Real estate investments in Kenya have the potential to double or 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 procrastinate against risks such as rising inflation, real estate investors are able to enhance their net worth, generate high capital gains and potentially experience rapid rates of appreciation.
Real estate investment financing options
1. Group investments
It is the most efficient and commonly used financing option by lower middle class and informally employed people who cannot qualify for mortgages and bank loans due to their irregular source of income. .
Group investments, known locally as ‘Chamas’, hold over Ksh 80 billion of wealth in Kenya in terms of savings and investments, with one in three adults being an active member of a group investment club. They have had the greatest success with women, young people and independents.
To operate, members pay daily, weekly or monthly contributions for a fixed period and with a specific financial objective. Once the goals are achieved, they identify a potential property, buy it, and either begin saving to develop it or dividing it equally among group members.
Alternatively, banks develop investment groups and invite interested parties to make monthly contributions. If the group member wishes to purchase a property, they simply borrow (with applicable interest rates) from the group based on their contribution. Group members co-sign the loans and bear the cost of repaying the loan if one of the group members defaults.
The success of group investing is powerfully driven by a cultural impulse to pool funds for investing and borrowing.
Most banking institutions and building societies in Kenya have realized the potential of the option and have developed targeted programs to stimulate group investment – it is based on the idea of creating savings and investment opportunities .
2. Home loans and mortgages
There is a thin line between loans and mortgages in Kenya, and people often use the two terms synonymously.
These are facilities offered by various financial and lending institutions, such as banks and building societies, to help you buy a property:
Loans and mortgages are granted to successful loan applicants who meet minimum loan qualification requirements.
Loans and mortgages can be fully or partially funded by you. However, the majority of lenders finance the property up to 90%.
Various lenders have varying interest rates and income generating loans are charged at an interest rate of 15% per annum and property development attracts 13% per annum.
Property intended for owner occupation can receive 80% financing, while investment properties, such as rental units or vacation homes, can receive up to 70% financing.
Repayment period for loans and mortgages
15 years for individuals
10 years for limited companies
2 years per phase for real estate development
Most loan and mortgage seekers in Kenya are unaware of the hidden fees that come with taking out loans and mortgages.
Currently at 4% of the cost of the property.
Fees vary depending on the appraiser, and it is essential that you have yours before the property is appraised.
Determined by the amount of the mortgage. Higher loan amounts result in higher legal fees. Banks have their favorite law firms that they deal with, so be sure to learn from the lender about their preferred law firm.
Bank facility fees
Varies from bank to bank and aims to cover loan facilitation
Costs of settling the mortgage before the agreed time; varies between
It is not compulsory and it is paid annually. It protects the property during the loan repayment period.
mortgage life policy
Varies by lender and covers your outstanding balance in the event of death.