Thursday, November 30, 2023

Bizna Kikao: Where do I invest 3m savings for maximum returns?

Bizna Club Member: I have saved Ksh 3M. There are 2 investment options I am considering. Which one should I go for? # 1. Buy a plot worth Ksh 2.8m with ready rentals bringing in Ksh 40 000 monthly. # 2. Put up a new branch for her existing business at Ksh 1.5M ideas on how to spend it. By Benson Bundi

Bizna Kikao is an open platform where Bizna Club members can exchange ideas on how to improve their personal finance and business well-being.

Firstly, it’s important to consider the source of the money in question. Is it from savings or loans? Secondly, has the nature of her business been structured to allow growth?

Opening a new branch would be inadvisable if the business is only productive in the owner’s presence. A new branch should only be opened if there is a possibility of operating the business autonomously.

However, if she is not going to open a new branch, acquiring the plot would be the best recourse – assuming she has done enough due diligence on whether the plot has a title and the rental income is exactly Ksh 40,000.

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Not only will the rentals provide passive income, but she can also use the property as security and a source of steady income to secure a loan to finance the opening of the second business branch.

This will enable her to repay the loan without affecting the first business while giving time for the new branch to break even.

Finally, it may be a good idea to renovate the property and see if it can fetch more. Here is a full evaluation of rentals vs opening a new business branch:

Option 1: Buy a plot worth Ksh 2.8m with ready rentals bringing in Ksh 40,000 monthly.

  1. Break down of expenditure – Ksh 500,000 – 800,000
  2. Administrative expenses (permits and licences) – Ksh 200,000 – 300,000
  3. Construction of 10 – 12 single rooms each costing Ksh 160,000 – 180,000 – Total construction cost Ksh 1,700,000 – 2,000,000

The rooms will be rented at a rate of Ksh 3,500 – 4,000 per unit giving you an income of Ksh 35,000 – 45,000 monthly. Minus expenses, you should make Ksh. 25,000 – 35,00 net income monthly.

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According to Henry Ayieko, a real estate consultant, rentals are a good source of passive income. Even with 10% expenses and 10% vacancy, the returns can be as much as 13.9% yearly. For this option, money trickles in immediately, unlike a new business that takes time to gain traction.

However, tenants might vacate the premises, and it might take time to replace them. This might mean that the Ksh 40,000 per month might not be assured until the tenant is replaced.

In rentals, the return on investment is about six years, which is only possible if the house is at 100% occupancy level. If the occupancy level is 50%, the rentals will take 12 years to recoup the capital.

You want to ensure the houses are in good condition and in a good location. You should also ensure tenants have treated well and the availability of security. Otherwise, the ROI might exceed six years.

Option 2: Put up a new branch for her existing business at Ksh 1.5M

Opening a new business branch might be a good investment, considering that you’ve been running the business and are familiar with its pitfalls and strong points.

However, ensuring your business is already running smoothly and profitably before opening a new branch is important. Remember, what works in one area might not always work in another. If you have trouble managing your first branch, you will certainly have trouble running any new branches.

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Other factors that should be considered when opening a new business branch include market requirements, location, availability of enough resources, and business plan.

Finally, it’s important to have excellent customer service and an aggressive marketing campaign to accelerate your growth.

Alternative Investments

Rather than investing in rentals or opening a new business branch, Njung’e advises investing the capital in Treasury bonds and bills.

According to him, if one invests Ksh 2.8M in the current infrastructure T. Bonds @ 14% pa tax-free, one can earn Ksh 32,666.666 interest per month, paid bi-annually. Alternatively, one can invest in a high-yield Money Market Fund scheme.

He further advises that the best investment is a hybrid model where the structure of your capital is segregated into two equal portions, one into low but guaranteed returns and the other portion into high risk but with potential for high yields.

Do you have a burning question on entrepreneurship or personal finances?

Email your questions to [email protected] or WhatsApp +254738198620 or +254722529685 and get advise from Bizna Club members and the wider Bizna audience.

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