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Saturday, August 8, 2020

To make money from rentals, build bedsitters upcountry

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Building Bedsitters in Kenya: This post was written and published by David ‘Kyrgitt’ Kiprono: Property market in Kenya is grossly over valued. A run down property in Loresho could cost you Sh. 85M yet the same amount can afford you premium property twice it’s size in a bigger economy like Cape Town or Ohio.

I once inquired of property prices in Ruaka. A quarter of an acre was going for 70M. It makes absolute nonsense to me. Why? Because it encourages tiny subdivision of land which in turn creates a zoning nightmare. It discourages better land use. Just like the cost of energy, property prices should encourage development for better chances at revving up the economy.

Also, young people are getting stuck on loans trying to buy and develop properties in such an untenable and risky situation such that a slight turn of fortunes such as a Covid pandemic land them on auctioneers’ lists.

Let’s do a flipside on property development for a second.

You buy a quarter of an acre at Ruaka at 70M. You develop the same with a four storey 2 bedroom apartments block. Each floor has 4 houses. You rent out the same apartments at 30K each. (I don’t know Ruaka rental rates but this is just estimation). The entire project earns you 480k before taxes and bills.

So, cost of property 70M
Cost of developing the apartment complex 20M

Then you have to wait for many months to fill it up with tenants… months of which financiers still enumerate for repayments.

So the flats cost about 90M from purchase to development for a paltry 480K return on investment.

How to build a three bedroom house with Sh. 800,000

How many years will you repay your cost of development?

Let’s forget expensive Ruaka. Let’s calculate the cost of the same in Kitengela. That’s more practical right?

A 50 x 100 plot in Kitengela goes for about 1.7M a piece.

To the clueless, 50×100 twice makes a quarter of an acre. 4 quarters have eight 50×100 plots thus, with this estimation, an acre here is 1.7m x 8 = 13.6M or thereabouts.

So, since construction costs only vary due to distance from source of materials, we shall estimate that building the same apartment block like the one in Ruaka will cost you 20M. If you add the property price for a quarter of an acre to build on your costs shall be in the ranges of 23.5M.

Kitengela may rent out the same apartments for 18K per flat. Let’s even use the same rate as Ruaka for the sake of argument. So your revenue before bills and taxes is 400K. (Even though the real estimates will be less than 300K per month before bills and taxes)

So if you borrowed a building finance of 30M to repay in 15 years, you’ll need to pay about 200k monthly consistently meaning your beautiful property shall stand tall as your ego but a road side carpenter could be earning all that without the stress.

If you borrowed the 50M to build on Ruaka assuming you raised the rest by yourself, you’d need to pay for more than 20years … Or else, as you’re aware, auctioneers’ and banks are bossom buddies.

But let’s assume you had all the capital in your bank savings account; would you invest it in a project that earns you less than 500K a month? Social media influencers make that without the stress.

Now, go back to your home towns. Please travel out of Nairobi and invest there.

Find a plot near the town center. A quarter acre could cost anywhere from 2M to as low as 300K.

Let’s buy it at 1.5M for this flipside post.

Build single self contained rooms that rent for 6K. ( This is the average revenue of a well built, neat , partitioned and self contained bed sitter anywhere)

Build the ground floor all round the plot. You’ll probably have about 10 well spaced rooms per row. If it’s by a road, build the front face about 5 spacious shops to rent out at 4k each.

Have a strong foundation that will anticipate three floors of the same as time goes by.

The ground floor and foundation costs you almost 5M to finish if you find a good economical fundi. The two extra floors will be cheaper and may cost you about 2M each which you only build when comfortable to proceed.

So, the ground floor shall cost you about 1.5M + 5M = 6.5M

The revenue of the shops is 20K.

The revenue of the bedsitters is 180k

Total revenue minus bills and taxes is 200K.

For an investment of 6.5M you earn a gross of 200K.

Unlike the apartments, low cost housing has no wait time. They fill up almost immediately because the bulk of the society live within reachable means. I mean, how many of you drive nice cars but live in SQs in the cities? Many.

Low cost housing is where the money is. However much you flip this script, the low cost housing wins.

Now, if you borrowed the money from a bank, to repay in 10 years the 6.5M, you’d only pay about 50K each month.

On the same plot, you had made room for 2 more floors remember?. Each floor will still earn you 180k meaning if you build a floor every two years cos you’re slow, in 6 years you’re earning 560k. That’s 6.7M annually. For the two new floors, remember you now have access to cash to build at your pace without the drama of loans.

So, a landlord in Kitengela has a nice fancy apartment building and earns a paltry net of 200k . The bigger the apartment block the more money he has spent to build.

In this life, retire your ego, and try to think.

So if you’re already building apartment blocks for revenue using loans, quickly go and find cheap plots in small towns and it shall help you either repay your loans faster or make more money faster, whichever is your need.

The world is changing…. Let’s change how we do things otherwise in 10 years as you sink in debt, the smart ones will thrive. Building Bedsitters in Kenya.

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