means: This spew of circulars follows another one issued on Monday by the apex bank which effectively instructs banks to pay foreign remittances in dollars and no longer in naira.

  • This move has strengthened the exchange rate in the black market with the dollar selling for N470/$1 before weakening again to N480/$1 in the evening of Wednesday.
  • Analysts, including Nairametrics, believe the series of circulars by the central bank is aimed at reducing the disparity between the black market and official I&E windows.
  • According to the theory, if more Nigerians are able to sell their dollars at the rate that they want then this could create more liquidity thus reducing the exchange rate disparity.

What you should know: Before now, inflow through IMTO such as Western Union was paid to beneficiaries in Naira. However, the CBN now wants this payment to be made in dollars.

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