I am currently employed, with a monthly salary of Sh37,000. After contributing Sh10,000 to a Sacco and accounting for other deductions, my take-home stands at Sh22,000. I began this role in May 2023. Additionally, I operate an online business which generates Sh20,000 every month. I’ve acquired land worth Sh500,000 and began a rental project. As of now, two units are partially built, both of which are occupied by tenants, yielding a monthly rent of Sh5,000 each. My vision is to build three more rental units at an estimated cost of Sh1 million. What would be the best strategy to finance this? Would it be prudent for me to secure a loan? I am also contemplating purchasing a car. Given my current financial position, how feasible is this?
Chacha Nyaigoti, a financial coach at Chachanomics Consulting Firm
Your total income is Sh67,000 but your expenditure is not clear. Your take home is Sh22,000, but this does not give us a picture of where every shilling goes. First, you need a well thought out monthly budget. Use the 50/30/20 rule to guide you so that you save 20-30 per cent (Sh13,400-Sh20,000) of your total income, channel 50 per cent (Sh33,500) into necessary expenses like food, rent, transport and utilities, and allocate 20 per cent (Sh13,400) to wants and unnecessary expenses like black tax or donations, entertainment, paid up TV channels, subscriptions and the likes. The percentages can be adjusted from time to time.
Track your money on a daily, weekly and monthly basis for about three months. This will enable you come up with realistic financial estimates based on the average expenditures on various items. A budget and daily expense tracker will enable you reduce your expenditure on unnecessary expenses and increase your savings and investments.
To finance and complete the remaining rental units, you need a robust investment strategy anchored on sound short-term, medium-term and long-term financial goals. It is commendable that you have already acquired land and built two rental units.
You have indicated that to build an additional three, you need about Sh1 million, which is on the lower side considering the escalating cost of building materials and labour. One of your medium-term goals should be to finance your construction project.
There are various funding options. One is going for a Sacco loan which will require you to have accumulated a collateral saving deposit of about Sh350,000.
A Sacco loan is much better than other loaning institutions because the profits realised are ploughed back in terms of dividends and the interests charged are on a reducing balance and are comparatively lower than banks or micro-financing institutions.
You can also secure a bank loan in case you realise that it will take long for you to raise the required minimum deposit for a Sacco loan, although this option comes with higher processing costs and interests. Third, you can approach venture capitalists and angel investors who can finance your rental business in exchange for equity which eventually makes the financiers partial owners of your business.
Fourth, you may consider building one unit at a time the same way you have done with the first two. If you haven’t already, set up the foundation and slab for the three units then start walling one unit at time.
That way, ready units will start generating income and help finance the building of the others. This method will give you space to acquire materials at your own speed.
Assuming that the return on the investment in rental units based on the current rate is Sh5,000 per unit, then three additional units will realise Sh15,000 more, totaling to Sh25,000.
However, these amounts are bound to go up once you renovate the existing units and do a fine touch to the three more units which presumably are standard on-demand bedsitters. If each unit goes at Sh7,000, you will collect Sh35,000 every month, translating to a whopping Sh185,000 at the end of the year.
This amount is sufficient to repay your loan and use the remaining balance for reinvestment in other income generating projects. Diversify your investment into other asset classes such as stocks and government securities.
In addition, diversify your savings beyond Sacco by taking a life insurance policy and establish an emergency fund by opening a compound interest earning money market fund to cushion you against unforeseen eventualities.
It is not prudent to purchase a car on loan because that will be a liability rather than an asset unless you convert the car into a taxi business to generate positive cash flow instead of incurring bad expenses such as spending at least Sh1,000 daily for fueling (with the escalating fuel costs), incurring unspecified amount for repair and maintenance. The best strategy is to build more assets that will generate enough cash flow to finance the car purchase and other operational expenses.
If you have any money problems, send us an email at [email protected] and leave your number for contact. Money questions will be answered here.
