My name is Vincent. I have a 40 by 80 plot of land in Mlolongo area and I intend to take a loan of Sh14 million, which is the cost of developing five 3-bedroom units at a potential rental income of Sh35,000 per month. The repayment period is 96 months or eight years at an interest rate of 15.6 percent. I am also thinking of Plan B, which is to borrow the same amount and buy treasury bonds and repay the loan through Treasury income, although I have no knowledge of Treasury Bonds. I don't know the tenure and associated interest rates and government taxes here. Please advise me on the best investment options to go for.
My name is Philip. I have a rental property with two floors and two more floors to be completed. From the two completed floors, I get an income of Sh116,000. I am considering taking a mortgage loan of Sh4 million from a Sacco to complete the other two floors. Is this feasible or will I end up in a financial mess?
Alex Kibebe is the founder of Rubiani Wealth Management Ltd and an investment consultant and business development coach.
Vincent, taking a loan of Sh14 million at an interest rate of 15.6 percent per annum over a repayment period of 96 months means your monthly repayment will be Sh265,120. Given your expected rental income of Sh175,000 from the five units, you would need to cover a shortfall of Sh95,120 each month for the next eight years.
While rental income provides a long-term revenue stream, this approach places you under a substantial debt burden for an extended period of time.
Your financial exposure could be further strained by potential non-tenancy periods and possible interest rate fluctuations if the loan is not on a fixed-rate basis.
A more sustainable approach would be to invest for four years the Sh95,000 you would have used for loan top-ups monthly. This would allow you to accumulate approximately Sh5.75 million. With this amount, you could then borrow Sh8.25 million under the same terms, reducing your monthly repayment to Sh151,000. Since your rental income remains at Sh175,000, this strategy would leave you with a positive cash flow of Sh24,000 per month, which can act as a buffer for non-tenancy periods while also reducing your overall exposure to debt.
In addition, you may want to explore other financing strategies such as entering into a joint venture with a developer or seeking a low-interest loan.
Regarding your alternative plan of investing in Treasury Bonds, the current market rates for bonds in the Nairobi Securities Exchange (NSE) range between 13 percent and 14 percent, while the Infrastructure Bonds on offer by the Central Bank for February 2025 are expected to yield around 14 percent. If you were to take a Sh14 million loan and invest it in Treasury Bonds at this yield, your annual interest earnings would be Sh1,960,000, translating to Sh163,333 per month. With a loan repayment of Sh265,120, you would still need to supplement the shortfall of Sh92,787 every month throughout the loan period.
While the bond investment would continue generating returns beyond the loan term (depending on the bond tenure), the net benefit may not be worthwhile especially considering inflation and the risk of fluctuating interest rates.
I would therefore advise you to focus on completing your rental property first and then consider investing in Treasury Bonds later using accumulated savings from the rental income. I would also advise that you examine what your current net worth is before you contemplate on going into debt. This should involve taking stock of the sum total of your assets minus liabilities. You also need to look at your personal financial budgeting strategies to see how you can accelerate your savings to consolidate an investment capital base for the future.
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Philip, if you take a loan of Sh4 million from a Sacco at an estimated interest rate of 14 percent over a repayment period of six years (72 months), your monthly repayments will be around Sh82,000. With your current rental income of Sh116,000, you would still retain Sh34,000 per month during the construction of the additional two floors, assuming the project can proceed with tenants in place.
However, if the tenants have to move out because of the construction and you rely on the rental income for your upkeep, the temporary loss of income could put a strain on your finances. In this case, I would advise you to build up a buffer fund for some time before taking out the loan -- to cover loan repayments and personal expenses during the construction period. In addition, building projects often exceed initial cost estimates and having a contingency fund will help you manage these extra costs. Please note that building materials are also on the rise, and for a multi-storey building, items that were affordable when you laid your first slab may now seem unaffordable. For example, a bag of cement that sold for Sh600 just two years ago now costs Sh850. Your bill of quantities will need to reflect similar price changes.
Nevertheless, once the project is completed, your rental income is expected to double to Sh232,000, while your loan repayments remain at Sh82,000. This leaves you with a net monthly income of Sh150,000. Given the figures, this is a sound investment strategy. You could also consider a phased, incremental development where you build the structure and complete the units one by one at your own pace and without incurring heavy debt burdens.
If you have any money problems, send us an email at [email protected] and leave your number for contact. Money questions will be answered on this column.
