Lagos 2-bed at NGN 1.372bn: does the rent justify the risk?

E

ezra.crane

Property investor
I would like the 2-bed Lagos country home to work as a rental, but the margin may be too thin once financing and operating costs are tested properly. The price is NGN 1,372,000,000 and the expected rent is NGN 7,250,000 a month, or NGN 87,000,000 a year. That produces a gross yield near 6.3%.

The building looks sound from the information available. I have included vacancy, management, routine upkeep and a reserve for a major repair, but insurance, service or estate charges, security and landlord-paid utilities could still alter the result. Changes in rental regulation are another uncertainty.

My next checks are evidence that NGN 7,250,000 is achievable, a clear list of what the tenant pays, and several financing and vacancy scenarios. Which local expense would you stress-test most heavily, and how would you decide what net return compensates for these risks?
 
Before choosing a target net yield, confirm what the NGN 7,250,000 actually includes. Who pays any estate or service charges, utilities, security and common-area costs? Those items can turn a plausible gross yield into a weak net result if the landlord carries them. I would also want evidence that this rent is achievable rather than simply the asking figure.
 
The annual rent arithmetic is right, but 6.3% leaves limited room for uncertainty. On NGN 87m gross rent, hypothetical total operating deductions of 15%, 25% and 35% produce yields of about 5.4%, 4.8% and 4.1% respectively before financing. That range is more informative than selecting one vacancy percentage.
 
I disagree that there is a universally acceptable net yield here. An unleveraged buyer comparing this with other uses of NGN 1.372bn may judge it very differently from someone borrowing. What financing assumptions are in the model, and is the yield being calculated against purchase price alone or the full amount required to complete and prepare the property?
 
Grace’s point about total cost is important. Add every acquisition and initial preparation expense to the capital base, even if you do not yet know the final amounts. Separately, avoid counting the same tenant turnover risk twice: a vacancy allowance plus repainting, agent fees and other turnover costs can overlap unless the model defines each line clearly.
 
The missing detail for me is the phrase “rental regulation.” Which possible change are you worried about: restrictions affecting rent, collection timing, termination, or something else? Each has a different cash-flow effect. Rather than adding a vague regulatory discount, model the specific consequence—lower collected rent, longer vacancy, slower recovery of the property, or higher administration costs.
 
Helpful points. The NGN 7,250,000 is still an expected figure, so I’ll treat it as unproven until I can establish the tenant’s total occupancy cost and who carries the recurring charges. I’ll also rebuild the return using full acquisition and preparation cost, then separate ordinary vacancy from turnover expenses. For regulation, I need a locally informed explanation of the actual exposure rather than a general risk premium.
 
That approach is better. I would request a line-by-line schedule of recurring charges and recent repair history, then stress the rent downward as well as the expenses upward. Also test one unusually long empty period instead of assuming vacancy arrives neatly every year. Cash flow is often more vulnerable to timing than the annual average suggests.
 
Insurance deserves its own investigation rather than being buried in maintenance. Establish what cover is available, what is excluded, and whether the insured value reflects the relevant rebuilding exposure rather than the NGN 1.372bn purchase price. Property-related taxes and charges should likewise be confirmed for this exact property and ownership structure, since broad Lagos estimates may not fit it.
 
One more distinction: a large repair reserve is not the same as funding routine replacements. If the building is sound today, it is still worth listing components that eventually wear out and assigning timing scenarios. Otherwise a single generic reserve can look conservative while missing a cluster of costs in one year.
 
Financing sensitivity could decide this even if the operating estimate is accurate. Run the deal unleveraged first, then add the actual proposed borrowing terms and test changes in debt cost, repayment burden and delayed rent collection. If it only works with continuous occupancy and stable finance costs, the apparent 6.3% gross yield is not providing much protection.
 
I’d turn the remaining work into three numbers: verified annual rent collectible by the landlord, realistic annual operating cash outflow, and total capital committed. Then keep a separate downside case for turnover, a major repair and the specific regulatory concern. The required net yield is personal, but it should clearly beat the alternatives available for the same capital after allowing for the extra concentration and management burden.
 
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