Investing in real estate in Kenya has a good reputation as a wealth-generating avenue bringing good returns. The great secret of earning good returns in real estate lies in understanding the fundamentals of real estate and focusing on purchasing the best.
But first, let us address the things that could cause you the biggest problems when investing in real estate in Kenya. To avoid any complications when investing in real estate, ensure you do things right – take no short cuts – and check the following:
- The validity of the title deed. This is a must and shouldn’t be taken for granted.
- The zoning of the property. Be aware of the zoning laws and take note of your target property’s zone.
- The land rates and taxes. Ensure that you know the status of land rates and taxes on the property you seek to acquire – paid or not paid.
- Caveats or pending disputes. Check if they are any caveats against your target property or any pending disputes on ownership.
As always, I will further emphasis on the importance of doing your own research. Save yourself the hustle and headache – just avoid being another case study. Be as thorough as you can be and glean the best advice before buying any investment property. Also note that just like any other investment, there are no guarantees. But, for those of you who prefer investing in tangible things, here are some important facts about investing in real estate in Kenya that you need to know.
Important Facts About Investing in Real Estate in Kenya
Some important facts about investing in real estate in Kenya that you need to know:
#1. Real Estate Makes A Good Retirement Investment
Investing in real estate is one of the best ways to secure early and safe retirement. If you are willing to invest years and patience, then real estate is the best way to build a steady source of retirement income. However, you’ll need to invest some time to build the knowledge, the skills needed and the guts to invest in real estate.
#2. Real Estate Offers Protection Against Inflation
Real estate investment offers the best protection against inflation. As inflation rises, so do property values and rents. This allows you to earn more over time and keep pace with the rise in inflation rates.
#3. Real Estate Has Tax Benefits
Investing in real estate has many tax incentives and benefits. Owning investment real estate allows you to make certain expense deductions such as insurance and mortgage expenses. Additionally, you can depreciate the cost of any income-generating property over time – which unfortunately can be recaptured upon sale and taxed as ordinary income.
However, when you sell an investment property, the profits on sale are taxed as capital gains, which is a much lower tax rate than ordinary income tax.
Learn more: How to Make Money in Real Estate
#4. Real Estate Builds Wealth
Buying real estate is one of the most efficient ways to increase your net worth quickly. However, it is important to note that it isn’t a get rich quick scheme either. It takes time and patience to build serious wealth with real estate.
#5. Real Estates Can Easily be Maximized Through Leverage
With real estate, you can easily use leverage to maximize you returns by putting less cash in each property investment.
Even with little to no income, you can leverage and build wealth with real estate. You can use bank money to acquire properties and your tenants pay your mortgage – which over time will enhance your equity in the market while the market value of the property increase.
Learn more: How to Create Wealth by Investing in Real Estate
#6. Real Estate Has Low Barriers to Entry
The barriers to investing in real estate aren’t as high as most people perceive. You don’t need an extraordinarily huge amount of money to invest in real estate – just the bare minimum down payment and the rest can be leveraged.
The other low barrier is knowledge. This can easily be overcome if you take the time to learn about investing in real estate. There is a lot of information out there – books, podcasts, seminars and so much more – most of which is free.
#7. The One Per Cent Rule
The one per cent rule states that the rent of your target investment property should be equal to or more than one per cent of the total purchase price. Real estate investors utilize this rule when analysing real estate investments, as any property that meets this will have a shorter investment payback period.
Here is how its calculated:
(Rent ÷ Purchase Price) x 100
i.e. (20,000 ÷ 4,500,000) x 100 = 0.4 (This property falls way below the one percent rule)
Note that this rule doesn’t account for property expenses that you may incur – i.e. loan, repairs, insurance and more. It also isn’t and makes of break benchmark for investors. It is quite useful though, as a screening tool and estimating cash flow of a rental property.
At the end of the day, everything boils down to your personal goals and criteria as an investor i.e. how well does the property fit your needs.
#8. Location is Everything in Real Estate
The price of an investment property and the rent it attracts is greatly determined by location. Appraisers consider location when determining a property’s value by comparing it with other similar properties in the same geographical area.
Therefore, if you don’t have much when it comes to buying an investment property in the best locations in the country, consider purchasing the worst property in the best location and upgrade it to meet the standards of the said location.
Learn more: How to Profit With Real Estate Regardless of The Economy
Tips on Getting it Right
- Ensure that you have a strong grasp of personal finance before investing in real estate. Do your research, read widely and get to know what successful real estate investors do.
- Network widely with other people who are investing in real estate. This will enable you to gather information and also provide some understanding of what it’s like to actually invest and own real estate in kenya.
- Do the math well – consider optimistic and pessimistic scenarios. If you are taking a mortgage to finance your buy, ensure you calculate how much profits you need without being above market price. Also, gauge how quickly you will be able to recover your investment. Note that property prices fluctuate depending on location and other unforeseen circumstances.
- Understand the types of property you want to invest in and the target tenant. Ensure you understand the intricacies of such an investment and also understand what your potential clients are looking for.
- Get to know your target location. Take note of the various amenities, transport, security, and the possiblities for growth of the area. Also, know the vacancy rates in the area and understand the local average rent rates.
- Have a cash reserve. Cash research will come in handy when unforeseen circumstances arise. Such times like during property purchase for hidden fees, initial unforeseen maintenance, repairs and other expenses in case there are no occupants or generally other unforeseen circumstances.
- If you decide to take out a mortgage to finance your purchase, understand the terms and the interest rate. Know the risks and find ways to mitigate them.
- Finally, decide whether you want to self manage your property or get a professional manager. Self-management is time-consuming but cheaper. Understand that you’ll need to set time aside to do repairs, conduct viewings and advertise for vacancies. Professional management offers access to a great network of service providers (i.e. plumbers, electricians etc) and potential tenants.
Real Estate Investment Options
Here we will only focus on the direct forms of real estate investment options that exist in Kenya. In direct forms of real estate investment, investors can invest in real estate by purchasing:
a. Residential property. You can purchase housing units i.e. apartments, villas, mansions, bungalows and more, then lease it out for dwelling purposes.
b. Commercial property. When the economy is doing fine, commercial real estate offers a more stable income. This is because lease agreements on commercial real estate are for longer periods and include a rent increments clause over the lease period.
c. Land. In Kenya, people mostly buy land for speculative reasons. They purchase the land with the aim to sell it later at a higher price and realize great returns. You can also choose to buy land and construct residential or commercial real estate on the land, for sale or lease.
Learn more: How to Become a Real Estate Investor this Year
Overall
For any time of investment, you should always do your research and plan for the worst-case scenario and devise an exit plan. Investing in real estate in Kenya (or any other type of investment in Kenya) is no different.
All in all, put your best foot forward and invest.
Happy Building!
Image credits: Top by Nataliya Vaitkevich via Pexels