Real Estate Investment, Finance and Appraisal
This domain tests appraisal techniques, yield analysis, financing routes and the risk profile of property as an asset.
Appraisal tools
Net present value, internal rate of return, payback and profitability index. Discount at a rate reflecting risk and the cost of capital. Yields: initial yield (net income over price), reversionary and equivalent yields; the ARY links income to capital value. Leverage works both ways: positive gearing when return exceeds the mortgage rate, negative gearing when it does not, and lenders test debt service cover.
Finance in Nigeria
Equity, commercial mortgages, mortgage banks and the Federal Mortgage Bank, pension funds investing under PenCom guidelines, SEC-registered REITs, syndication and corporate debentures. Remember the transaction costs that drag returns: agency, legal fees, stamp duty, consent fees and capital gains tax.
Worked example
Invest N50m today; net income N6m a year for five years; sell at N60m at the end; discount rate 10%. Annuity factor 3.7908 x 6m = N22.745m; present value of 60m = 60m/1.61051 = N37.254m; total N59.999m; NPV approximately N10m. The IRR therefore exceeds 10%, so accept, subject to sensitivity and liquidity considerations.
Traps
Discounting nominal cash flows at a real rate; ignoring capital expenditure and taxes; confusing income yield with total return; assuming property is liquid; forgetting the cost of consent and registration in the exit calculation.