I am a doctor and my goal is to have passive income that pays my bills 10 years from now. Currently, after paying all my needs, I can save between Sh100,000 and Sh150,000 monthly. I was thinking of buying a house off-plan. I’ll make a deposit of 10 per cent and finish the rest in 36-48 months at a cost at Sh8 million, then rent the house afterwards. Is this a good investment? What about offshore stocks, Saccos or any other investment that can fulfil my goal?
Benjamin Cheruiyot – Engagement Lead at Abojani Investments firm
To achieve your goal, you will need an investment of Sh10 million earning 18 per cent annual interest. Putting aside Sh120,000 monthly will add up to Sh1.5 million in the first year. Achieving Sh10 million for long term investment can take between five and 10 years. If saved in an ordinary bank account, it will take you 10 years but the cash will have lost nearly 50 per cent purchasing power. A modest, annual return rate of 12 per cent typically in a Sacco or money market fund will accumulate to at least Sh1.65 million in the first year. In five years, it will add up to Sh10 million. With this amount in cash, you may then decide where to put it. The following options are feasible.
a) BOSA or Money market fund. At 12 per cent net interest rate, a Sh10 million investment will earn Sh1.2 million. This will average Sh100,000 monthly. b) Treasury bills. At 14 per cent annual return rates, this will earn you at least Sh1.4 million, averaging Sh116,000 monthly. c) Treasury or Infrastructure Bonds. At 18 per cent return rate, these will earn you Sh1.8 million, averaging Sh150,000 monthly.
Offshore stocks would require expert guidance on pickings, and still, you may not achieve yields above five per cent on dividends unless you actively trade on share price fluctuations. Should you opt for an off-plan purchase of a house, you will need to service monthly repayments at Sh160,000 for 48 months. Depending on location, an expected rental income of Sh150,000 may be a hard target. Most two-bedroom serviced apartments attract monthly rent pricings of between Sh70,000 and 100,000 in middle class locations like Kilimani. Upmarket locations that may attract your desired rental income would cost you much more to acquire.
Real estate returns average eight to 10 per cent per annum. Your Sh8 million investment would fetch between Sh55,000 and Sh65,000 a month. This falls 40 per cent off your expectation. Investing Sh10 million in an infrastructure bond for Sh150,000 monthly will help you efficiently acquire property for renting.
Bonds pay every six months. You will earn Sh9 million in the first six months. This can pay a 10 per cent deposit. Rental income of about Sh60,000 will comfortably service a mortgage. Continued monthly savings of Sh120,000 will enable you explore other investments for diversification such as offshore stocks, hedged funds and Exchange Traded Funds (ETFs) while still keeping your basic vehicles – Sacco and MMF.
