Real estate investment requires careful planning and significant financial resources.
My name is Ibrahim. I have a prime land with a few temporary structures that earn me Sh20,000 monthly. I graduated last year and since then, I have not gotten a job.
I don’t have a family and this enables me to save Sh10,000 from the money I get from my structures. I intend to build one storey rental building with quality one-bedroom units on this piece of land. I anticipate this to cost Sh5 million to complete.
How do I go about implementing this project, given my current financial circumstances?
Dominic Karanja, a financial and investments consultant, says:
It’s commendable that you’re exploring ways to maximise the potential of your land for income generation. Constructing a rental property is a good strategy for generating income and building wealth.
However, real estate investment requires careful planning and significant financial resources. With your current savings of Sh10,000 per month, it would take a considerable amount of time to accumulate enough funds to complete the project on your own. At this savings rate, it would take approximately 40.6 more years to save the necessary amount.
Consider investing your monthly savings in a Money Market Fund (MMF) while you strategise on how you will fund the project. By saving Sh10,000 monthly in an MMF with an annual return of 13 per cent, factoring in tax and management fees, you could accumulate at least Sh126,000 by the end of one year.
MMFs offer a low-risk investment with guaranteed returns, ensuring the preservation of your capital and the funds remain easily accessible for withdrawals if needed. This approach not only keeps your savings secure but also offers the potential to generate additional income through interest.
Given the extended period required to save to generate enough resources to do the project, you should explore alternative methods to raise funds for your project. Consider generating more income by seeking a part-time job, starting a side hustle, or finding ways to increase revenue from your existing temporary structures.
Partnering with an investor or co-owner could also help share the project costs and risks, reducing your upfront investment and speeding up the timeline. Joint ventures investors or developers will be interested in a share of the rental income in exchange for financing.
Rental market dynamics
You can also consider an incremental housing concept where you will be building the houses in phases. Start with a smaller number of rooms and expand as you generate rental income. Additionally, I would urge you to consult a financial advisor who can help you create a personalised savings and investments plan based on your income, expenses, risk tolerance, and financial goals.
To have a thorough understanding of your project, it is essential that you develop a comprehensive budget that covers the construction expenses, permits, legal fees, and contingency funds.
Do research on the demand for rental properties in your locality to grasp the local rental market dynamics, tenant preferences, and prevailing rental rates. Real estate investment returns in Kenya can vary significantly depending on factors such as location, property type, market conditions, and demand.
In major cities, residential rental yields usually range from five to eight percent annually. Areas with high demand may offer higher yields, whereas less sought-after areas might yield lower returns. Commercial properties typically yield higher returns, ranging from 8 to 12 percent annually, influenced by location and tenant quality.
The cost of constructing high-quality one-bedroom units varies based on building type and location. According to the 2024 Integrum Construction Project Managers Report, construction costs for various residential buildings are approximately Sh55,350 per square metre for standard low-rise apartment blocks, around Sh60,435 per square metre for standard high-rise apartment blocks, and about Sh77,910 per square metre for luxury apartment blocks.
Consult professionals
These prices can fluctuate due to factors like specific location, market conditions, and material quality. While these figures provide helpful guidance for project planning, I would recommend that you consult professionals for precise cost estimates. Collaborate with an architect or contractor to develop detailed designs and accurate cost projections for the construction.
If you intend to build a one-bedroom house covering approximately thirty-five square metres, with construction costs ranging from Sh55,000 to Sh80,000 per square metre, the total expense would be approximately between Sh1,925,000 and Sh2,800,000. An initial investment of Sh5 million would cover the construction of two one-bedroom units.
Assuming a projected monthly rent of Sh15,000 per unit, this translates to an annual rental income of Sh360,000, yielding a 7.2 percent annual rental return. Additionally, if the property appreciates at five percent annually, its estimated value after five years would be approximately Sh6.3 million.
Properties in major towns tend to experience faster appreciation due to high demand and limited supply. Annual appreciation rates in these urban centres typically range from five percent to 10 percent.
Suburban and rural areas usually have slower appreciation rates, of around two to five percent annually, but may offer better value and potential for future growth as infrastructure develops. By combining rental income with capital appreciation, your overall returns would be significant.
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