By Eunice Macharia
Why invest in real estate? This question that many investors will ask as they consider the various investment options that are available to them.
There are many benefits of investing in real estate. A well-considered and planned real estate investment should be able to provide predictable cashflow, good returns, a leverage to build wealth, diversification and tax advantages among other benefits.
In Kenya, a good residential medium sized property investment like apartment block should be able to break even within eight to ten years. This may be a little longer if the initial investment funds are borrowed to take care of interest expenses. As a safety net, you should select a property whose rental returns are able to cover your mortgage or loan repayment. In Kenya, the interest paid on the loan can be expensed. After the repayment of the loan/mortgage or after one has recouped their initial investment funds, the property offers a stable cash flow for its lifespan, which can be thirty to fifty years or more.
Property owners can engage the services of professional property managers to manage their properties, hence giving them an opportunity to concentrate on other commitments. Cashflow should grow over time as you build your equity leading to financial freedom to investors and a good pension in old age.
Leverage to build wealth
Real estate investment provides a good basis for one to build their wealth. One can use their property as collateral to borrow more funds and increase their investment in the field or in other areas. The income generated from the rental income can be used to service future loans. Property bought at lower prices and which have appreciated over time can be sold and the funds re-invested.
There is an old adage that one should not put all their eggs in one basket. Diversifying investments therefore becomes important to avoid adverse effects in the event that one area of investment like stocks and bonds goes down. Property investments have been found to be one of the stable alternative investments. Except in situations of property market crashes which are rare, property is expected to appreciate over time.
Tax and other government incentives
Property developers in Kenya are offered certain tax and other incentives by the government in order to lower the costs of development. Once developed and leased, property owners are allowed to deduct the cost of managing, operating and maintaining the property from their taxable income. This includes the cost of hiring a property manager and other staff, cost of servicing the building, cleaning, security, utilities like water and electricity, garbage collection, cost of repairs among others.Also, depreciation expenses are also expensed.
Housing developers in Kenya can now participate in development of low-cost housing where the government is guaranteeing developers a ready market for houses built under the affordable housing scheme. To avail long term mortgages and loans, the government is in the process of establishing the Kenya Mortgage Refinance Corporation. Other incentives for low-cost developments include : halving corporate tax for developers who have built at least one hundred low-cost units, a 15% tax relief for purchasers of houses under the scheme as well as installation of critical infrastructure like water, power supply, sewer lines, roads and drainage in proposed low-cost housing development estates to reduce the developer’s costs.
There are endless opportunities for investors in real estate. The investors make money through rental income, value appreciation and liquidation of the assets.
The passive income that the assets generate allows successful investors to take control of their time without being actively involved in the day-to-day management. Some real estate investments like Real Estate Investment Trusts (REITS) allow one to invest without having to own, operate or finance projects. There is also a wide range of investment opportunities to choose from low-income housing and commercial facilities (like stalls) to multi-million high end properties and everything in between.
Prospective developers should take time to review the real estate investing strategies that are available to decide which opportunity is best for them to make the best-educated decision. Consultation with property investment professionals is highly recommended.
The writer is the Managing Director of Etwons Property Consultants Ltd (valuers and estate agents). She is also the Chairperson – Estates Agents Registration Board and former Vice Chair- Institution of Surveyors of Kenya.