My name is Christopher. I’m 40 and I have a family of six. My financial status is as follows:
1). Income: Salary Sh37,500; Travels Sh25,000; Rental Sh10,000; Others Sh3,500; Total: Sh76,000.
2). Expenses: Sacco savings Sh10,000; Sacco loan Sh5,000; School fees Sh10,000; Family expenses Sh15,000; Work related expenses Sh10,000.
I have an acre of arable land, a 50*100 plot. My wish would be to bring up a business or set up guest houses in this plot. Kindly assist me in (re) aligning my vision with my income.
Dominic Karanja, Financial planning and investment consultant
At the age of 40, you need to focus on building your wealth, educating your children, controlling your debt, family health and planning for retirement. It is recommended that you commit 20 percent of your income towards savings and investment but in your case, you are only saving 13 percent of your net monthly income with the Sacco. How long have you been saving in the Sacco and what amount do you currently have as savings? This is what will determine your capacity to fund your projects.
For instance, savings for a period of 10 years at your rate of Sh10,000 per month will get you Sh1.8 million at an interest rate of nine per cent and assuming that all dividends earned are ploughed back into savings. Saccos are a good source of development loans. However, your income sources need to be enough to afford the monthly loan instalments. It is recommended that you commit at least a third of your net income towards loan repayments.
Currently, the excess amount you have after paying for your monthly expenses and Sacco savings can only afford you a Sh600,000 Sacco Development Loan at an annual interest rate of 12 percent on a reducing balance payable in 48 instalments of Sh15,800. Considering that real estate investment requires a lot of capital and it’s a long-term commitment the loan is not sufficient to complete the project. You will need to consider your spouse’s income because if she assists in paying some of the family expenses it will assist you to have more funds committed towards the project.
A 50x100ft plot is the equivalent of a one-eighth of an acre parcel. This might not be very sufficient space for the construction of a commercial building and guest houses if you want to provide ample parking slots. This land might be sufficient if it is utilised for a multi-storey development. However, this type of development might require more financial resources to accomplish. Start by getting a suitable plan from a qualified architect and a bill of quantities to help you measure costs versus possible returns on investment. If the land is not in a prime area where there is demand for guest houses, you might sink your cash only to realise that rooms fetch as low as Sh500 to Sh800 per day. The reality, though, is that even in high-traffic areas, you would enjoy only half capacity.
Alternatively, you might go the temporary rentals way, whereby you set up rentals one at a time. If in future you might want to develop this land into a multi-storey rental development, you may consider setting up temporary mabati houses for rent. These will help boost your income as you gather resources for the mega construction. However, if the land is not in a prime area, consider selling and investing your money in a more productive manner. Setting up rental houses in a rural area may take years before you can recoup your investment.
Start by constructing the core structure then keep on adding more rooms in phases as you accumulate more resources. Remember there is an opportunity cost for investing in real estate and thus the returns from that investment should be higher than what you should be earning from other sources of passive income. Should the returns from the real estate investment be lower than other passive investment options like government securities you will need to defer the project. BY DAILY NATION