A couple of years ago, various developers thought that it was a great idea to build houses for young bachelors and bachelorettes. However, on the sale of the constructed units, very few young people showed interest in the buying homes. They built these single-family homes, which are mainly detached homes, bedsitters and studio apartments.
As much as these young people are focused on owning large spacious homes and buying Subaru’s, the reality is these single-family homes can be very good investments even though they are not initially designed as cash flow machines.
With this single home unit costing between KES 400,000 – KES 700,000 and renting for KES 6,000 to KES 15,000 depending on factors such as geographical location. It is important to note that with the single digit inflation rate and interest rates capped at the current levels and rental income increasing by 5% every year – this makes these single-family homes great investments.
Best Monetization of Single Family Homes
Single-family homes are best monetized as a primary residence for someone to live in. This, however, provides various problems as it can be very difficult to profit significantly from rent, as single-family homes as primary residence priority is not entirely highest and best use for it.
Potential Rent Problems
♠ Occupancy within single-family homes is a problem because there is only one person covering the rent, raising potential problems for default thereby potentially eliminating all cash-flows – the aim is to have 0% vacancy to make good money on this type of property.
♠ Single-family homes have low capitalization rates – basically, the cost of purchase of these single-family homes relative to rental rate is much less.
For instance, for the above-mentioned homes, suppose we rent out a KES 400,000 home for KES 12,000 per month. Deduct all costs such as taxes on property, insurance, property management costs, maintenance fees which gives you the net operating income for the unit – lets approximate these costs to KES 1,500 per month. The net operating income then will be KES 10,500 x 12 (to get the yearly rate) = 126,000. The cap rate will now then be KES 400,000 /KES 126,000 = 3.17, this is lower than 10, making it a very unattractive investment.
Exploring Other Ways to Make Money from Owing These Homes
Already we have established that these homes are a cash cow, how much more money can you make from these single-family homes. So if you were to transform this into an even bigger cash-flow machine – it is important to retain this asset as is – that is a single family home.
They might be more liquid than most real estate investments and there might be many prospective buyers for them. As such, here are some of the other ways you can make money from these units:
Student Housing
You can convert these units into student housing if the property is near a university – to do this successfully, you will need to furnish the house with the basics.
Other factors that you may need to consider to successfully do this are:
♠ Timing (university calendar year).
♠ Parental co-sign lease agreement to reduce the risk of default.
Vacation Rental
Taking into account the location, vacation rentals can fetch a prettier penny. Renting by the night through Airbnb or for any other use which can earn you quite a lot by the night compared to the normal rental rate. Vacation rentals normally earn much more. Costs to consider over an above the normal costs incurred on the rental property include:
♠ Nice furniture to get more views and bookings
♠ Utilities over an above the standard water, electricity, and security – these are cable TV and internet which can be quite expensive.
The cap rate for this should be double than the normal, making it an even more viable investment. The advantage of this arrangement is that you will never have to worry about evictions and legal stuff.
Rent to Own
This is where the tenant pays an upfront non-refundable option payment. To set this up, tow documents are needed a lease document and an option to purchase the property at a specific price when they move in.
How you make money from this –
1 The upfront non-refundable option payment – option fee which is a percentage of the home value that will go towards the down payment at the end of the term.
2 Savings on maintenance costs – which you push onto the tenant (beware of landlord-tenant laws in Kenya though)
3 Raise the rental income – tenant will pay a fair price for monthly rent but must also pay a rent premium.
For instance, for the KES 400,000 house, with the rent of KES 12,000 per month. The lease options by the numbers will be as follows:
Lease option by the numbers
| Lock in Purchase at market value | KES 400,000 |
| Less | |
| Option Payment (up-front non-refundable 5% of asset value) | (KES 20,000) |
| Rent Premium (KES 5,000 x 24 months, assuming the length of the option contract is 2 years) | (KES 60,000) |
| Cash out Price of | KES 320,000 |
Note: Two possible outcomes from this kind of arrangement:
1 If you don’t want to sell and actually do exercise the option to rent to own – you would have sold the house at a higher price than the market value anyway.
2 They do not exercise their option to rent to own, they would have paid you higher rental income above the market rate anyway- hence machine ends up being a serious cash cow.
Why is this great deal? The target market for these kinds of arrangements are for people who have no access to bank credit and as such, will take whatever options they have to actually own a home.
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