What should you factor in before making the decision to invest in Kenya’s rental market? The rental property market in this country is experiencing a tremendous growth due to the ever-increasing demand for rental houses. It is a lucrative investment that has attracted thousands of Kenyans and non-Kenyans who are seeking a steady flow of income from the promising real estate industry.
However, like any other investment, it attracts a fair share of risks that could jeopardize your returns as an investor in the rental property space in this nation. For this reason, you must take all the necessary steps to safeguard yourself from any misfortune before venturing into the rental property business as an investment. So, what should you consider before investing in this opportunity?
A guide to Investing in the Rental Market in Kenya
- Evaluate Your Reasons– Every Kenyan has a specific reason (s) to create a steady flow of income in the rentals space. Before putting your money into this venture, you must have clear goals as to why you want to a piece of the rental market cake.
Are you planning on buying property for short term or long-term rentals, vacation rentals or students’ housing? Setting goals and having a purpose will influence other related factors like financing, location, social amenities etc. Find a property with features that are appealing to your potential tenants.
A perfect combination of valuable investment is finding property that matches your investment strategy while fulfilling the needs of your target tenants.
- Study the Location – After evaluating your purpose for investing, find a perfect location that suits your goals. Look for places that have high potential for growth. Gather adequate and relevant information on the neighborhood before making any decision.
How is the infrastructure and the transport system? What are the social amenities available in the vicinity? How is the security status? How is the market fairing?
Find out if there is an oversupply of the kind of property you want to invest in the area. If you are looking to invest in one-bedroom units in an over-saturated location, this will affect the occupancy rate of the property.
- Evaluate your Finances – How do you intend to finance your investment? How much money do you have? Most banks in Kenya require an average of 20% – 30% of the value of the property as a down payment before granting you a
Engage a mortgage adviser to find out the available options keeping in mind the interest rates and durations for the mortgage approval process. Do not settle on your first mortgage offer. It’s possible to get a lower interest rate or more money from your bank. You will have to prove your credit-worthiness and possibly bring lower quotes from different sources to give you better-negotiating power. The key is to shop around for different offers before you settle on your choice.
When dealing with finances keep in mind other additional costs that will not be covered by your financier that you need to settle before renting out the property. These include; maintenance costs, agency fees, property purchase tax and closing costs which could be fairly high. This means you need to have a good reserve despite getting funding.
- Work out Expected Returns – Before making that big move, you must know whether the investment makes financial sense or not. Find out the capital growth potential; (whether the value of your property is likely to grow over time) and estimated rental return.
Study the average rental prices of similar properties in the area to calculate the rental yield of your property. Rental yield is a percentage of estimated annual rental income divided by the cost of acquiring the property. Use this figure to estimate whether the rent you will receive can take care of the cost of maintaining the property while still making a profit. A good rental yield is at least 7%. Use this figure to compare with other investments options like Government bonds, T-bills, money markets and shares in the Nairobi Stock Exchange (NSE).
Ensure that you can afford maintenance costs when the rental property is empty. As a landlord, this is not something you can avoid as it could take days, weeks or even months to get a replacement when someone moves out. However, this is something that you can take care of with proper risk management.
In conclusion, the Kenyan property market operates in cycles of demand peaks and falls. Investing in rental property provides a great opportunity to diversify your investment portfolio but does not come without risks. Be sure to have realistic expectations, do due diligence and assess your finances before committing to investing.