Lagos 2-bed coastal rental: does 4.1% gross leave enough margin?

T

teaAndPath

Property investor
Established
The 4.1% headline yield is what makes this Lagos property worth examining, but it leaves little obvious margin for mistakes. The asking price is NGN 1,589,000,000 for a 2-bed coastal home, with projected rent of NGN 5,468,000 a month.

My calculation uses eleven occupied months and allows for management, ordinary upkeep and a separate fund for major repairs. I have not yet pinned down the actual insurance terms, estate or building charges, likely tenant turnover costs, or the full transaction expenses. The building looks sound, though that does not answer how coastal exposure affects cover or future premiums.

Which of those figures would most change your view of the purchase? I’m particularly interested in whether the quoted rent is supported by completed lettings and whether management fees increase when a tenant leaves.
 
The first warning is that eleven months of rent equals NGN 60,148,000, or roughly 3.8% of the purchase price before any operating costs. Starting from there, management, maintenance, insurance and property-related charges leave very little room. At this price, I would not rely on the 4.1% headline.
 
I’d investigate the building or estate service charge first. Ask for the actual amount, what it covers, whether any major work is pending, and whether the tenant or owner pays each item. A vague service-charge assumption can make the model look much better than the real cash flow.
 
Because it is coastal, a generic maintenance percentage may be misleading. Get separate estimates for exterior deterioration, waterproofing, cooling equipment and any shared infrastructure. Also obtain an insurance quote for this specific property rather than applying a percentage borrowed from a non-coastal home.
 
Also, is NGN 5,468,000 supported by an existing tenancy or merely an asking-rent estimate? The distinction matters more than fine-tuning the vacancy allowance. I’d want comparable achieved rents, the expected payment schedule and clarity on what the quoted rent includes.
 
On the numbers Oscar calculated, even modest recurring costs push the yield down quickly. I would build one version where the rent is lower and the property sits empty during tenant turnover, rather than treating eleven months as the only downside case.
 
Don’t combine acquisition costs with operating yield and then lose sight of them. Show both: annual net operating income divided by the purchase price, and the same income divided by the total cash invested after transaction fees. The second figure answers the actual capital-allocation question.
 
I agree with ayas that eleven months is not a complete vacancy model. One empty month every year is smooth on a spreadsheet; real turnover may mean no vacancy for a while and then a longer gap plus repairs and reletting costs. Test that lumpier outcome.
 
Ask for several years of service-charge demands and evidence of payments, not just the current figure. Then list separately any owner-paid utilities, security, shared-generator or infrastructure costs that apply to this particular building. Responsibility can depend on the tenancy terms, so assumptions need confirming.
 
Will this be financed? If so, model the loan separately from the property return. A thin unlevered yield can become negative cash flow once interest, fees and repayment timing are introduced. I’d also stress-test refinancing rather than assume today’s arrangement continues.
 
I’d use three cases: expected rent and costs; lower rent with longer turnover; and a repair year with both vacancy and a major bill. If the deal only works in the first case, the question is no longer whether the reserve is slightly light—it is whether the price is supportable.
 
There is another missing fact: what exactly has been verified about title, permitted use and outstanding property-related obligations? Those are jurisdiction-specific, so a Lagos property lawyer should confirm them. A sound-looking building does not resolve ownership or compliance risk.
 
The requested yield cannot be considered without the alternative use of NGN 1,589,000,000. At roughly 4.1% gross, this appears to depend heavily on appreciation or some non-financial value. If the thesis is rental income alone, the margin looks unusually narrow.
 
Following Luca’s point, separate the investment thesis into income, possible appreciation and personal use, if any. Don’t let hoped-for appreciation compensate silently for weak rent. If appreciation is essential to the decision, state that explicitly and test an outcome where the resale price does not rise.
 
Exit costs and time to sell deserve a scenario too. A low-yield property may still suit someone with a long horizon, but it is less forgiving if capital is needed unexpectedly. I would not treat the quoted purchase price as cash that can be recovered quickly.
 
You asked what net yield would compensate for the risk, but there is no universal percentage. What is clear is that the net yield cannot exceed a starting gross yield already near 4.1%. Set your required return first; if it is above the property’s realistic ceiling, stop rather than optimize assumptions.
 
What did “the building looks sound” involve? A viewing is different from a technical inspection. For the repair reserve, obtain condition-based estimates for the unit and shared areas, then note which shared failures can be charged to owners. That is more useful than one flat annual percentage.
 
I’d ask the manager how quickly comparable 2-bed homes actually turn over and what work is normally needed between tenants. The cost is not just lost rent: cleaning, repainting, minor repairs and any letting charge may arrive together.
 
A useful scale check: eleven months gives NGN 60,148,000 before expenses. Every recurring NGN 15,890,000 of annual cost removes one percentage point of yield on the purchase price. Put each confirmed cost into naira first; percentages can hide how little income remains.
 
That scale check is the heart of it. Once total annual expenses are known, subtract them from NGN 60,148,000 and divide by both purchase price and total cash invested. I would also show cash flow before and after financing so a loan does not get mistaken for a property expense.
 
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