By Eunice Macharia
Are you an investor in real property? Do you want to invest in rental properties? If yes, there are several factors that you need to consider in order to invest in the property that suites your needs and desires.
Do you want to build or to buy?
`You can choose either to buy a ready unit or choose to build from scratch. Buying a readymade unit will save you time and the challenges of the construction process. You will also start earning immediately. For example, if you are investing in a block of apartments, it is possible that the units are already occupied so once the transfer is done, you will start collecting the rent immediately. The process of identifying and buying can take approximately six months. The downside to buying readymade units is that you will of course pay more because the developer or seller will want to make a profit. You also will not have a choice on the construction design.
On the other hand, you can choose to build the block of apartments. In this case, you will start by purchasing a suitable plot, then engaging professionals to design and contractors to build the units. The process of identifying and buying the plot can take up to six months. Design and approvals on the other hand may take four to six months and construction twelve to eighteen months. In total, it will take approximately two years to build and the process is involving. The main advantage of managing the construction process on your own is that it costs much less than outright purchase. You also get to choose the design for the units and if you do not have all the required funds, you can build at your own pace as you raise the funds from other sources.
Purchase and closing costs
Once you have decided on the approach, you will need to consider the costs. These can be divided into two categories: the initial costs to acquire the property and secondly, the running or maintenance costs.
In the first instance, there are costs towards acquisition and these include the purchase price for those buying ready units. For those doing construction, it will include the cost of buying the land, design and approval costs and cost of construction. Other costs in both purchase and construction will be the consultancy costs which include agency commission/fees, valuation fees and legal fees. Also included are the transfer charges and fees that include land board approval charges for rural properties, the stamp duty and transfer fees. If the funds are borrowed from financial institutions or other sources, the investor needs to consider the cost of funding. It is imperative that an investor takes into consideration all the costs to have a smooth purchase or development and prevent stalling of the process or unnecessary delays.
After purchase or construction, the developer will now need to take care of the running costs. These will include maintenance costs like cleaning, cost of power and water for common areas, cost of repairs and manpower like property management costs and caretaker costs. Other costs include commissions paid to agents who assist in identifying tenants. For example, if you have Kshs.400, 000 in rental collections per month, a portion of this (up to 10%) will go towards the maintenance costs. The other costs are insurance and landlords’ taxation costs.
Your target market
While investing in apartments, you should carefully consider your target market. Is your target the low income earners, the lower middle income, the higher middle income or the high income earners? Or is it the special groups like students? Each of these groups have their own unique needs and preferences. Their financial capabilities are also of course different. While the low income earners are looking for basic provisions, the high income earners are looking for convenience and prestige. A block of apartments in Nairobi’s Pipeline estate for instance, will differ greatly with the ones in Donholm, Ruaka and Kilimani in terms of actual space, number of rooms, finishes, design among other aspects. The cost of construction and the income is also different. In the middle income and high end areas, you will need to provide ample parking which is not the case in the low income ones. You will also require facilities like stand by generators and boreholes in high end areas. The quality of finishes like tiling will be different. While you can get away with say a plain ceiling in middle lower and low income market segments, the high end one will demand acoustic ceilings. You also need to consider whether you are targeting families or single persons. Families require more space – two and three bedrooms – while for singles, studios and one bedroom units will suffice. If you go for students, then the units will be required to cater for their unique needs.
What to Invest In
The type of units to invest in will also differ depending on your choice of location and target market. In some locations, you will mostly find apartments, while in others, it could be town houses with some sharing common facilities in gated communities. Where privacy is required, then the units will be separated in individual compounds. Due to security and other concerns, the society has embraced the idea of gated communities. You can also invest in vacation units. These can also be jointly owned in time shares with a common management. You can also invest in commercial premises for letting or for sale.
Where to Invest
The investment can be in urban centres like Nairobi and other major towns depending on one’s budget and personal preferences. Land in urban areas will be more expensive than in rural areas but again, the income in terms of rent and sale prices from urban properties is higher. Investing in satellite towns like Kiambu, Ngong, Limuru, Kikuyu, Ongata Rongai and Kitengela gives you the advantage of attracting tenants or buyers from the main city like Nairobi.
Sale and rental value
While investing, you will need to carefully consider the income from the type of investment that you choose. This will differ with location, type of unit, the size of the unit, the type of finishes and the extra facilities provided. For example, a two bed roomed unit in Pipeline and similar estates will let at Kshs. 7,000 per month, while the same unit will let at Kshs. 15,000 in Donholm, Kshs.30,000 in South C and Kshs. 70,000 in Upper Hill. The difference is that in Pipeline, you can do 40 units, in Donholm you will have say 20 units, in south C, 12 units and only about 10 in Upperhill from the same size of land.
Cost of Land
The cost of land contributes greatly to the cost of the investment. Urban land will cost more than rural land. The further one is from the central business district (CBD), the cheaper the land becomes. The cost of land also depends on the exact location and the socio-economic status of the neighbourhood. With improved infrastructure, urbanites can now comfortably live in peri – urban areas like Kikuyu, which are easily accessible to Nairobi through the Northern Bypass. The investors therefore have a wide choice. You can purchase a quarter acre at Kshs. 10 million at a good location in Kikuyu. The same will cost you close to Kshs. 40 million in South B. This translates directly to the cost of the units.
Cost of Construction
The cost of construction will vary from one location to another and from one type of design to another. Some types of soils (like red soil and murrum) are easier and cheaper to construct on while others like black cotton soils increase the cost of construction as they have to be excavated and carted from the site. The design of the building also contributes significantly to the cost. If a building has more washrooms, the cost for piping and fittings will go up. Similarly, the finishes in a building like tiles, type of doors and acoustic ceilings also raise its cost as does the type and size of fittings like wardrobes and kitchen cabinets as well as electrical and plumbing fittings. It is therefore important to consider these costs while planning your investments. It is also good to consider the maintenance costs as these can eat into the building’s income. For commercial premises, I would suggest that you consider finishes that are maintenance free. Also good quality electrical and plumbing fittings will save you frequent breakdowns and replacements. It is also critical that you employ qualified workers and professionals. We have had cases of buildings collapsing due to poor designs and construction standards. Poor working electrical and plumbing systems can also be a nightmare. So while planning to construct a building, one should always consider the role and cost of consultancy works.
Availability for services
Availability of economic and social services should be considered while investing in real estate. This will also be in line with the investment type. Availability of good roads, clean water, electricity, schools, public transport, hospitals, good security and shopping and other social facilities is important. Some types of facilities will attract different people depending on their socio- economic status. For example, for low and middle income earners, public facilities like transport, public schools and hospitals are critical. A building without clean water and good security will be less attractive than one that has these facilities. The further a building is from public transport in low income estates, the less the rent and vice versa.
Investors should carefully consider the cost of compliance with legal requirements as part of the cost and process of construction or outright purchase. For example, all buildings in urban areas must be approved by the local government. The process of approval takes at least three months. The National Environmental Management Authority (NEMA) and the National Construction Authority (NCA) approvals will be required. For commercial facilities, there are safety and health requirements to consider like cost of installing horse reels and fire equipment. The Safety and Health Act also requires provision of escape routes in case of fire. The law also requires provision of lifts for buildings taller than five floors. Planning regulations dictate the site coverage among others. In buildings exceeding a certain amount of hot water usage per day, the law dictates provision of solar heating. If you have a residential property and you wish to invest in a commercial property, you will need to apply for change of user from the local authority first. These and other requirements ultimately increase the cost of construction and the period it takes.
Eunice is an experienced professional in the field of property. Based in Nairobi, she is the managing director of Etwons Property Consultants. She is a registered and practising property valuer, a registered estate agent and a former Deputy Chair- Institution of Surveyors of Kenya – ISK.
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