My name is Sarah. I earn Sh37,750 monthly. My expenses of rent, food, transport, water and electricity bills take up Sh26,000, Sacco Sh3,000 and Chama Sh5,000. The Chama is not a merry-go-round but more of table banking. My Sacco savings currently total Sh106,000 and in the Chama, I have Sh134,000. My plan this year is; I have a small plot in a ghetto area where I can build about eight temporary rental houses to go for Sh3,000 rent monthly each. The project will cost between Sh400,000 to Sh550,000. Kindly advise me on the best way to raise the money and how possible it is to achieve this by the end of the year.
Dominic Karanja, Financial planning and investment consultant
The budget you have offered for the project might be on the lower side. If we work with the higher budget you have provided of Sh550,000, the cost for each of the 10ft x 10ft iron sheet houses translates to Sh68,750. I would urge you to work with a higher budget of about Sh700,000 so that your project doesn’t stall halfway. Since you are not the only one offering those kinds of houses in that area, you need to provide houses that will be appealing to potential tenants. This includes reliable sanitary areas (toilets) and possibly water.
Saccos are a good source of development loans because they can advance you a loan amount that is three times your savings; however, your income sources need to be enough to afford the monthly loan instalments. If you continue saving Sh3,000 per month with the Sacco you will have saved Sh136,000 by the end of the year which can enable you to access a loan of about Sh408,000 from the Sacco. I would recommend that you reduce your Chama contribution and double your Sacco contribution so that you can qualify for Sh500,000 loan by the end of the year.
It is recommended that you commit at least a third of your net income towards loan repayments, meaning at the moment you can commit up to Sh10,125 towards loan repayment, but you require to adjust your current budget since your monthly commitments are slightly higher than your income. If you access Sh500,000 Sacco development loan at an annual interest rate of 12 per cent on reducing the balance payable in 60 months you will be required to pay monthly instalments of Sh11,122. In your case, since you are investing this money in an income-generating project, you can afford to pay higher loan instalments when the houses are occupied which will enable you to pay off your loan earlier.
You will need to reduce some of your expenses during the construction period and before the houses are occupied. I would encourage you to increase your monthly Sacco savings once your project starts generating income. I would also recommend that you set up an emergency fund that can take care of at least six months of your expenses. Consider investing part of the income that will come from your project in this money market fund.
I assume that your Chama is a time-bound accumulating savings and credit association where members save regularly and borrow from the Chama fund, usually after about a year, all the financial assets are divided among the members in proportion to each one’s savings. Once you are paid your savings and dividend by the Chama you can add that amount to the Sacco loan so that you will have enough funds to undertake the housing project.
Landlords whose rental income is below Sh24,000 monthly (Sh288,000 per year) are exempted from 10 percent income tax. Assuming the best-case scenario of 80 percent occupancy rate, with a rent of Sh3,000 per room you are likely to be collecting about Sh19,200 rent per month which is almost an annual return rate of 30 per cent before factoring in defaults and maintenance expenses. We are living under hard economic times which have affected people at the bottom of the social pyramid adversely and thus you should expect defaults and delay in rent payment. BY DAILY NATION