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Should I take Sh20 million loan or save and build rental houses?

 

My name is Eunice. I earn a net of Sh250,000 (after Sh16,000 additional deductions that goes to voluntary retirement contribution). I would like to construct rental units in a 50*100 plot that I already own (tentative cost is Sh20 million). I have access to a facility at 8 percent p.a. from my current employer with a repayment period of 20 years. Do I go for the loan or save and build in phases?  Are rental units a viable investment in the first place? Below is my expenditure:

  • Sacco loan: 65,000. Balance Sh1.5 million.
  • Sacco savings: Sh1 million (I have paused saving).
  • Tithe: Sh20,000.
  • Money market: Sh25,000 (current savings Sh100,000).
  • Bonds: Sh70,000.
  • Household expenses: Sh32,100 (including nanny salary of Sh10,000).
  • Fuel: Sh20,000. I drop kids at school hence the high cost. 

The remaining balance accumulates in the account and is used for personal expenditure / social support. Currently, I have Sh2.1 million in bonds which I earn approximately Sh20,000 per month which I re-invest in the money market. Our current house, occupied three years ago, is incomplete, but very habitable and requires approximately Sh1.5 million to finish. I would also want to pay Sh200,000 for my niece's college.  How do we accomplish all this in the shortest time - like 5 years?


Viola Sanga, Assistant Manager, Investment Accounting, Enwealth Financial Services

The 8 per cent interest rate on offer is without doubt enticing. It’s way lower than what formal banks are lending. But before you take the loan and venture into construction, look at the income projections of the rental investment. Is income from the rentals guaranteed? What are the risks involved? Is your job security and income guaranteed over the repayment period? What would happen if the job ended? A basic schedule projects that the Sh20 million over 240 months (20 years) will cost you Sh167,288 in monthly repayments. 

The total interest will be Sh20,149,120, meaning your total repayment at the end of the loan duration will be Sh40,149,120. If you were to scale this down to a five-year repayment period, your cost (interest) will be projected to be around Sh4.3 million. Your monthly payments are projected to be Sh405,528 for five years

Any income you may project is dependent on the rental units being occupied. In a perfect world, under the five-year projection, if you have an apartment of 20 units of two-bedroom houses in Nairobi that you rent out at Sh30,000 each per month, this would translate to a net present value of Sh2.3 million with the assumption of 100 per cent occupancy making it self-sufficient. 

The reality, though, is that completing construction will take time, during which you will still be required to meet your instalments. This means that the more viable of the two options is the loan at 240 months. You will still need to service from your paycheck about Sh167,288 monthly before rental returns kick in. As it stands, your surplus is Sh18,000 after your expenses are deducted. 

Get a proper bill of quantities to project what construction materials and labour will cost in the event of inflation. This should be contrasted against the proposed location, rental supply, and the prevailing rental rate of returns to give you an idea of whether the rentals will be the best investment. For example, it will make more sense to invest in infrastructure bonds that offer returns of nearly 14 per cent instantly than to pile your cash in real estate apartments with returns dependent on project completion speed and percentage of occupancy, at lower ROI rates.

You have an outstanding loan and an incomplete home project. It will take you 24 months to clear the current loan of Sh1.5 million with your current repayments. Your tithe isn’t cast in stone. Reduce it to Sh5,000 and top up the extra Sh15,000 on your repayment, to clear the loan in one and a half years. 

This will take your surplus money to Sh98,000 (Which would still be lower than the Sh167,288 monthly instalment needed for the mega rentals’ loan). 

You have Sh1 million Sacco deposits. If your Sacco is reputable, they will earn you dividends at a rate of 10 to 13 per cent. This translates to about Sh100,000 to Sh130,000 annually. Reinvest the Sh20,000 (Sh240,000 annual returns paid every six months) average bond returns into the bond. This will take your monthly bond investment to Sh90,000. 

Make sure you are in the government infrastructure bond that pays highs of 13.7 percent returns. With a disposable income of Sh98,000, resume your contributions to your Sacco. You may start off by saving Sh50,000 in the Sacco and utilising the remainder towards acquiring materials for the phased completion of your home. On the college fees for your niece, have you explored the Higher Education Loans Board (Helb)? If Helb is not an option, you may redirect the disposable income towards raising the Sh200,000 fees. Hive off Sh50,000 to settle this expense within four months.    BY DAILY  NATION   

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