I want to buy a plot and car on loan and later build Sh2.5 million home. Is this a good move?

My name is Clement. I am planning to have a car worth at least Sh700,000. My current income is Sh65,000 net. I repay a loan at Sh30,000 every month. I pay Sh5,000 per month education plan for my son and Sh2,500 for my daughter every month. House rent is Sh17,000, House help is Sh6,000, bills amount to Sh4,000. I also get other payments as loyalty at Sh15,000 per month. I have three businesses; one gives me an income on average of Sh10,000 per month, and another Sh5,000 per month.

The third is new but it can generate around Sh10,000 monthly. I am also about to buy a plot worth Sh300,000 on a loan that is to be paid within two years. Is it possible for me to buy the car and own my own house worth Sh2.5 million on the plot? What do I need to do to make this possible and how soon can I realistically achieve these goals?

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

Your current income is Sh95,000 without factoring in the expected Sh10,000 from your third business. Your current expenses are Sh64,500. You have a budget surplus of Sh30,500.00 that you can use towards fulfilling your investment goals. Assuming that the loan repayment installments of Sh30,000 are inclusive of the repayment of the Sh300,000 loan for purchasing the plot, these are the two options that you can consider;

Option One:

This is the riskier and costlier loan route. If you take the car loan at an interest rate of 14 percent, and get repayment of 2.5 years, your repayment per month will be about Sh28,000 which is within your capacity. Within the 2.5 years, you will have paid off the loans for both your car and plot. Once this is done, you may then consider taking a development loan to construct your house. With many lenders (including SACCOs), you will need to have 20 percent of the amount you borrow, and the maximum loan repayment period will usually be 10 years. You will therefore need to save up Sh500,000 for the deposit.  

This should take you 14 months of saving Sh35,000 every month (Assuming that you free up at least Sh5,000 for saving after paying off the current loan and adding this to Sh30,500 that you are already investing). After raising the deposit in 14 months, you can take a loan for the balance of Sh2,000,000 to construct your house. If you get a development loan at 14 percent, you can repay the loan in eight years with a monthly repayment of Sh34,743. Once you have completed constructing your house, you can increase your loan repayment with Sh17,000 that you will be saving from rent – now that you will be living in your home. This will reduce your repayment period by about 1.5 years.

If you start this journey now, you will get your car immediately and the loan paid off in 2.5 years (by mid-2025). You will have paid off your plot loan in two years (by end of 2024) and you would move into your house in 4.5 years (mid-2027) assuming it will take you 10 months to construct. You will then pay off all your debts for these investment goals in 11 years or thereabout (2033).

These milestone marks can be reduced if revenues and net profits from your side businesses are increased. At the same time, you should consider the extra costs that will come with owning a car on loan and how these can eat into your funds and compromise your goals. This can be mitigated by acquiring a car that will support your businesses.

Option Two:

This is the safer and debt-free route. You can invest Sh30,500 in a Money Market Mutual Fund for two years and with a conservative net interest rate of 7.5 percent, you will have Sh789,000. You can purchase your car in cash and by then, you will be done with repaying your land loan. You can then focus on building your house. You can then invest the boosted Sh35000 savings in a Money Market Fund for four years. At a conservative net rate of 7.5 percent, you will have saved up about Sh1.9 million over the four years. This figure can rise higher if you choose the right MMF.

Do your due diligence and avoid scandalous funds and fund managers. You can start your house construction with these funds as you continue investing the Sh35,000 monthly in your house construction. You should be done building your home in less than one and a half years. If you choose this path, you will have to wait two years to drive your car and wait seven years to move into your house. The advantage is that you will be debt free. Most people who choose to build their house debt free save a lot on legal, assessment, and loan fees. Taking this route also protects you against foreclosure risks.

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