Looking for a venture that is a perfect fit for someone can be quite a daunting task. However, in recent years, one particular venture has been gathering quite a lot of interest. Real Estate Investments could be termed as the current honey-pot of investments in Kenya. This article takes you through what you need to know about investing in real estate in Kenya.
With an adequate understanding of this market, it is quite possible to reap the benefits of investing in this market. Being a venture in which in most instances the market value appreciates, real estate investing is a great way to get monthly income, have a steady cash flow and amass wealth if only one is keen and smart enough.
Real Estate by definition, refers to land along with any permanent improvements that have been made to the land, natural or man-made. Buildings, roads, utility systems, structures and resources all form part of real estate. It is a kind of property.
Real estate is immovable which is why it is considered real property as compared to personal property that can be moved. Real estate property can be bought or sold for a vast number of purposes. It can be a place to live, a place for farming, a place for a commercial business or an investment.
There are five common types of real estate property.
1. Residential property
This is any real property that is strictly and privately for residential purposes. It is a real property that people call home and live in. This kind of real estate includes family homes and houses, multi-family rental properties with four or fewer units and condominiums. The sale of existing homes and apartments as well as the construction of new ones also falls under this category.
2. Commercial Real Estate
This refers to any real property that is for-profit. It is the real property used strictly for business and generates income and some cash flow for the owner or the person with a lease. This includes apartment buildings, retail spaces, office spaces and buildings, gas stations, shopping centres, strip malls, restaurants, hospitals and any other for-profit properties.
As long as the property generates some income, then it is a commercial real estate property.
3. Industrial real estate property
This refers to property used for industrial purposes. It is property used for manufacturing, production and storage. While this may qualify as commercial real estate due to the factor of income, the production aspect makes it a different type.
The storage and distribution aspect of this property is what is considered commercial real estate. Factories, mines, warehouses, power plants and any other industrial infrastructure are considered industrial real estate property.
4. Raw land
This refers to a broad spread of property including vacant land, timberland or agricultural land. Vacant land is undeveloped property. Raw land is land that has not been touched, and little to zero improvements, cultivations and building has been done on it. It is less expensive than developed land and it is more flexible. It is upon the owner to decide what to use or convert it to.
5. Special purpose real estate
These are real estate properties that are for public use. They include government-owned properties and public areas such as parks, schools, libraries, cemeteries etc. They also include places of worship.
These properties have specific uses and limited purposes but fall under commercial real estate considering the aspect of income being generated.
Novice or not, there are several basic rules that you must follow, to maximize on success rather than the failure of your real estate venture. You’d rather stop trying to invest in real estate than fail to follow these basic principles. Your success is based on your discipline. The rules are as follows;
B. The Basic Starter Pack
Research is a basic, yet crucial aspect of any business venture. In real estate, research critical pieces of information such as location and market. Learning how to research location can make or break your future.
Remember that all businesses grow and real estate will always need land for expansion. Stable market demand for your real estate property will also be determined by location and marketing strategy. You can opt to conduct surveys or talk to experienced entrepreneurs who may have started something similar before for more information. Look for a friend or relative who has been in the venture for some time. They will provide invaluable information.
Research on jargon of real estate such as occupancy rate, gross rental multiplier (GRM), debt service coverage ratio (DSCR), and many others that will always influence your business.
2. Have a strategic business plan
A business plan is a document that lays out in detail a company’s objectives and how it plans to achieve its goals. You can only draft a good business plan after carrying out in-depth research on the, as explained above.
This business plan will help you come up with solutions to possible problems that you may encounter in the future. Aside from that, it will help external and internal audiences of your real estate business to understand and see the benefit of working with you. In simple words, having a business helps your brand look credible to investors and all other related audiences.
Depending on the kind of real estate you want, startup capital will require a generally accepted minimum of Ksh. 5M. The higher the capital, the bigger your investment, and relatively, the higher your profit margins.
This capital value is not fixed, as it depends on your market and investment strategy. Consider your sources of finance, location, and the type of property you want to invest in.
4. Legally register the business
Once you have followed steps 1 and 2, you need to register your new business. You need to walk up to your nearest Huduma Center, where you will be guided on how to legally register the business.
Obtain a KRA pin/certificate. Landlords that fail to pay taxes regularly are constantly nabbed and fined huge sums of money. It is therefore important that you pay your taxes to avoid unnecessary problems.
One big obstacle that is likely to hamper your real estate career in its first few years is convincing people to trust you with the largest investment of their lives. This will be influenced by the kind of branding you choose, the mode of advertisement and the kind of broker you associate yourself with.
5. Build your brand/business
People must find out about your business. You, therefore, have to use a good marketing strategy. There are several marketing channels that you can decide to use. They include Google Ads, TV station advertising, and using billboards and print media.
On large-scale real estate, TV Station ads prove to be the most effective marketing strategy, as they will probably attract serious customers.
Remember, it is important to establish your online presence, most preferably through a clean and well-designed website. There is no denying that most traffic will come from social networks and therefore, you should make your business available through all social media platforms.
6. Study about Cashflow (Robert Kiyosaki Guide)
In your race to acquire real estate and make a considerable profit, study about the theory of cashflow, by Robert Kiyosaki, as this will help you lead a successful financial real estate business.
Information provided by the real estate multimillionaire is invaluable. This option is not as critical as the previous four, and thus optional to you.
C. Math Formulas in Real Estate
Learning a few basic math principles won’t hurt. Ignorance will make customers, brokers and real estate agents take advantage of you.
1. The 1% Rule
Your monthly rental income should be equal to or greater than one per cent of the purchase price of an investment property. The formula below will help you determine if you are following the 1% rule.
(Rent ÷ Purchase Price) x 100
For example: Take an investment property that costs Ksh. 3M, and rents for 20,000 per month:
(20,000 ÷ 3,000,000) x 100 =0.6%
This property deal has failed to achieve the rule, and thus an investor will automatically reject this deal, and look for one that satisfied the stipulated rule.
2. The 50% Rule
Your gross expenditure on the property purchased should be at most, 50% of your gross rental income. Expenses include insurance, taxes, repairs, property management fees and reserve funds.
For instance, if your business generates KSh.3,000,000 per year, KSh.1,500,000 should go into the expenses mentioned above.
3. Gross Rent Multiplier (GRM)
GRM = Property Price ÷ Gross Rental Income
This formula provides a quick way of assessing if your investment will yield profit in future, in scenarios where market conditions change.
For example, a property purchased at Ksh. 3M, and an estimated gross annual income of Ksh. 0.24M, the Gross Rent Multiplier will be as follows:
Ksh. 3M ÷ Ksh. 0.24M = 12.5 GRM
In this example, it will take a little over 12 years for rental income to pay off the purchase price of the real estate property.
4. Occupancy rate
This formula is based on how many days a real estate unit is occupied by a tenant. Logically, it is most profitable if all units are always occupied. However, this is not possible. An investor should therefore ensure that the property acquired should aim for the highest occupancy rate.
Occupancy Rate = (Total No. of Occupied Units ÷ Total No. of Available Units) x 100
For short-term rental;
Occupancy Rate = (No. of Days Occupied ÷ 365 days of a year) x 100
5. Debt Service Coverage Ratio
This calculation is used to assess cash flow, and establish if a property will generate enough cash flow that will pay off all debt that was accrued during the establishment of the real estate.
DSCR = Net Operating Income ÷ Debt Obligation
In a property with a net operating income of Ksh. 0.4M, and a debt obligation of Ksh. 0.34M, the calculation is as follows:
DSCR = 0.4 ÷ 0.34
DSCR = 1.17x
A property with a DSCR of more than 1x is considered profitable.
D. Laws and Community Considerations
1. Validity of the Title Dead
Ever heard of land fraud? Several Kenyans have lost millions in cash, after being conned by people claiming to be selling land. Fake title deeds facilitate this form of theft. The steps for proving authenticity of a title deed will be stipulated in a subsequent article.
2. Zoning of the property
You should be aware of zoning laws and take note of your target property’s zone.
3. Land rates and Taxes
Article 209 of the Constitution of Kenya allows the National and County Governments to levy taxes and charges that will help raise revenue. The National Government imposes a value-added tax (VAT) and customs duty among others while the County Governments may impose property taxes, entertainment taxes etc., as allowed under an Act of Parliament.
4. Caveats, cautions and pending disputes
People protect their interest in the property through Caveats and Cautions. Any person that claims a contractual or other rights over real estate may lodge a caution or caveat under the Registrar of lands. More about this at www.begislaw.com
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Thinking About Becoming A Real Estate Agent Instead?
Below are the basic requirements for the career path.
Real estate is an attractive profession because one gets to be their boss. Realtors work as independent contractors. Among the myriad pros that come with this independency are deciding on your number of working hours, working from home or a place of your choice, and setting your short-term and long-term goals by yourself.
However, this independence is not as juicy as it sounds because as much as you’ll reap the successes all by yourself, you’ll also bear the burden of losses/mistakes by yourself.
Real estate is a niche that is yet to get saturated and here is what you need to know before starting the journey to become a successful Realtor.
Learning about Real Estate
You should endeavour to take courses on real estate or estate management to better know the industry that’s if you don’t know what real estate pertains.
Understanding real estate will help you manoeuvre the market.
In addition to getting certifications in various courses, you will need to get a license that will enable you to practice as a realtor. Getting this license needs you to pass a licensing test; another reason why you should take a course. This license will also have to be renewed after a certain period.
Select the firm of choice
A new real estate agent needs to look for a good brokerage to work with. A brokerage is a firm you intend to work with. The firm should be the type that shares your values, and goals, and will place you in a position where you’ll easily take off as a realtor. This firm will be your platform to gain experience in the real estate market.
Come up with the blueprints
You need to come up with a business plan which will serve as your guiding system and allow you to evaluate your progress. Drafting a business plan yearly will show you your strengths and weakness and you’ll be able to correct where you fell short in the previous business years.
Birds of a feather flock together
Having like-minded individuals in your business circle and working hand-in-hand with them to do business can help you to become successful. As a result, endeavour to attend events such as conferences, seminars, and webinars which will help you network with the professionals in the real estate business.
Identify a chaperone
Get yourself a mentor in addition to having a network of like-minded individuals with whom you’ll work. Have a mentor who will chaperone you in making the right decision and avoiding mistakes. The wealth of experience that comes with a mentor will let you know more about the advantages and disadvantages of the real estate business and how you can overcome hurdles to achieve success.
Endeavour to market yourself as soon as you venture into the real estate business. Inform the populace about what you do. Start with your family, friends, and colleagues. They might refer you to potential clients once they know that you’re a realtor. Hesitate not to ask for referrals when you start getting clients, especially after a successful job.
Know a thing or two about the various niches in real estate. Having a major area of focus will give you an edge in the business. As soon as you find a lucrative business niche which appeals to you, focus on that niche passionately until you become a professional in that field. By doing this you’ll be charting your path to becoming a consultant in that niche when you become well-recognized in it. This will ultimately help you to grow in the real estate business.
Money your Central Lodgepole
If you wish to successfully run your business, have a budget that will cover your various expenses. Once you begin to generate income from your business niche, endeavour to set some of your income aside as savings for unforeseen future purposes. This will aid you in staying afloat during challenging times.
Impress your clients
Devote time to deliver a satisfactory job to your client. This helps build a great level of trust between the two of you. You will need to work extra hard as a new realtor to impress your clients and build a strong and successful business relationship with them.
Just because a client did not give you feedback about a particular investment you intend is not tantamount to the deal being off or over. The most professional thing you need to do as a new realtor is follow up. Call your clients. Make them see the reasons why the property is worth your quoted price. Assure them. You’ll be surprised at how much property you’ll successfully sell just because you do a follow-up.
If you’re looking to switch careers, then at the top of your list should be becoming a real estate agent because this is a less time-consuming process than pursuing a law or a medical course. However, this doesn’t insinuate that real estate is an easy choice, but simply that there are accessible educational opportunities people of varied backgrounds can use to their advantage.