Investment property in Kenya has the potential to double and even triple in value per year, with the right property. So how does an investor finance a real estate investment? There are at least two main options available in Kenya: group investments and mortgages.
In addition to being able to prevaricate against risks like rising inflation, real estate investors can enhance their net worth, generate high capital gains, and experience potentially rapid rates of appreciation.
Real Estate Investment Financing Options
1. Group investments
This is the most efficient financing option and commonly used by the lower-middle class and those in informal employment who cannot qualify for mortgages and bank loans due to their irregular source of income.
Group investments, locally called ‘Chamas’, hold over Ksh80 billion of wealth in Kenya in terms of savings and investment, with one in three adults being an active member of a group investment club. They have registered the greatest success among women, youth and the self-employed.
-
To function, members make daily, weekly, or monthly contributions for a specific period of time and with a specific financial goal. Once goals are met, they identify a potential property, purchase it, and begin saving to develop it or divide it equally among group members.
-
Alternatively, banks develop investment pools and invite interested parties to make monthly contributions. If the group member wants to buy a property, she simply borrows (applying interest rates) from the group based on their contribution. Class members co-sign the loans and bear the cost of repaying the loan if one of the class members defaults.
The success of group investing is powerfully driven by a cultural impetus to pool funds to invest and borrow.
-
Most of the banking institutions and building societies in Kenya have realized the potential of option and have developed programs to encourage group investment; It is based on the idea of creating savings and investment opportunities.
2. Real estate loans and mortgages
There is a fine line between loans and mortgages in Kenya, and people often use the two terms interchangeably.
These are facilities offered by various financial and lending institutions, such as banks and mortgage companies, to help you buy a property:
-
Loans and mortgages are made to successful loan applicants who meet minimum loan qualification requirements.
-
Loans and mortgages can be fully or partially financed by you. Most lenders, however, finance the property up to 90%.
-
Several lenders have variable interest rates and income generating loans that charge an interest rate of 15% per year and real estate development attracts 13% per year
-
Owner-occupied properties can receive 80% financing, while investment properties, such as rental units or vacation homes, can receive up to 70% financing.
Loan and mortgage repayment duration
Maximum of:
-
15 years for individual borrowers
-
10 years for limited companies
-
2 years per phase for real estate development
additional costs
Most of the applicants for loans and mortgages in Kenya are unaware of the hidden fees that come with loans and mortgages.
-
Stamp duty
Currently at 4% of the cost of the property.
-
valuation rates
Rates vary by appraisal appraiser, and it’s critical that you have your own before the property is appraised.
-
legal charges
Determined by the amount of the mortgage. Higher loan amounts attract higher legal fees. Banks have their preferred law firms that they deal with, so be sure to learn from the lender what their preferred law firm is.
-
Bank facility charges
Varies between banks and is intended to cover loan facilitation
-
sanctions
Mortgage settlement charges before the agreed time; varies between
-
property insurance
It is not mandatory and is paid per year. Protects the property during the repayment period of the loan.
-
mortgage life policy
It varies between lenders and covers your outstanding balance in the event of your death.