Thanks for buying our Real Estate Business in Kenya E-book.
BY TIMOTHY ANGWENYI MOREBU
TABLE OF CONTENT Page 3
Introduction 1
What You Must Know Before You Invest In Kenyan Real Estate Big Mistakes You Must Avoid In Kenya Real Estate
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How to Start a Real Estate Homeany in Kenya
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Kenya Real Estate: Buying - Selling Laws & Procedures
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Step By Step Guide To Obtain Business Permit in Nairobi County Most Costly Home Selling Mistakes -- And How to avoid them Real Estate Success Stories How to determine an accurate pricing for your rental houses. How profitable is it to invest in real estate?
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The Risks and Benefits of Investing in Real Estate Business Sources of real estate finance in Kenya Conclusion
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INTRODUCTION Many people in Kenya usually get money and do not know what to do with it! Nowadays, especially with lotteries gaining popularity in Kenya, anyone can become a millionaire. It is not the era when only accountants and lawyers had real money in Kenya, now the problem is not how to become rich, the problem in Kenya is how to distribute wealth. There was a research in Kenya that found that if all the worlds money was to be redistributed equally it would only take seven years for the once rich to get back their money and the once poor in Kenya to go back to their poor self. Mostly, poverty may invade Kenya, due to lack of knowledge on the right projects to invest in in Kenya. If a Kenyan got a million shillings, they are likely to buy a public service vehicle worth eight hundred thousand shillings, after paying the necessary tax and insurance in Kenya, the million shillings would be over. That means, in case of the vehicle breakdown, the Kenyan would not have any money to revive it. So three months after receiving the million shillings in Kenya, the Kenyan would be poor again. To invest in the transport industry in Kenya is a good venture, but it requires you to have a fair amount of money to cushion you against any uncertainty. Most people in Kenya however prefer investing in real estate in Kenya. Real estate business in Kenya entails buying a house, and it is one of the safest ways to invest your money in Kenya. This is mostly due to the factor that an asset like a house in Kenya will always appreciate. Real estate business in Kenya also fair well in the market because with growing population in Kenya, 2
the demand for houses is on the rise. A Kenyan with the money to buy a house can prefer to buy a house and make use of the money used to pay rent for investment somewhere else in Kenya. With con men and fraud in Kenya, nowadays buying a house is a risky business because you may be given fake title deeds only later to find that you are the fifth person to be sold the same property in Kenya. If you are a Kenyan buying a house, make sure you employ the services of a lawyer in Kenya. This might be costly, but it will save you lots of trouble later during the process of buying a house in Kenya. Also, make sure you engage the land commissions in Kenya. The land commission offices is located in 1st Ngong Road on Ardhi House in Nairobi. To get to Ardhi House in Nairobi, you board a matatu number 4W at Kencom stage in the cetre of Nairobi or at railways. There is a better way of investing your cash in Kenya than purchasing real estate. Instead of buying a house, you can buy land in Kenya at a cheaper price, build a house and sell it. Yeah, I mean you start your own construction homeany in Kenya. Buildings in Kenya are on high demand since the population in Kenya is growing, and people need places to stay. As the economy of Kenya is growing, Kenyans want to invest, which makes it almost impossible to lack a buyer for a house. The advantage of constructing a house for sale is, unlike vehicles, houses do not depreciate. A Kenyan is always guaranteed to sell a house at a profit. It should be noted that success of any business venture in Kenya will be determined by your hard work and management skills. So no matter how profitable a venture is in Kenya, if you do not invest your brains and precious time in it, you will go under. Also before starting any business in Kenya, you should do a research of the market in Kenya. A certain business can be marketable in a certain area and a total flop in another area within Kenya. Just like the way you cannot sell umbrellas during the dry season or in dry areas of Kenya, choose your business well. People in Kenya are different in the sense that some people cannot manage large scale businesses while others can. If a business in Kenya is growing, you should assess if expansion of a business in Kenya is possible and the effect on the business positively or negatively.
What You Must Know Before You Invest In Kenyan Real Estate The process of purchasing property in Kenya is actually quite straightforward. The majority of cash purchases in uncontested plots or properties is smooth. The homelications arise when questions are raised about the validity of deeds, tenancy rights or unpaid rates. You will do well to understand these before you part with your hard earned cash.
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Periodic outgoings, most monthly, in the form of rates, taxes or mortgage repayments need to be at the forefront of your mind. Very often these payments make or break budding entrepreneurs, in what should be easy and risk-free ventures On a positive note, the property sector is still on a high. Demand for good quality property remains high because supply has not caught up. Although employment in Nairobi has only marginally improved, Kenyans have become more resourceful and are now able to sustain good regular incomes. These are the people who keep the demand of good quality properties homeetitive.
Big Mistakes You Must Avoid In Kenya Real Estate 1. Fraud. You simply must avoid fraud! Too many people, even businesses, have fallen
victim to sophisticated and in many cases, very simple fraudulent sales. Involve lawyers in your real estate investment. Suffice to say, a decent conveyancing lawyers should be able to spot them from a mile away. 2. Repayments. If you plan to pay for the property by mortgage or loan, then you need to
clearly understand what your repayments will be. The sad truth is that Kenyan mortgage rates are not good enough. Most borrowers face very high interest rates, up to 20%. A whopping 20% is enough to cripple the average Kenyan, yet this is what the major banks and lending organizations will offer. 3. Security and Insurance. You must make sure that the area you are looking to invest in
has good security arrangements. It may be difficult to gauge or subsequently implement, but all your wealth must be guarded in one way, shape or form. Therefore you must have the correct insurance so that if anything goes wrong, you are covered. 4.
Going DIY with too many things. Today, information is readily available to all of us. You want a recipe? Use the Internet. Do you need a financial plan? Go online. How about a housing plan? Just download it and you're all set. While this can be convenient for us, it can also become a liability at times. Since these downloadable materials are for free, it is a lot more attractive than the ones professionals create. Since it looks simple too, a lot of real estate owners would tackle the project by themselves. For your information, the internet won't give you the skills you need to properly and safely build your home. When building a real estate, it is recommended that you distinguish which projects you can do yourself and which are those that you should leave up to the professionals.
5. Skimping on the materials. We all know that the biggest portion of the house building
budget is allocated for the materials and equipment. In order to save money, a lot of people would tend to save money on materials just so they can lower down the cost. Because of this, they would usually opt for materials of lower quality. What you need to 4
do is to ask your contractor for suppliers that are affordable and reliable. In addition to that, it is also recommended that you opt to rent construction equipment instead of buying them. Today, you can find many equipment rental homeanies, like El Camino Rental, that can provide you your equipment needs. 6. Not planning the finances properly. When you are too excited, you have the tendency
to overlook some details in your financial plans. The first step that you should take is to establish a budget. Take into consideration each and every little-- from the professional services to equipment rentals to purchase of materials and many more. Make the budget realistic so you can be able to finance your project properly. Avoid these simple mistakes and you can certainly enjoy seeing your dreams turn into a sweet reality.
How to Start a Real Estate Homeany In Kenya Real Estate industry has been seen by many entrepreneurs to be a lucrative business to start due to attractive profit margins that one can earn through a successful sale of land, property or building. But before you begin that journey, you need to have a legal entity registered. You will need to choose any of the following entity to start your business; • • •
Sole Proprietorship Business (only 1 person) Partnership Business (minimum 2 people and a maximum of 20) Limited Homeany (minimum of 2 directors and a maximum of 7 directors. You can also add more shareholders)
KRA PIN & VAT This is the most important document your homeany must obtain to do any business in Kenya. Kenya Revenue Authority (KRA) Personal Identification Number (PIN) can be used to open a business bank account, perform tax returns on rental income, applying for Government tenders, purchase of land, buying and selling property and many other business transactions. So you can see how crucial this document is to your business operations. Alien Card ID (Foreigners only) If the homeany is register under foreigners then the homeany directors must first apply for Alien Card ID registration that will enable them to register for personal Kenya Revenue Authority (KRA) Personal Identification Number. Business Permit Business permits are crucial for Real Estate businesses. If you are operating an office in a business premises where you meet with your customers, it is important to apply for business permits in order to avoid business disruption, embarrassment or heavy fines from the county council. Compared to the past where it was very difficult to apply for a business permit due to bureaucracy in the Government that seems to have changed. Today, the county governments have seen the importance businesses play in their revenue collection, in some counties the process of applying business permit take as little as one day to acquire it. Please note that you will need to renew it on a yearly basis or based on the validity duration indicated on the permit. Ask your county council for more details. 5
Homeany Seal If you are looking to run a property management on behalf of the landlords then you must purchase a Homeany Seal. This is very important tool to be used when signing homeany legal documents such as contracts. You can get your homeany seal from Seal Honey. They charge Ksh. 3,000 if you want it within 3 days. However if you are in a hurry, you can pay a bit more and get it within a day, last time I checked it will cost you Ksh. 4200. Please note that you will require to take a photocopy of your Certificate of Incorporation for them to process for you. Tax Homeliance Certificate If you are looking to apply for Government Tenders or to apply for AGPO Certificate, then you must register for Tax Homeliance Certificate. Before applying for tax homeliance certificate you need to find out whether you as homeany directors are tax homeliant. Many entrepreneurs are always afraid of applying for Tax Homeliance Certificate with fear that they might own Kenya Revenue Authority a huge amount in unpaid taxes. KRA has changed so much nowadays, they are friendly and more understanding if you go to them and discuss your situation. You can be able to check how much you own KRA and start making arrangement to pay for the penalty fees on your individual KRA PIN, if any. If you haven’t made any income tax returns every June 30th, then you will need to sort that issue first before being issued with a tax homeliance certificate for your homeany. Penalty fee for not making individual income tax return is around Ksh. 1200 per year for individuals. Please confirm with Kenya Revenue Authority or an accountant to get accurate details. AGPO Certificate registration If you are looking to tap on the biggest opportunity to financial freedom that the Kenyan government has offered, then you need to apply for AGPO Certificate. This will enable your hominy to access the 30% of government tenders set aside for youth, women and persons with disabilities. Logo & Business Card Design Branding is important in business. You will need create a brand that represent your business personality. Logo & Business Card is the way to go. You can even use your logo to make a letterhead for your hominy that can be used to notify your tenants or landlords on any official communication. Hominy Registry also requires the CR-12 request be written on the letterhead from the Hominy requesting for the CR-12. Here is to your Success in Real Estate Business
Kenya Real Estate: Buying - Selling Laws & Procedures A process that should be straightforward as it is guided by homerehensive property and land laws, buying and selling real estate in Kenya is far from straightforward, however. Instead, buyers have to deal with slow documentation processes that are marred by corruption, where buyers either have to know the right people or have to offer bribes to quicken the processes. All hope is not lost, with extensive implementation of new reforms such as the new land reforms, buying and selling property in Kenya will improve and existing laws will be applied to the letter. 6
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To ensure you abide to Kenyan laws guiding real estate transactions and to avoid pitfalls such as being fleeced, it is advisable you seek legal representation when buying/selling property in the country.
Land Registration In Kenya, land is registered under: • • •
The Land Act National Land Commission Land Land Registration Act; offering registration in all districts
Land Control Act •
Formulated under the Land Control Act, land control boards are forbidden by law to award assent to transfer agricultural land to hominies and people who are not eligible to hold it.
Foreign & local investment of real estate in Kenya: the process Under the new Constitution, non-citizens and hominies with shareholders who are non-citizens are barred from owning property on freehold tenure. The law allows them to own property on lease for a period that does not exceed 99yrs. •
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Both local and foreign property investors are allowed by law to purchase residential and commercial real estate situated in towns and within municipalities without any restrictions so long as they adhere to the legal procedures put in place. However, foreigners and private hominies with shareholders who are non-citizens of Kenya are barred by law to buy agricultural land except where such purchase is exempted by provisions of Land Control Act, SEC 24.
Property identification Once an investor has searched for and identified a suitable property, he or she should strive to visit and assess the real estate to ensure that: • • •
It actually exists It meets your needs and expectations such as physical location and access to infrastructure Its conditions are favorable and worth in investment
Note: there is a viewing fee applied when visiting properties for sale. Fees vary by type and size.
Conducting requisite search A lawyer or the buyer must then obtain copies of the National Identity Card and property title from the seller and carry out requisite searches at lands office and Registration of Persons Bureau. • • • •
This step is very important to verify that the said owner is truly the titleholder of the property. To carry out the search, you are required by law to file a copy of the title deed and a search application form and lodge it at the registry. The charges for requisite search are Ksh500. Land registry obtains the results within 2-3 days.
Results from the search should show • • •
The registered title holder of the property Property size Any pending issues registered against the property such as court orders, caveats and prohibitions, etc. 7
Additionally, it is important to: • •
Verify whether the property is illegal or irregularly acquired as contained in Ndung’u Land Report filed by Commission of Inquiry on Illegal and Irregular Allocated Land. Procure a registered surveyor to not only establish the beacons of the property but also check out the land at the Survey Office.
Negotiation and sale agreement Satisfactory preliminary checks should be followed by negotiations about terms of sale between the buyer and seller with the presence of their respective legal team. • • •
Negotiations entail discussions about the price of property and terms of payment 10% of the total amount is paid upfront as down payment and the balance is paid when the sale transaction is homelete Agreement of terms by both parties set ground for preparation of a sale agreement by the seller’s advocate, who then seeks approval from the seller.
A sale agreement contains • • • • • •
Terms of sale Purchase price Terms of payment Payment homeletion period Homeletion documents that facilitate the property transfer Law Society Conditions of Sale are often included
When both parties accept the sale agreement, they execute it with the buyer signing first followed by the seller. Finally money changes hands. •
A stamp duty costing Ksh200 is then obtained from lands office as required by law to ensure that in case of a dispute, the signed documents are admissible to court.
Transfer of property ownership and stamp duty Once the buyer’s advocate has prepared the transfer, both parties approve and sign. 1. The seller is responsible for acquiring every requisite homeletion document needed to effect property registration to the buyer. 2. The buyer is then liable for the stamp duty fees payable to the Kenya Revenue Authority in line with Chapter 480 in the Stamp Duty Act of laws of Kenya. 3. Prior to determination of duty, the seller must apply for property valuation by lodging signed valuation for stamp duty form and transfer of property form to the Land Office. 4. A stamp duty declaration, assessment and pay-in slip is then filled at Lands Office.
Once stamp duty is obtained and transfer process is homelete, law requires that transfer documentations together with the following documents are booked for registration: • • • • • •
Original title deeds Stamp duty declaration Assessment and pay-in slip form Land rates clearance certificates Transfer consents Valuation for stamp duty form
Property registration: the final stage of property transfer
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When the buyer obtains the registered property transfer, the law advises verifying registration of the same by conducting a property search.
Permission to develop In case the property owner intends to develop the purchased property, he or she is required to go to relevant local authority and get requisite development authorization. Often, the owner will be requested to: • •
Commission an environmental impact assessment report to determine if the intended development has adverse environmental effects Get an environmental license from environmental body-NEMA.
Step By Step Guide To Obtain Business Permit In Nairobi County Single Business Permit is a crucial document if your business is looking to apply for Government Tender, borrowing a loan and many more. It is something that you just can’t do without. Step 1: Application Form A client who intends to apply for a new Single Business Permit (SBP) or to renew an existing one is required to obtain BR–1 form from Ward office. Step 2: Visit to Business Premises Fill and complete the form and return it to the Ward Licensing Officer who approves within a day upon his/her visit to the business premises to verify the type of business being carried out by the client. In case of a renewal, a copy of previous year’s SBP shall be attached. Step 3: Cost of Business Permit Based on the information obtained by the inspection team, the Ward Licensing Officer shall determine the appropriate fee to be charged for the SBP as guided by the SBP fees and charges schedule. Step 4: Approval of BR-1 Form The Ward Licensing Officer shall recommend for issuance of the SBP by indicating the appropriate fee to be charged, stamping and signing the BR-1 form. The Ward Licensing Officer shall then refer the client to licensing main office at City Hall for further action Step 5: Data Loading At licensing main office, the application form is approved by the signatories before presenting to Data entry clerks for data capturing in the Single Business Permit database Step 6: Invoice Issued After capturing the data, an invoice/bill is generated. Step 7: Payment Once the client has been issued with an invoice he shall make payment to Cash Office and obtain original receipts. Step 8: Signature The client shall present the application form and the original receipt to the license Reception Desk officer who shall receive and record them in the register. The Reception Desk Officer shall then take the application forms to the SBP Printing Office for Printing of SBP. The Officer in 9
charge SBP printing office shall print record and take the SBP to the signatories for final signature. Step 9: Collection Once signed by signatories, the Single Business Permit is received by Registry, where it is stamped again and taken to dispatch office for collection by the owner Content Courtesy of City Council of Nairobi County
Most Costly Home Selling Mistakes -- And How to Avoid Them To get the most money out of your home, it pays to do everything right. Shockingly, sellers make up to three costly mistakes each sale. We’ve put together nine of the most common (and most avoidable) seller mistakes. Learn to identify and eliminate all of these, and you can save yourself thousands –even tens of thousands – of dollars. Here are the 10 mistakes you must avoid: 1. Not Hiring A Professional To Sell Your Home – Trying to sell your home by yourself is sheer madness. You need the expertise of a professional. The numbers also don’t lie – home sellers who try to do it themselves often end up taking longer to sell and sell for far less than homeowners who work with an agent. 2. Miss-Pricing Your Home – Over-pricing or under-pricing is a huge money-losing mistake. It’s so critical to know your market and get familiar with homes of similar homes currently for sale (and those that have recently sold) to understand exactly what price tag your home needs 3. Neglecting Necessary Repairs Prior To Sale – You will lose money if you don’t take care of repairs before the house goes on the market. It’s always going to cost you less out of pocket to fix things ahead of time, rather than have buyers see your house in disrepair. I promise they’ll offer less or ask for a credit back for the work that needs to be done before the deal closes. 4. Refusing To Remove Your Clutter And Junk Prior To The Sale – Clutter eats equity and kills deals. One of the least expensive improvements you can make to your home is to declutter and create a sense of spaciousness throughout, from the kitchen countertops to the overstuffed closets to the trophy-lined shelves in the den. It costs you nothing to get rid of all that ‘stuff,’ yet it reaps big rewards. 10
5. Selling Your House Empty – Selling an empty house makes buyers feel the same way: empty. I’m a firm believer that a home should be dressed or ‘staged.’ Don’t worry, you won’t need to go out and buy new furniture and accessories. Chances are, you have plenty to choose from already; in fact, that’s usually the problem (see tip four, above). Editing out items – lots of them – may just leave you with the perfect amount of furnishings for a simply staged home (space is your friend, after all). If your furniture is already in another house or taking a cross-country trek, I highly recommend making the small (but mighty) investment in a local stager to give the for-sale home a new look that will charm potential buyers. 6. Letting Your Ego Get In The Way When Negotiating – Too many sellers take negotiating personally and lose out on creating a win-win deal. Remember, this is a business transaction – perhaps the biggest one of your life. Take your ego out of the equation and put your head back into it. 7. Failing To Homelete A Full Set Of Disclosures Prior To Closing – I’ve watched too many sellers pay big amount of Ksh because they didn’t reveal it all. Being upfront and forthcoming about any of your home’s issues will save you lots of money and time, especially if the buyers end up uncovering problems themselves. And they will. 8. Miss-timing The Sale for Maximum Tax Benefits – Even a sale mischeduled by one day can cost you tens of thousands in extra taxes. Don’t be left a day late and many Ksh short. Make sure you talk to your accountant to find out if any long term capital gains tax breaks apply to you, and check your calendar to determine when they come into play. 9. Overlooking Junk Fees And Extra Expenses At Closing – Home sellers throw thousands away by not requesting and confirming a list of fees and expenses long before closing day. Make sure you and your real estate agent review estimated closing cost statements long before it’s time to hand over the keys. Because the closing table on sale day is way too late to be fixing costly mistakes or asking for discounts and credits. 10. Using Lousy Photos – I can’t tell you how many beautiful looking and awesome homes have horrible camera phone photos in their sale listings. Now, more than 90% of all buyers start their home search online, so you’d better make sure you and your agent nail your home’s close up! You won’t ever get a second chance to make the perfect first impression.
How to determine an accurate pricing for your rental houses. Choosing the right asking price is one of the hardest parts of selling your home. One of the trickiest parts of the home selling process is selecting a list price that’s just right. Not just any number will do: if you overprice your home, it will sit idle on the market, and if you underprice it, you miss out on cash and equity that could’ve been earned in the sale. This is when you need to think like a buyer, scoping out other homes that are for sale or have recently sold in your neighborhood. Get familiar with what’s out there – and maybe even swing by a few nearby open houses. Most importantly, work with your realtor to understand and analyze “the homes.” They’re the only way to truly determine an accurate list price for your home.
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Remember, this is one case where true value doesn’t come from within, it’s actually based on those around us. In the meantime, take a look at quick guide to comparable homes: 1. Apples to Apples: Analyzing the homes entails some detective work. Obviously, your house isn’t exactly like every other on the block. It can be far better – or far worse. You have to wade through and pick out homes that truly come closest to yours. Then make note of what similar homes have that you doesn’t and what your house has that the homes lack? Consider these comparisons: o Square footage: This is significant for most buyers. Some will even hunt based on square footage alone. And when it comes to pricing, the bigger the property, the bigger the price tag. o Age and condition: Do you live in a 1910 Victorian? Or is your house practically brand new? Newer homes don’t necessarily command higher prices, or vice versa, but condition relative to age does factor into price. So when you compare your home to others, stay within a five-year range. o Number of bedrooms and baths: How many your home has – and where they’re located – can radically change the price. Like square footage, families often shop for homes based on these numbers. o Amenities: This one’s pretty straightforward: the more perks you have, like walkin closets, a pool, spa, gourmet kitchen, and so on, the higher the price. o Lot size: Is there room for the buyer to add on to the house or plant a sprawling rose garden in the backyard? The exact acreage of your land correlates to price. When you compare your home to others, stay within .05 acres. o Condition: A tear-down, a fixer-upper, updated, or pristine – where do you fall in the spectrum? The condition of your house can be a deal-maker or a deal-breaker. That’s why you have to pay close attention to other homes’ upgrades to make a fair assessment of how they affect value. o Location: This factor is multi-faceted. It relates not only to your state, city, and neighborhood, but also to where your house sits on the street. Does it face an eyesore or busy intersection? Does it have a view? Does it get nearby freeway noise or sit on the bank of a tranquil lake? Don’t forget to take these location nuances into consideration. 2. Don’t Look Back (Too Far) – The price of your home today can’t be compared to the selling price of your neighbor’s identical home 6 months ago. This has been a year of quick price increases in most towns. If you’re looking at homes further back than 3 months, dump them. Your house could be worth more. In fact, in some of the fastest-paced towns, like Nairobi, Mombasa, Nakuru and Kisumu homes move so rapidly that sellers should only look at the prior 60 days of sales, if possible. 3. Go Online and Check Prices – A wealth of information lives online, and it’s accessible with the click of a mouse. You can see exactly what homes have recently sold for. How does access to this information change the way you price your house? First, think of it as a ballpark guide – not an exact number. Then price your home confidently based on the similar homes knowing you have more information than ever before, and it’s literally at your fingertips. 4. Check out the competition in Person – Don’t analyze your homes on paper alone. Get moving! Ask your realtor to recommend homes you should drive by or open houses you should 12
attend. It’s important for you as a home seller to know what’s out there. Find out up close and in person where your home stacks up against the competition. 5. List vs. Sale Prices – The difference in percentage between list prices and actual sales prices for the homes in your neighborhood speaks volumes about the current real estate climate. This number is a strong indicator of which direction the market is moving, and it will suggest how much under – or over – your ideal asking price you can expect to get for your home. Anyone can throw a house on the market at a high price. But the number you want to look at closely is the sale price of the home, which is much more indicative of the actual value. 6. Know what’s Not Selling – You can learn a lot by observing not only what is selling nearby, but also what’s NOT selling. Is a home that initially looks like a home really overpriced for what it offers? How does it compare with your house? What is it lacking that yours isn’t? Once you identify why it’s not selling at its current price, you can avoid the same mistake when determining your own home’s price tag.
How profitable is it to invest in real estate? Many experts have questioned the attractiveness of investment in real estate based on long term returns on investment compared to other asset classes, but real estate continues to be a rage. The primary goal of real estate is always to serve the need of the end user i.e., a family who is going to stay in a house or a shopkeeper or company who will lease out space for their business. But, still many people buy real estate as an investment. You may have heard many people proclaim that they have made huge profits on their investment. Let’s understand reasons why real estate can prove to be a good investment. 1. Easy availability of Home Loans Real estate is the only investment class for which loans are promoted by the government by providing a tax rebate on interest paid on a home loan. Home loans rates are typically much lower compared to personal loan rates as home loans are backed by a tangible asset, which is your home. The fact that you can purchase a house by availing of a home loan of up to 80% of the total cost makes the purchase a highly leveraged purchase. This can help you earn a relatively higher rate of return (much higher than the 12.5% annualized rate mentioned above) on your part of the contribution towards the purchase price. Buyers also see the EMI payment on their home loans as a regular savings mechanism where they are saving a part of their salary every month (similar to SIPs in mutual funds) as opposed to making a large investment at one go. 2. Tax benefits Investing in real estate is also quite efficient from a tax perspective. If you make any gains on your capital by selling your house you can avoid paying capital gains tax by reinvesting the proceeds in another house or by investing the money in some bonds stipulated by the tax department. 3. Long term nature of investment (reduces reinvestment risk) Unlike investments in many other asset classes, a typical real estate investment ends up being over a relatively long term i.e., 4 – 5 years. The reason for the same is the relatively illiquid nature of the investment. To exit a real estate investment you need at least 3 – 4 months of time coordinating with real estate agents, meeting buyers, negotiating the final price and completing paper work. Now, this could as well be treated as one of the short comings of investing in real estate but in the end it helps the buyer to stay invested for longer period of time. Hence, even if 13
an equity investment might return 12.5% annually over 5 years, there are very few investors who are able to earn such a return over the entire period. This is because they frequently trade in and out of their investments and end up making bad choices which reduce their returns (reinvestment risk). 4. Large ticket size of transaction A typical real estate transaction starts at Rs. 10 Lakh (20% of the total cost) and thereby it provides an opportunity to invest large chunks in a single asset. This makes identifying and monitoring one’s investment a lot easier. Investing similar amounts in equity is a challenge because psychologically most retail investors find it difficult to build conviction about a single stock and for investors to find multiple attractive opportunities to invest is time consuming. 5. Investment for future larger purchase Many investors purchase relatively smaller ticket homes as a precursor for future purchase of bigger homes. For example, youngsters are buying homes even while on their first jobs as they see this as a first step towards purchasing their dream home in the future. The strategy is to buy a house in an emerging area where the ticket sizes are low and eventually trade up to buy the home of one’s choice in one’s preferred location as and when one can afford it. This is a great way to take on some exposure to real estate and take advantage of rising prices without having to compromise on one’s standard of living. To summarize, real estate should form a part of your overall portfolio as there are many advantages such as investment horizon, quantum of return, ease of obtaining leverage, regular savings and tax benefits. As an investor you need to understand your individual situation to see if you can take advantage of some of the above mentioned benefits to turn real estate into a lucrative investment proposition for you.
The Risks and Benefits of Investing in Real Estate Business If you plan to allocate some of your investment Ksh to real estate, you’ll find several options in the marketplace. Each type of investment has its own benefits and risks, and you should fully educate yourself on those before you write the check. Below are details on a few of the more common real estate investment types.
Individual direct ownership This category of real estate ownership covers buying properties on your own (maybe with a spouse) and handling everything related to operation — such as maintenance, leasing and management of the property — yourself or hiring a property manager to do the job. Benefits: You would make all decisions, earn all profits (if any) and directly control the asset. Risks: You could face the possibility of bad tenants and other management hassles, making a poor financial choice, losing money on the sale of the property and assuming full liability past insurance coverage.
Partnerships with close or well-known associates You could also partner with a friend, a small group of like-minded investors or family members. Hopefully you know your co-investors well and their financial position, motivation, work ethic and desire to share in the management of the property.
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Two big suggestions here: Have a written agreement between the parties, and one party should be responsible for management of the property (or managing a property manager) and be paid for handling the management. This eliminates disputes over who handles the problem if a major issue arises during a holiday or the Super Bowl. Benefits: You would share decision making and profits, and all partners directly control the asset. Having partners can be a plus as long as all partners are on the same page. Risks: You might choose partners who don’t have the financial wherewithal needed to handle major issue, or partners whose strategies for renting, managing and/or improving the property are not aligned. Plus all the risks in the individual direct ownership category above.
General or limited partnerships These investments — including tenant-in-common investments and private real estate investment trusts (REITs) — are pitched in newspapers, at real estate clubs, by some financial institutions and by investment groups. In these investments you are totally trusting someone else, the “sponsor,” to handle a huge portion of your net wealth. The biggest issue with these is that most investors don’t do even the most basic due diligence on the investment sponsor, and even if they want to it’s hard to do. Few investors, for example, review a sponsor’s credit report, detailed investing history and tax returns on past deals. Nor do most investors contact banks, check criminal or civil litigation histories or consult lawyers and others the sponsor has dealt with in past real estate deals. Benefits: You could get a fair return on investment for the risk. You wouldn’t deal with management hassles, and the sponsor probably has more investment experience than you do. Risks: You would have no control and potentially could face dealing with unscrupulous sponsors, personal guarantees and liability, low investment returns and loss of your investment.
Publicly traded real estate investment trusts These are really investments in a big company that is involved in the business of buying and generally owning property. A REIT buyer is investing in the ability of management to make good decisions on the shareholders’ behalf. There are many well-known publicly traded REITs with long-term operating histories and audited financial statements. So you’d want to look at a particular company’s results and dividends before making a decision on whether that company is a good investment for you. Benefits: You’d have no management responsibility, no liability past your initial investment, experienced management investing your money and liquidity in selling the shares. Risks: You could lose your total investment. Shares and company value are subject to regional, national and stock market influences and risks, which could diminish share value even if the company is relatively strong and well managed.
Sources of real estate finance in Kenya Do you need to have a lot of money to invest in real estate? 15
The short answer is: no. The longer answer, is more complex. There are numerous strategies that investors use to invest in real estate without having a lot of cash. Some deals can be done without using any money, period! Below you'll find several great strategies for financing your real estate deals. 1. Savings and Loan Associations/ Investment Clubs/ Chamas They are a major source of financing for real estate development. According to the Kenya Association of Investment Groups (KAIG), an investment group is ‘a collection of individuals who periodically contribute monies for investment purposes’. Whereas most have focussed heavily on land buying activities, others have successfully marshalled their funds and provided housing solutions. KAIG estimates that there are at least 300,000 groups in Kenya with assets worth Ksh 300 Billion. The Norwich Union Properties Limited’s story best describes the journey. Other investment clubs that have grown rapidly include Home Afrika, Mhasibu Investment Company and TransCentury Limited. 2.
Financial Institutions
Banks for a very long time have been the most common sources of construction loans but in recent past several other financial institutions have entered the market. This has made it easier for developers to get finances for their developments. Financial institutions offer real estate development finances in two forms; Construction loan With a construction loan, you are asking the bank to estimate the value of something that does not yet exist and then lend you money for it. A lot can happen during the construction process from the expected construction delays and cost overruns to the unexpected like a change in your employment situation or your builder going out of business. The risk to the bank is much greater, so it exercises greater caution in loan decisions. The loan is supposed to be paid immediately the development is complete. For a construction loan to be granted, the real estate development projections have to be realistic and able to show that it is profitable. The developer also has to show how he will be able to repay pack the loan. A construction loan is really a reimbursement process. The bank does not advance construction funds; it will only pay for construction items that are complete. Each month you must submit a draw request along with supporting documentation to prove that building is progressing. The bank reviews the documentation; the bank relies heavily on the team of consultants documents certifying a payment but can also do their independent confirmations. Most banks and financial institutions do not offer full financing to a particular project. They require the developer to commit a certain percentage to the total cost. Most of them give 70% of total construction cost. The 70% they give is only available after you have fully exhausted the 30% a developer is supposed to contribute. Interest for the loan give is normally supposed to start immediately the loan is awarded but if one is not able to start paying immediately one can apply for a moratorium. Basically a moratorium on loan repayments is a loan repayment holiday. You are not required to make loan repayments or pay dues/fees for non-payment for a required period. Usually for financial hardship members/clients and needs to be organised and approved with your loan supplier. 16
Construction Mortgage A loan borrowed to finance the construction of a real estate development and typically only interest is paid during the construction period. Once the construction is over, the loan amount becomes due and it becomes a normal mortgage. The money is advanced incrementally during construction, as construction progresses. The advantage of such plans is that you have to apply only once and you will have only one loan closing. 3.
Life Insurance Companies
Insurance companies play an important role as providers of capital for real estate from an equity (owner) standpoint. Unlike the savings and loan association or the bank, which normally deals directly with the borrower, the 1,800 insurance companies typically do their lending through local correspondents, either mortgage brokers or mortgage bankers. Insurance companies normally specialize in large-scale projects and mortgage packages. Historically, between 25 and 30% of their assets have been invested in mortgages. Insurance companies receive their money through the payment of premiums by their policyholders and since both the inflow of premiums and the outflow of claim payments can be predicted with reasonable accuracy, insurance companies are able to invest in those assets yielding higher returns but less liquidity than is available to either banks or associations. For their real estate investments, this normally means long-term commercial and industrial financing. While insurance companies have historically invested in residential mortgages, this form of investment has continued to become a smaller and smaller percentage of their portfolio. Few insurance companies presently originate residential mortgages. All insurance companies are nationally chartered since there is no agency which issues charters. The result is less regulation in most states than is true for either S&Ls or banks. Less regulation generally results in liberal lending patterns which leads to the funding of a wide variety of real estate projects. Over 90% of the insurance companies are stock companies; however, the majority of the industry`s assets are held by mutual companies. 4.
Personal saving/Owner funding
This applies where a developer has enough money to run the project through to completion. This is a very rare scenario and mostly happens to projects of smaller scale that do not require heavy capital outlay and also common among developers who been in the industry for a longer time. It is important for the developer to come up with a development budget for the project so as to be certain that he/she has enough capital to complete the project. Once he has come up with a budget it is also important to develop a cashflow which allocates the finances to the different activities and phases of the project. This method has no huge expenses in terms of cost of finances and is therefore very profitable. 5. Mortgage Brokers Mortgage brokers are not direct or primary suppliers of capital. However, they do play an important and necessary role in the financing process. A mortgage broker is a person who serves to bring together the user of capital (borrower or mortgagor) and the provider of capital (lender or Mortgagee). For this service, a finder`s fee equal to one percent or so of the amount borrowed is normally paid by the borrower. The financial success of the mortgage brokerage firm depends upon the ability to locate available funds and to match these funds with creditworthy borrowers.
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Certain sources of funds, particularly insurance companies and the secondary sources discussed below, do not always deal directly with the person looking for capital; rather, they work through a mortgage broker. Thus, if you wish to borrow from certain lenders you would need to go through a mortgage broker. Normally, the mortgage broker is not involved in servicing the loan once it is made and the transaction is closed. 6. Mortgage Bankers The mortgage banker is also a financial middleman; however, the services offered include more than simply bringing borrowers and investors together. Mortgage bankers normally make mortgage loans, package these loans and then sell these packages to both primary lenders and secondary investors. Financial help is often sought from a lender, typically a commercial bank. The bank becomes a warehouse for mortgage money, and the mortgage banker draws on these mortgage funds until payment is received from the investors. Usually the mortgage banker continues to service the loan (collect debt service, pay property taxes, handle delinquent accounts, etc.) even after the loan has been packaged and sold. For this management service a small percentage of the amount collected is retained before forwarding the balance to the investor. Obviously, the success of the mortgage banker depends upon the ability to generate new loans. In some geographic areas, mortgage bankers are the primary source for financing real estate. All mortgage bankers try to stay in constant touch with investors and are aware of changing market conditions and lender requirements. Quite often the loan origination fee or finder`s fee charged the borrower is more than offset by a lower interest rate from a lender not directly accessible to the borrower. Mortgage bankers are involved in both commercial and residential financing and also carry out related activities such as writing hazard insurance policies, appraising and investment counseling. As with mortgage brokers, mortgage bankers are regulated by state law. 7. Private Equity Funds They have also dominated the headlines since 2010. Private equity in real estate development is a co-development arrangement in which investors fund a project using unsecured funds in return for a stake in the development. Equity is usually provided in the form of either shareholder loans or as a share capital investment. The most notable equity fund participating in real estate development in Kenya is Actis. The UK-based equity fund has invested billions of shillings in projects such as Garden City which is valued at Ksh 12.6 Billion. Another major player, Centum had at least $100 million in private equity assets as of March 2012.
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8. Pension Funds They are another source of real estate financing in Kenya. These funds hold money on behalf of their members. They, in turn, invest the money in different sectors, including real estate development. Proceeds from sales or rental income are then used to pay their members upon retirement. The law dictates that pension funds should not hold more than 30% of their assets in property. The most common funds include the Kenya Railways Staff Retirement Benefits Scheme that has plans to dispose property assets of up to Sh 21 Billion. The University of Nairobi Staff Pension Scheme recently bought part of the 20storey Delta Towers in Westlands. 9. Bonds They have recently been issued in Kenya to finance real estate development projects. ShelterAfrique floated bonds six times at the Nairobi Securities Exchange to finance its development projects, with the most recent one valued at Ksh 3.5 billion. Usually, institutional investors, insurance companies and banks subscribe to these bonds. Through the bond, Shelter Afrique has plans to invest in residential projects to the tune of Ksh 9 Billion. 10.
PRE-SALES/OFF-PLAN SALES
This method of financing is common in real estate developments that are fast moving commonly referred to as ‘hot cake’. In this method the developer seeks to sell the property before actual construction starts on site. The developer normally gives incentives to early buyers who buy the property off-plans by giving a discount from the actual cost. The developer can say decide to sell the property at 15% off the cost it would have cost if buying when complete. Through this way the developer gets money in advance which uses to finance the construction. 11.
JOINT VENTURE (JV)
A Joint Venture is a partnership in which people decide to pull resources together. In most cases one person has the land while the other person has money. How does the JV work? A Joint Venture works whereby a land owner does not have the requisite funding enabling him obtain financing from a bank. In most cases, banks require that the land owner fund approximately 30% of the total cost of the project including land and consultancy fees. Where the cost of land is less than 30% of the total costs, banks require that the land owner top up the difference either using cash or construction input till foundation stage. This top up is what lacks to most land owners. Joint Venture partners come in to assist the land owner reach the required bank minimum of 30% contribution by the land owner. Another way a Joint Venture works, the Land owner contributes the land as part of his/her contribution, then the Financier contributes finances for construction. The profits are then split on a pre-agreed ratio with the land owner usually getting over 50% of the net profits. In the joint venture agreement a Special Purpose Vehicle (SPV) has to be formed. An SPV is a company owned jointly by the financier and the Land Owner. The land ownership is now transferred to the SPV. 19
12. CONTRACTOR FINANCED
This is another form of Joint Venture but in this case the joint venture partner is the contractor who will be given the work of construction. The developer enters into an arrangement with the contractor such that the contractor agrees to do the works and receive payment at the end of the project. Just like a Joint Venture a Special Purpose Vehicle is created.
Real Estate Success Stories Property tycoon Pete Muraya has made many mistakes in business before finding success in property development.
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Pete Muraya The CEO of Suraya Property Group, one of the most successful real estate businesses in Kenya, has endured one failed business after another, but kept trying because he believed entrepreneurship was what he was cut out for. “I had a restaurant, it failed. I had a disco in town, it failed. I had a [truck], it failed…” Muraya told How we made it in Africa. The trained architect recounted how in the mid-1990s he decided to organise a concert in Nairobi. He flew in a US musician with the hopes of making significant profits from the show. “Do you know it wiped me out? I lost everything I had in just one show. I spent US$235,000 and after the show I had made $35,000 in sales. The place was full but there was no money. Guys stole the tickets… no one was watching the gate,” he recounted. Before organising the show, Muraya and his wife had several cars, including a Range Rover and a BMW. They also owned three properties. “From that day my best friends were auctioneers… It took me six years to recover fully,” he said, adding that he eventually managed to salvage just one car and one property. The only business Muraya managed to sustain for a long period was an architecture consultancy he started in 1987. Although business was good, it had its own downsides. “The problem with consultancy is that it is very personal. The client must like you, not necessarily your work. The personal relationship is very critical. You spend a lot of time chasing people and trying to befriend people so that they can give you work,” he noted. After Kenya’s 1997 presidential elections, the government decided to freeze all projects being undertaken by state-owned corporations, which were Muraya’s primary clients. “We thought it was temporary but it became five years of no work. A lot of firms closed down. I had an office of 12 employees and ended up firing everyone expect the receptionist and a technician. It was a very difficult time,” he said. Tasting success After reading Robert Kiyosaki’s Rich Dad Poor Dad, Muraya began aggressively working towards getting into the property development business. The only problem was that he had no money, no assets and no banks were willing to lend to him. He then partnered with a friend who had the capital to put up their first project of 16 apartments. Muraya went on to pioneer partnerships between land owners and developers, and he cites innovation as one of the reasons why his property development business has been successful. “Yes, we are making money. Yes, we are big. But our drive comes from the desire to impact as many people as possible. We have introduced new concepts and pioneered innovative products in the market that have changed the industry,” he said. Suraya Property Group has been involved in a number of large projects, and the company has recently also entered the low cost residential market. Muraya said his goal is to have customers come to his office and have a choice between a $12,000 apartment or a $705,000 penthouse, and anything in between. Some of the challenges the property group faces is the cost of land and archaic laws. “It is very difficult to find land. It is very expensive in this country. Land is appreciating at rate that is illogical,” he said. “Never lose faith”
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After losing so much money and failing again and again, why did Muraya decide to give it another shot? “I always believed that I could make it happen. But I didn’t understand that one needs a very clear direction of where you want to be. I was always getting into businesses, not because I knew what they were, but because people told me there was money in it,” he explained. He also admitted that his wife, who is the managing director of Suraya, has been very supportive. His failed attempts in business have taught him never to lose faith. “The day you stop believing that something good is going to happen, you are basically dead. My wife and I always had a positive vibe about things.” Muraya said he hopes other entrepreneurs do not make the mistake he made – investing in businesses they know nothing about. Real estate has attracted a lot of investors in recent days due to its high returns, but Muraya urges entrepreneurs to exercise caution. “Real estate is good business, there is good money but one needs to be careful. If you want to go into real estate, don’t do it because you heard Muraya is making money, [otherwise] you are going to burn like crazy. Spend time researching it. By the time you get into it, you should have a good understanding about what it involves.” He advises aspiring property investors to read widely about the industry, speak to experts in the field and seek advice from successful property developers.
I failed 15 times on the way to building Sh1bn real estate firm
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The many challenges that stood in the way of George Wachiuri’s earlier start-ups did not dampen his hopes of becoming a successful businessman. Today Mr Wachiuri, the CEO of Optiven Limited Investments, can look back at the hurdles which dogged him for more than 15 years with a smile. This is because the real estate developer has earned prestigious accolades over time. They include the company’s surprise ranking as the overall winner in the Top 100 midsized companies 2014/15 edition. Optiven was also the best real estate company in the mid-sized category. Mr Wachiuri’s journey to the top was strewn with hurdles. He described the path through his previous 15 enterprises as depressing, stressing but also rewarding. He recalls a time when he sold his property to refund a client’s money after making a Sh5 million loss in a deal gone sour. “After the loss I swore that I would never do business again, but I remembered that winners never quit and quitters never win,” he said. Mr Wachiuri founded Optiven as a general supplies entity which diversified operations into the real estate sector in 2008. “My previous businesses failed but they acted as a lesson to do better, my appetite for taking risks grew as a result of many failed ventures that I started.” Among his failed enterprises were joint ventures, partnerships and sole proprietorships. “I learnt from the initiatives that no one should ever give up. I learnt to focus on my vision, trust in God, be self-disciplined, network relentlessly, be passionate about my undertakings, work smart and hire people who are smarter than me,” he said. Having wizened up through lessons in failure, Mr Wachiuri set up Optiven using a paltry Sh80,000 as seed capital and an additional Sh300,000 borrowed from a bank. “Despite the dramatic start which forced us to rely on debt financing, the company has grown and employs more than 50 today. Our projects have gradually raised the company’s asset value to more than Sh1 billion,” Mr Wachiuri said. He attributed the firm’s growth to a culture of honesty, professionalism, creativity and innovation. 23
Wealthy customers “At Optiven we do not promise what we cannot deliver. The secret of our growth is keeping our word and integrity. We aspire to keep our focus on making our customers wealthy,” he said. The MBA graduate of the University of Nairobi said they have set a 200 per cent growth target for 2015/16, adding that the business environment has improved with many Kenyans joining the middle class. “We have seen more lenders willing to offer us credit facilities. We also have seen our main lender reduce interest on loans and our customers have increased, too” he said. Winning the Top 100 competition has also placed the company on a pedestal, making it a pacesetter in the real estate industry, he said. He has set up a YouTube site, Optiven Kenya, to advise people on investment. The company interacts with clients through investment forums, radio programmes, videos on mentoring and investments and one-on-one talks. Mr Wachiuri plans to decentralise the firm the counties. “We are targeting 20 counties before the end of 2016. This is part of our five-year strategic plan.” The main challenge in the business, he said, is getting “clean property”. “One can spend six to eight months before getting clean property. I lost over Sh5 million on a bad deal which was all my 10- year savings in employment. That loss drives my passion. No single Kenyan will ever loss money if they deal with us,” he said. He advises property developers to build more homes to meet the country’s rising demand for them. “We need more affordable homes as real estate companies are currently providing only 42,000 per year.” Optiven sells valueadded plots with emphasis on conserving the environment, which includes planting trees. The firm also emphasises on providing security, piped clean water and infrastructure among other facilities. “There are places where the focus has been on making life easy for dwellers by providing commercial centres, provision of children’s playing fields, setting up green zones and resting parks,” he said. Clients can pay for property in instalments of up to three years. Mr Wachiuri, who described himself as an early riser, often takes a break from his busy schedule to go swimming with his children. He also creates time to read and write books. His works include Soaring Like an Eagle, a book whose proceeds go to charity, and Unleash Your Full Potential. “I also take my wife for coffee once a week. We travel a lot to the village to see our dairy farm and I run mentoring forums,” he said. Optiven runs a foundation which pays fees for needy children, plants trees to conserve the environment, runs medical camps and builds houses for elderly people as part of its social responsibility contract.
Conclusion Also Consider These Kenya Real Estate Options Before you homeletely set your sights on residential property, look around carefully at the playing field before you. There are commercial, agricultural or tourism properties which you could take advantage of. 24
Also why not consider adding value to any undeveloped properties? For example, tilling barren land, installing water and electricity supplies or simply fencing agricultural land. These are good low-cost value adding options. Finally, you could consider leasing land / property and making your investment in this way. Some farmers will lease land for 3 years and plant their produce. There is a lower startup capital and the returns may be attractive to some.
Real Estate Business in Kenya Copyright 2015 TIMOTHY MOREBU All rights reserved. Published by TIMOH BRIGHT at Smashwords This book is a work of real estate professional. Names, characters and incidents are the product of the author`s research. Smashwords Edition, License Notes Thank you for buying this eBook. This book remains the copyrighted property of the author, and may not be redistributed to others for commercial or non-commercial purposes. If you enjoyed this book, please encourage your friends to buy their own copy. We are writing more eBooks on Investment and How to make money in Kenya. And we will notify you via a text message or email. . Thank you for your support.
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