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Friday letters are usually dedicated to taking questions from our community. Do you have a question for us? Please feel free to:
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- simply fill out this form. Don’t worry, your responses are kept anonymous.
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Question
Does REIT or traditional real estate investment make sense?
Answer
You don’t need to be physically in Nigeria (especially Lagos) to hear about the buzz around real estate in recent years. It shouldn’t come as a surprise as Land—properties included—is one asset that continues to appreciate with time.
It should interest you to know that there are several types of real estate investments. In this letter, we will be grouping them into two categories: traditional/physical real estate investments and non-traditional real estate investments or REITs.
The former, involves buying of land or property and the latter has you investing without owning a physical property such as REITs and crowdfunding platforms. Both categories have their pros and cons as we will see in no time.
What are REITs?
REITs or real estate investment trusts are companies that specialise in owning commercial real estate like offices and supermarkets. Investors buy shares of these companies listed on the stock exchange. The interesting part of this type of investment is that you can, to a good extent, mitigate the risks associated with owning real estate directly. It affords investors the opportunity to diversify their portfolio. Even the return on investment is pretty attractive, too.
Another benefit of REITs is that it offers more liquidity compared to other real estate investments since you can sell your shares on the stock exchange market when you need to. If you don’t have the time and can afford a stockbroker, this will also be a great option for you.
How about traditional real estate investments?
This type of investment offers a high return as well but usually requires large upfront payments when compared to REITs. In recent times, however, real estate companies have made it easier by permitting payments in installments but not without a cost. Let’s not forget the high ongoing costs and fees you might have to face. Finding a buyer when you need to liquidate can also be a challenge.
Now, do these investment categories make sense? It all goes back to your financial goals. If you are looking to invest for the long-term, going traditional should give you higher returns. If your goal is short-term, then REITs might be your best bet. This is not to take away from how good REITs are for long-term investments. If anything, they possess great qualities worth investing in for a long period of time.
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Question
Do you advise that one should buy stocks when it’s rising?
Answer
Every other day, thousands of people ask Google when the right time is to buy stocks. This shows that you’re not alone, and the good thing is, we are here to help. Stocks are simply investments that give you part ownership of a company and definitely a great way to build wealth. You buy shares of the said company with the hopes of making a significant return on investment. The next question is:
What happens when a stock rises?
When the stock of a company rises in value, it means that the value of your investment also increases and when you sell, you make profit asides from the dividend paid on those stocks. Imagine you bought a stock at N300 per share and it rises to N500 per share. When you decide to sell it (we always advise long term investments), you will be having a profit of N200 per share plus any dividends paid per share.
When a stock value rises, it means that investors are willing to pay more for it because they believe the company is doing well or will do well in the future. This can happen for various reasons, such as strong earnings reports, new developments like Reddit and Astera Labs, positive news about the company, or increased demand for the company’s products or services. Now to the elephant in the room.
Should you buy stocks when they are rising?
First things first, be clear on your financial goals. Will you be investing short- or long-term? Traders who have short-term goals would rather buy when the stock is low so they can sell when it rises after doing their research, of course. At MoneyAfrica, we also advise having a long-term investment strategy and here is one of the best strategies to hit your goals while staying grounded regardless of the volatility of the stock market.
It is a technique known as dollar-cost averaging. This approach requires that you invest a specific amount at regular intervals (once a month works fine) instead of stressing over what the market is doing every other day. This way, you will be buying at various prices which will average out over time.
Truth is, it can be difficult to know the perfect time to get into the market and this approach has proven to be an excellent way to do so. Instead of waiting to see how the market unfolds in the next 6 months, your best bet is to go in little by little but consistently. Pair this strategy with stock funds like ETFs (exchange-traded funds) to diversify your portfolio as this will serve as an added cushion for any significant fall in the stock market.
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