How do I buy a car and build rentals with Sh1.8 million loan?

My name is Nelson. I earn a gross of Sh100,000. I currently have no loans. My monthly expenditure is as follows: rent Sh15,000, household expenses Sh10,000, fees Sh5,000, Misc Sh6,000, Sacco savings Sh30,000, black tax Sh5,000, medical policy Sh5,000. I have a prime plot at Eldoret where I would like to build bedsitters. Currently, I have Sh500,000 savings at a Sacco and I plan to take a loan of Sh1.8 million in three months after saving Sh600,000. I have two ambitions; to buy a second-hand car at Sh600,000 and to build five bedsitters on the plot. But I am afraid about the costs, cost of the loan, project timeline and whether I will make it or not. Please advise.

Alex Kibebe is the founder of Rubiani Wealth Management Ltd and an investment consultant and business development coach.

From your gross salary, I would expect your net salary to be almost equivalent to your monthly expenses of Sh76,000 as per your provided schedule. This leaves you with very little if any at the end of the month. This is okay as you save Sh30,000 every month to your SACCO.

In order to accomplish your goals without getting into unmanageable debt or being unable to complete your projects, you will need to get a good estimate of the costs of building your rental property as well as purchasing a second-hand car. You can do this by getting a project bill of quantities from a professional.

According to a 2023 construction report, the cost of building has increased by about Sh1,500 per square meter as compared to costs in 2022 mainly due to inflation. There are also specific factors that will affect your costs of construction including topography and geography of the land, the choice of finishing, design of the property among other factors. You, therefore, need to hire a quantity surveyor to give you a more accurate estimate of how much it will cost you to construct your rental property. You can get a list of qualified quantity surveyors from the Institute of Quantity Surveyors of Kenya website to choose one. The costs of importing second-hand cars have also skyrocketed in the recent past. You also need to factor in the cost of maintaining the car, especially given the current high costs of fuel.

Once you have determined your costs of building the rentals and purchasing a car, you can proceed and raise funds to finance your goals. If the costs of construction plus the purchase of a car are as per your expectation of about Sh1,800,000, you can proceed and take a loan from your SACCO.  However, a loan of Sh1,800,000 at an interest rate of 12 percent per year and a repayment period of five years (60 months) will have a monthly repayment of Sh40,040. Since you currently have Sh30,000 to finance your goals, you will need to make adjustments to your budget to cover the difference. You can consider reducing the “black tax”, household and miscellaneous expenses. 

Alternatively, you can stop making further contributions to your SACCO and instead invest the Sh30,000 in a Money Market fund for a year. If you do, you will have about Sh380,000 in your MMF account and you can borrow Sh1,400,000 to finance your goals. The repayment terms will be Sh30,000 and this will be within your current ability.

If on the other hand, the costs of building the rentals plus the costs of purchasing a car are above your target amount, I would advise that you put the purchase of a car on hold and focus on constructing the rentals. It should take you about one year to construct the rentals once you have raised the necessary funds. You can therefore finance the purchase of your car from your rent collection and thereby avoid getting into further debt. The likelihood of the two projects surpassing Sh1.8 million is very high. Sh1.8 million might not be adequate for the construction of permanent rentals depending on quality and topography. A foundation reinforced with steel columns and beams can be especially costly. This means that you might consider setting up the foundation and building one unit at a time on an incremental basis.

If you have any money problems, send us an email at [email protected] and leave your number for contact. Money questions will be answered on this column.