Owning a property is often perceived as a single financial transaction, the property’s purchase price.
However, this simplistic viewpoint misses the complexity of real estate investments.
Here’s why…
The true cost of owning a property encompasses a wide range of expenses, many of which are often overlooked during budgeting.
In this comprehensive article.
We’ll explore the hidden and ongoing costs of owning a property in Nigeria, providing clarity for potential homeowners and real estate investors.
The Property Purchase Price
The purchase price is the most visible expense in real estate transactions.
For instance, if you buy a property for ₦50 million, it’s easy to assume that this is the total cost.
However, the actual cost is far higher when you consider additional expenses like:
Transaction Costs
When purchasing a property in Nigeria, several transaction costs are involved:
- Legal Fees: These include fees for drafting and reviewing contracts, verifying the property title, and registering the property in the buyer’s name. Legal fees often range between 5% and 10% of the property’s value.
- Agency Fees: If you use a real estate agent, expect to pay a commission, typically 5% to 10% of the purchase price.
- Stamp Duty: This is a government levy for legalizing property documents, usually calculated as a percentage of the property’s value.
- Mortgage Processing Fees: If you’re financing the purchase with a loan, banks charge processing fees, which can be around 1% to 2% of the loan amount.
For a ₦50 million property, transaction costs can easily add up to ₦3 million to ₦5 million, making the effective purchase price closer to ₦55 million.
Mortgage Costs
In Nigeria, most property purchases are financed through mortgages.
While mortgages make owning a property accessible, they introduce additional costs.
- Interest Payments
Mortgages are structured to collect the bulk of interest payments in the early years of the loan.
For example, if your monthly repayment is ₦500,000, approximately ₦400,000 could go towards interest in the initial years.
Throughout a 20-year mortgage, you might pay double or even triple the original loan amount in interest alone.
- Notional Interest
In addition to the interest paid to the bank, there’s an opportunity cost tied to the down payment.
For instance, if you pay a ₦10 million down payment on a property, this money could have been invested elsewhere to earn returns.
The forgone earnings from this investment are part of the hidden costs of property ownership.
- Property Insurance
Mortgage lenders in Nigeria typically require landlords to insure their properties.
This protects the lender’s interest in case of damage or loss caused by disasters.
Additionally, many landlords opt for contents insurance to protect valuable belongings within the home.
Insurance premiums depend on the property’s value and the level of coverage but can range from ₦50,000 to ₦200,000 annually.
Taxes
In Nigeria, property taxes are levied by state and local governments.
These taxes are calculated as a percentage of the property’s assessed value and are payable annually.
For example, in Lagos State, the Land Use Charge combines property tax, tenement rate, and neighborhood improvement levy into a single payment.
The rate depends on factors such as property location, size, and usage, and it can range from 0.076% to 0.5% of the property’s market value.
For a ₦50 million property, this translates to annual taxes of ₦38,000 to ₦250,000.
Maintenance Costs
Owning a home requires ongoing maintenance to preserve its value.
Maintenance costs can be categorized into three areas:
- Structural Maintenance
This includes repairs to the building’s structure, such as fixing roofs, plumbing, or electrical systems.
Unexpected repairs can run into hundreds of thousands of naira annually.
- Shared Amenities
In gated communities, property owners contribute to the maintenance of shared facilities like swimming pools, gyms, and security systems.
Monthly service charges can range from ₦20,000 to ₦100,000, depending on the level of amenities.
- Landscaping
Maintaining gardens, lawns, and outdoor spaces adds to the cost.
Hiring gardeners or landscaping services can cost between ₦10,000 and ₦50,000 per month.
Utilities and Furnishing
New landlords often overlook the cost of setting up utilities and furnishing their homes.
- Utilities
Transferring utility connections like electricity, water, and waste disposal to your name involves registration fees and deposits.
In this case, monthly utility bills can range from ₦20,000 to ₦50,000, depending on consumption.
- Furnishing
Furnishing a property to make it livable can be expensive.
From basic items like beds and sofas to appliances like refrigerators and air conditioners, furnishing a home can cost anywhere between ₦500,000 and ₦5 million, depending on preferences.
Inflation and Rising Costs
Property-related expenses such as taxes, maintenance, and utilities often rise with inflation.
Over a 10- to 20-year period, these costs can significantly increase, making long-term budgeting essential.
For example, if property taxes rise by 5% annually, a ₦50,000 tax bill today could reach ₦100,000 in 15 years.
Hidden Costs to Watch Out For:
- Security
In many Nigerian neighborhoods, property owners contribute to private security services.
Which may range from ₦10,000 to ₦50,000 monthly.
- Legal Disputes
Property ownership in Nigeria sometimes comes with legal risks, such as disputes over land titles.
Resolving these issues can incur significant legal fees.
- Depreciation
While land typically appreciates, buildings depreciate over time.
Renovations and upgrades are often necessary to maintain or increase property value.
Cost of Land Survey and Valuation
Before purchasing a property, a land survey and valuation are often required to confirm the property boundaries and estimate its market value.
- Land Survey: This ensures there are no disputes over property boundaries.
The cost may vary based on the property size and location, ranging from ₦50,000 to ₦500,000.
- Property Valuation: Valuation is necessary when securing a mortgage or calculating property taxes.
Professional valuers charge fees based on a percentage of the property’s value, usually 0.25% to 0.5%.
Renovations and Upgrades
Many properties require renovations before they become livable or meet the buyer’s preferences.
Common upgrades include repainting, fixing plumbing and electrical systems, and installing modern fixtures.
For this reason, renovation costs can range from ₦1 million to ₦10 million, depending on the property’s condition and the desired upgrades.
Professional Fees for Consultants
For larger properties or complex transactions, property owners often hire consultants, such as engineers, architects, or project managers.
- Architect Fees: Architects charge between 5% and 10% of the project cost to design a home or modify an existing structure.
- Project Managers: Overseeing construction or renovation can cost an additional 2% to 5%.
These fees add to the total cost, especially for custom-built properties.
Environmental and Waste Management Levies
In developing areas, local governments often impose environmental levies for waste disposal and sanitation services.
These levies range from ₦10,000 to ₦50,000 annually, depending on the neighborhood and services provided.
Additionally, gated communities might have separate fees for managing waste and keeping the environment clean.
Future Expansion Costs
Many homeowners in Nigeria plan for future expansions, such as adding extra rooms, building a boys’ quarter, or constructing rental units.
Such expansions can cost millions of naira, depending on the scope and materials used.
If you are planning for future developments, it gonna add to the overall cost of property ownership.
Risk of Fraudulent Transactions
Real estate fraud is a significant concern in Nigeria.
To mitigate risks, buyers often spend extra money on due diligence.
- Title Verification: Confirming the authenticity of property documents with the relevant land registry costs between ₦20,000 and ₦100,000.
- Legal Support: Engaging a reputable lawyer for title searches and dispute resolution can cost up to ₦500,000 or more.
These preventive measures, while necessary, increase the overall cost of purchasing property.
Income Tax on Rental Properties
For buyers who plan to rent out their properties, income tax on rental earnings is an additional expense.
In Nigeria, rental income tax rates range from 10% to 20%, depending on the property location and rental amount.
Homeowners must also budget for property management fees if they hire a company to oversee tenants and maintenance.
Conclusion
Owning a home in Nigeria is a complex financial undertaking with a wide array of associated costs.
By understanding and accounting for these costs, you can make informed decisions, maximize your investment’s potential, and enjoy a smoother property ownership journey.