Due diligence

I am looking to possibly buy a studio apartment in the Port Bouet area of Abidjan to let on a daily basis. It is close to one of France’s largest military bases in Africa, making it a good place to stay for westerners concerned about safety and political turmoil. Or at least that’s the idea and how it worked out during the anti-French riots in 2004.

It is however difficult to foresee exactly how things will work out in the future, so investment decisions will have to be taken at some degree of uncertainty. Clearly not thinking through or not reasearching an investment properly is a danger, but trying to answer every single “what if” can be a waste of resources and time, especially in a not so stable and fast changing business environment.

If I get a good price on the Port Bouet studio I’ll go for it, given that it passes a few due diligence checks. One of which is to check that the lady who is selling it to me is really the owner, and to do this:

(1)  the title document provided by the seller needs to be checked against the land registry and
(2) a photo id of the seller should match the seller in person, and the name on the photo id should match the land registry

That’s how it is to make business in a low trust environment. The extra checks are actually not that costly or complicated, but they take a little time though, as they can’t be done by phone or email.  One needs to to go to the ministry of construction where the land registry is located and queue there until one gets access to the requested information.


The Issue of Trust

A useful model to for dishonesty/trust in people can, I think, be made by dividing up people in three groups:

(1) Those who can act dishonestly regardless of risk/rewards, ie the Bernie Madoffs of this world.

(2) The majority who are capable of acting dishonestly if the risk/rewards are right.

(3) Those with very strong integrity that are honest even when the incentives stacked in favour of dishonesty.

The risk can be said the be the probability of getting caught multiplied by the consequences of getting caught. An example of a low risk situation would be to take home cheap office supplies like a paper or notepad from work. The risk would increase if the co-workers share an informal code of ethics saying that theft of office supplies is not ok, both by the probability of getting caught increasing, and by the informal punishment of being frowned upon which can be more severe than a formal punishment.  If management is perceived to be dishonest, and treating employees unfairly and badly, it is unlikely that a strong code of ethics among the employees will develop.

Put in the context of the Ivory Coast, there is a weak rule of law meaning that the risk of getting caught – at least for white collar crime – is reduced, and while formal punishment can be severe it is relatively arbitrary.  Trust throughout the society is lower, possibly due to a weak rule of low being in place for a long time and an unaccountable government (management) not perceived in a very good light by the population.  While I don’t think tolerance for violent crime or theft private persons’ property is higher in the Ivory Coast than elsewhere, tolerance for corruption and white collar crime appears to me to be greater than in more developed countries, thus reducing the severity of the informal punishment of such crimes.

The reward is the utility of the dishonest act for the person that commits it. It is linked to wealth, or rather to the relation between the utility of a person’s wealth to the utility of the dishonest act.  The rewards for the same dishonest act are much greater for a poor person than for a rich person.

In conclusion, the people of group (2) in the Ivory Coast have a different risk/reward ratio compared to developed countries – much more tilted towards dishonesty causing doing business there more challenging. I guess the family business model has an advantage in this type of environment – the family trust replaces the weak trust in society.

In a developed country with a functioning legal system, the greatest concern for a business is to avoid group (1).  In a country like the Ivory Coast, focusing on setting the risk/reward ratio right within the company becomes more important, and the distinction between group (2) and (3) becomes relevant.  Having a company entirely made up of group (3) staff would be a really big competitive advantage. The question is just how to find such people. I can spot them after spending a lot of time with them, but it seems very difficult to spot them over a job interview.

The Vision/Mission thing

A blog has the advantage of making you  express thoughts and ideas in written form often making them clearer.  I believe goals and challenges benefit from being expressed explicitly, so here it goes:

Short term goal:

  • Before the end of 2010, make at least 1000 EUR per month in passive income from African real estate.  And I am going to use a pretty loose definition of passive here, meaning not more than a couple of hours a week to check on things, not including time spent to research new investments.

Within 3 years:

  • Have a monthly passive income from real estate and other sources  that matches my net monthly inflation-adjusted day-job salary as of today.  This is basically about having the freedom to decide over my own time.


  • Travel the world during a multi month period living off passive income. Travel is more of a pleasure than a challenge really, but for this to work the passive income needs not only to be large enough but to be reliable enough.
  • Get to know and meet other people who live off passive income or run businesses that do not require much of their time, and who possibly also are perpetual travellers. I have read plenty of blogs of such people, but actually never met any in real life. That has to change!
  • Visit 100 countries. Last time I checked I believe I was at 72.  Counting countries is a great excuse for going off the beaten path and have great experiences one wouldn’t have had otherwise. Admittedly it can go too far, but I’ve been counting since my early teens so I’m not going to stop now.
  • Branch out and make a real estate investment in at least one country other than the Ivory Coast, probably Ghana or Senegal.  It increases diversification, and gives me a reason to travel around a bit and visit old friends.
  • Visit Berkshire Hathaway’s annual meeting while Warren Buffett is still captain of the ship.

Long term goal:

  • Making my little real estate venture into a real business with triple digit numbers of employees and properties, but that is after having thoroughly enjoyed not depending on a day job and travelling the world for quite a while.

I’m feeling wildly optimistic at the moment and can’t really understand why I didn’t start this earlier. There will certainly be trouble in the Ivory Coast but I don’t think it’ll hurt the business long term, the way to see it is that socio-political crisis are good buying opportunities! It would be a bit of a bummer if the CFA Franc was devalued, especially after a big investment,I’ll admit that, but it should still be recoverable.


The daily rental mystery

To sum up the previous post, I think it can be a very good business to be in the quartier populaire part of the market with a trusted local partner. I don’t exactly know what problems can arise or how big they will be, but I’ll try it with the piece of land in Yopougon and see what happens.

Another thing that looks promising, but which I haven’t tried yet is to rent per day to temporary visitors.  This doesn’t sound too much like passive income, but an employee can be hired to manage it, and there are management companies that do this kind of work.

Rentals made on a daily basis seem to only exist in the nicer part of Abidjan, and prices are in the 25 – 60 EUR per day range including the cheapest hotels. It doesn’t seem possible to find per day accommodation cheaper than 15 EUR, and even if there are no backpackers to speak of, I still think there is a demand for 10 EUR per day accommodation. I’d really like to know why it isnt offered on the market.  My theories on it:

(1) Letting accomodation per day is essentially being in the hotel business, and there could be so many rules and regulations and taxes making it unprofitable to rent at 10 EUR per day.  However, if this was the case there should have been people offering cheap daily rentals in the informal sector, and I have not seen that.

(2) There really is no demand, people who can afford to travel and rent on a daily basis, want to pay more for a nice place to stay.  On the other hand, I stayed for a while in a building where the apartment next to mine was rented daily at about 30 EUR/day, and there were frequently groups of people of 5 or 6 or so staying in apartment next door sharing the rent and filling up the floor with mattresses.

(3) Nobody wants to stay in a poor neighbourhood, and if you offer a daily rental in a well-off neighbourhood you have no reason to offer a lower price as there will be sufficient demand at a higher price.  Well, there are greyzones between well-off and not so well-off areas where a lower price should make sense.

(4) Nobody has thought about making more money by offering lower daily rents yet. After all, it took a while before low cost airlines emerged.

If point (4) is the case it would be nice to rock the market by offering low cost daily accommodations, but I am thinking it might be a combination between (1) tax/regulations (2) limited demand and (3) too small/few not-rich not-poor greyzone areas.


No Grunge

Residential real estate prices in Abidjan range from extremely low in the slums or “quartier precaires” as they are called, to several million Euros for luxury villas for an elite comprising of maybe 0.5% of the population.  In between there is a middle class comprising maybe 5%-15% of the population that have formal jobs, are successful small scale entrepreneurs – often in the informal sector – or have relatives in a developed country sending money, and can afford rents in the 80 – 500 Euro range.

Quartier precaire in Abidjan

Below the middle class, there’s the majority of the city’s population living in “quartier populaires” They make a living in the informal sector or have low level formal jobs, often living in walled courts with with one-story buildings that cater for the extended family and not uncommonly animals.

Additionally, there are areas where many Europeans (mostly French) live such as Zone 4/Bietry, which are in the gap between the middle class and the super-rich.

As a buy to let investor the question is which part of the market to aim for.

The slums can probably be excluded as the dwellings there are commonly not set up legally, and risk being torn down by the authorities. I may be wrong, but I don’t think the inhabitants of the slums pay any rents.

The super luxury part of the market will have to be excluded as well, at least at this time.  I don’t have the funds to buy here, and maybe one could buy land and have a luxury villa built but even that is too expensive I believe. Either way, people who can afford a luxury villa usually own it instead of renting it, so the rental market is limited. However, there could be exceptions such as foreign ambassador’s residences. I know a guy who owns a nice villa in Conakry, the Capital of Guinea, and rents it to the ambassador of a Scandinavian country. Conakry is a very different place compared to Abidjan though, and I think I’ll stay out of the super-luxury segment.

The building is an upper range hotel in a nice part of Abidjan

My first house is in a middle class area and the gross rental return is 12% which is not bad.  Returns could be a bit lower today as prices have gone up more than rents. One advantage of the middle class segment is that tenants often get their income from Europe in Euro, making the rents and value of properties a bit more shielded against a devaluation of the local currency the CFA Franc.  The CFA Franc has a fixed peg to the Euro at 655.9 : 1. In 1994 it was devalued by 50% and that might happen again.

A rule of thumb is that wealthier tenants are more likely to pay the rent and not to cause trouble. Because of this landlords demand higher risk premiums in poorer areas and consequently returns in the quartier populaires is higher than in the middle class areas. A higher devaluation premium also plays in.  Still, I don’t think these two factors explain the whole difference in returns. I speculate that there is some sort of behavioural bias going on. Ivorians who are wealthy enough to invest in real estate have, I think, often a desire put a barrier between themselves and poverty and prefer to deal with better off areas if they can. Coming in from a northern developed country, African poverty seems pretty alien and nothing that could happen to you, but for the local residents it’s another story.  An example of the same bias is that Africans who can afford to dress well, also do dress very well with very few exceptions – the way you dress becomes a status/class marker in a country where not everybody can afford nice clothes.  Grunge was never a hit in West Africa.  It’s the same thing in the real estate market, locals who can buy property in nice neighbourhoods, prefer not to deal with poor neighbourhoods.

This would seem like a good opportunity for westerners to invest in the quartier populaires, but alas, that is very difficult to do as the asking price would shoot up dramatically when the seller sees that the buyer has white skin and is presumably very rich and has poor knowledge of the neighbourhood. These areas are a bit like many small villages next to each other, and it is difficult to do business there unless you have some connection to the people living there, and it is even more difficult if you are a white European or North American.

The piece of land mentioned in the previous post is in a quartier populaire area, and I intend to let my local partner deal with it entirely.


Current Situation

The current situation is that the sum total of the micro enterprise/business I’m running comprises two properties. The first one, is a two-floor house in a well-off part of the Cocody municipality of the commercial capital of the Ivory Coast, Abidjan.  It provides  an annual gross return of 12%.

The idea behind this investment was:

Good value – Property prices were depressed due to political tensions, riots and actually war back in 2002, but could be expected to revert back to a higher level, so I deemed it a good time to buy.
Potential home – I wanted a place nice enough to live in someday, however, it was intended for rental income from the start.
Minimise risk – It is not without fear that I bought that house – when saying that I was thinking about buying a house in West Africa some people thought that I had fallen for a Nigerian email scam. It would probably have been cheaper to buy land and have a house built on it, or buy an older house, but all those things could have gone wildly wrong. So I opted to buy from a large well-reputed developer that builds and sells  many houses of the type I bought.
Get experience – Learn as much as possible about real estate business in the Ivory Coast – learning by doing is hard to beat.
Corner location – Buying a corner house allowing for a good location for add-on shops.
Return – While minimising risk, still getting a much better return than I would have gotten from a property investment at home in Europe. And I think doing business in Africa is strikingly more exciting than back home.

And in hindsight it has worked out pretty well. Going to my bank at home in Europe and transferring the purchase amount to the Ivorian developer’s bank account in the Paris branch of a Lebanese bank was a pretty scary moment, but thankfully I got ownership of the house without any problems.  Guess the main hiccups and mistakes have been:

-That the contract with the main tenant was signed before constructing the shops. I had to wait with the shops for a while and then made a deal with the tenant not to raise the rent at one year end in return for building the shops.
-That a builder stole the floor tiles (they were worth an annual salary for him). A few friends tracked him down and we sorted it out by him giving the tiles back and us not going to the police with it.
-The main tenant missing a few rental payments, but catching up.

This house is at the moment a pretty simple business, the rental income has since the start essentially been equivalent to net profit, not counting the time I have put into it, which has felt more like an enjoyable hobby than work. The balance sheet has no debt and is 100% equity of the size of the value of the house and the shops.   The only paperwork has been to sign the contacts with the developer and the notary at purchase, and the letting agreements with the tenants. The tenant for the main house, and the tenant for one of the shops were found via the ads at www.abidjan.net – a portal for all things Ivory Coast. The other shop tenant saw the shop under construction and expressed interest on the spot.

The second property is a piece of land in a not so well-off (but no slum) part of the Yopougon municipality of Abidjan.  The land was originally  was given to my  partner as an inheritance. This is a bit of a free option to try out and see how difficult it is to work in a not so well-off area and to manage construction. At the moment we’ve got a wall built (that’s very necessary) a gate, and water and electricity pipes / connections for 480 Euro. We have decided to build six studio apartments on the property.

I’m expecting each studio to rent for 20,000 CFA Francs (30.5 EUR) per month, which on paper at least should give a fantastic return. We’ll see how it goes.


Features of the Real Estate market in the Ivory Coast

The residential real estate market in sub-Saharan West Africa in general and in the Ivory Coast in particular, have some key features that are quite different from developed countries, namely:

Few mortgages –   Most houses are bought outright with 100% equity.  One model is that the buyer pays the developer in instalments over a multi-year period while the house is being built.  Mortgages do exist but are rare.  I checked with a local bank and the interest rates were in the 13%-15% range reflecting a high risk premium due to I’d say ultimately weak rule of law and possibly the probability of devaluation of the currency, the CFA Franc which has a fixed peg to the Euro.

High rental returns (on paper at least) –  Gross annual rents are in the range of 10% – 15% of the purchase price. The worse the neighbourhood the higher the return it seems.

Low salaries – People can be employed for 100 Euro a month which is great for passive income, but maybe less great for the country. Nevertheless I don’t think one should be ashamed of investing in Africa and hiring people for 100 Euro a month – it really helps economic growth and doesn’t twist incentives as aid money has a tendency to do.

Tax – There is a tax on real estate ownership, and on lettings – all pedagogically explained in a video clip at website of the Ivorian Tax Authority (http://www.dgici.com/). It’s basically 4% of the gross annual market rent for owner occupied properties, and 15% of the gross annual rent for lettings. However, in practice, very few people pay this tax and enforcement is a bit tricky as people are likely to protest or even riot against any attempt to collect the tax. It is perceived – correctly I’d say – that very little of the tax money comes back in form services to the people and that the bulk of it will end up in the pockets of tax officers and politicians. I think most of the Ivory Coast’s tax revenue come from custom duties – just as was the case for Western countries up until the beginning of the 20th century (US tax revenues graph) – and I’d say a not insignificant part of the tax revenues and benefits from government privileges/monopolies go to the luxury consumption of an elite group of politicians, public officers and well connected businessmen.

Weak Rule of Law – There is a land registry that seems to work reasonably well. It might have happened, I have never heard of cases in which a property has been stolen by the fraudulent change of ownership in the land registry. However, I have heard of several cases where the same property has been sold to multiple buyers, and of terrains where the ownership I disputed. The problem is so bad that property ads for land sometimes include “non-disputed” as a selling point. In any case, in a dispute with a tenant, seller or developer, what the law says matters, but unfortunately bribes and political connections do also matter.   Worse, if the local municipality decides to mess with you (charge arbitrary taxes, demand bribes, require permissions for this and that) there is not much one can do unless one has political connections. Hence business discussions/disputes – I have seen this a few times – can morph from discussing who is right to who knows the most powerful politician. I have known an Italian lady who ran a hotel and a restaurant on an island which is part of Senegal’s capital Dakar. She had two local authorities, each claiming she should pay tax to them and not to the other. She said that she in total paid more in bribes/tax than she would have paid tax in Italy and that difference between a bribe and tax was pretty nebulous.  She had registered the restaurant business, but never managed to register the hotel business due to complex bureaucracy and seemingly never ending demands for bribes.



Ok, I have been thinking about starting a blog for years, but haven’t really found a good focus until now. Inspired by lifestyle design blogs (such as Tim Ferriss, Chris Guillebeau, The Ren Men Show), and investing/business blogs (Epic business life and love stories Contrarian Edge) this blog will chronicle my possibly rocky path to set up a stream of passive income by investing in real estate in mainly the Ivory Coast while having fun and enjoying moving away from mainstream life choices.

As long as I keep my day job I’ll stay somewhat anonymous, but I am still very open to interact with readers. One of the purposes of this blog is to get in contact with interesting people!