Real estate investment is a time-tested method of building wealth, and Kenya offers an attractive market for those looking to invest in property. With a rapidly growing population and a thriving economy, the demand for quality housing is rising, making real estate a promising investment opportunity.
However, investing in real estate can be daunting, especially for beginners unfamiliar with the market. Whether you want to purchase a residential property for rental income or invest in commercial real estate, the process can be overwhelming without the right guidance.
Here are some tips to help you get started on real estate investment in Kenya.
Table of Content
- Real Estate Investment in Kenya
- A Guide to Investing in Kenyan Real Estate, Step-by-Step
Real Estate Investment in Kenya
Real estate investment in Kenya offers various avenues to earn a return on investment (ROI). Some of the most common ways to earn an income from real estate investment include:
1. Rental Income
Investing in a rental property can provide a reliable income source through the rent tenants pay. Rental income can cover the property’s costs, including mortgage payments, property taxes, and maintenance expenses.
A successful rental property investment will provide consistent cash flows and can be a good long-term investment strategy for those seeking a steady income stream.
However, managing a rental property can be time-consuming and requires careful attention to tenant screening, property maintenance, and other factors.
A real estate investor can earn money from the appreciation of the real estate property. This income is generated when you purchase a property at a reasonably low price and hold it for a period of time until its value increases.
Once the property’s value has appreciated, the investor can then sell the asset for a profit.
For example, if you buy a property for KES1,000,000 and hold it for several years, during which time the property’s value appreciates to KES5,000,000, you can sell the asset for a profit of KES5,000,000, excluding the disposal fees.
However, it is important to note that appreciation is not guaranteed, and investors should carefully research the real estate market and the specific property’s features/attributes before making an investment decision.
Location, demand, and economic conditions can all impact a property’s potential for appreciation.
Flipping is a real estate investment strategy whereby an investor purchases a property at a low price, typically a distressed or undervalued property, renovates, and sells it for a profit within a short period.
This strategy requires the investor to have the ability to identify potentially profitable properties, knowledge of the real estate market, renovation skills, and management expertise to ensure that the project is completed on time and within budget.
Successful flipping can result in substantial profits but this approach carries risks, such as unexpected renovation costs, market price fluctuations, and delays in asset disposal.
4. Interest and Dividends
Real estate investment trusts (REITs) own and manage a portfolio of income-generating properties. REITs are publicly traded on stock exchanges, allowing investors to buy shares and participate in the profits generated by the properties owned by the REIT.
One of the benefits of investing in REITs is the potential for regular income in the form of dividends. By law, REITs must distribute a percentage of their taxable income to shareholders as dividends, thus investors can expect a regular income stream from their investment.
The dividends are typically paid out monthly, quarterly, or annually and can provide a stable source of income for investors seeking to generate cash flow from their investments.
In addition to dividends, investing in REITs can also earn you returns in the form of capital appreciation. As the real estate properties owned by the REITs appreciate, the value of your shares is likely to increase, resulting in profits for you as the investor once you sell your shares at a higher price than you acquired them.
5. Tax Benefits
Tax benefits arise when the value of a property you have acquired reduces over time due to factors such as lack of upkeep, which can cause the property to grow mold and bugs. Other damages to property due to weather or fire, sewage and drainage problems, or structural issues can also cause the value of the property to depreciate.
As a result, as a real estate investor, you can deduct a portion of the property’s cost from your taxable income each year.
It is important to note that depreciation deductions only apply to the value of the building and not the land. The value of the land is considered a non-depreciable asset since it does not decrease in value over time.
Additionally, if the property is sold, the investor may be required to pay back a portion of the depreciation deductions taken over the years in the form of depreciation recapture tax.
A Guide to Investing in Kenyan Real Estate, Step-by-Step
Each step is designed to provide clear and concise instructions on navigating real estate investing. The various stages of real estate investment in Kenya include:
a. Decide on What To Invest In
Before making any real estate investment in Kenya, it is important to carefully consider and decide on the type of investment best suited to your needs. Different options are available, including purchasing vacant land, developing the property, or investing in real estate equities such as REITs.
When deciding on the type of property to invest in, it is crucial to consider various factors, including location, access to basic amenities such as water and electricity, infrastructure, and security.
b. Choose the Right Location
In Kenya’s real estate market, choosing the right location is crucial. Urbanized areas and developing regions with potential for growth are recommended, while commercial real estate is best located in urban areas.
Luxurious residential properties perform well in serene suburbs neighboring cities such as Nairobi and Kisumu. Location influences property value, demand, and potential for growth.
Infrastructure availability, including good roads, water, electricity, and internet connectivity, and proximity to social amenities such as schools, hospitals, shopping centers, and recreational facilities, also play a significant role in property attractiveness to buyers and tenants.
c. Perform Necessary Background Checks
Real estate scams are prevalent in Kenya, making it essential to perform background checks to avoid falling victim. To protect yourself against fraud, work with reputable realtors and legal and insurance firms.
Scammers create fake listings to rip off buyers by persuading them to pay deposits or fees without proper verification. To avoid falling for such costly traps, conduct in-depth background checks on the property you want to buy, research the seller’s reputation, and verify the property’s ownership and legal status.
Legal and real estate experts can guide you on this process and ensure legitimacy. Performing necessary background checks and working with reputable professionals can help investors make sound investment decisions and avoid real estate scams in Kenya.
d. Understand Regulations for Real Estate Investment
Understanding real estate regulations is crucial in Kenya to avoid illegal activities and financial penalties. Ensure you are compliant with the applicable tax laws and requirements such as Capital Gains Tax and withholding tax, which are important when investing in real estate.
The Land Control Act regulates land acquisition, ownership and disposal, and its transactions, such as sales, leases, and mortgages. As an investor, you should understand this act in order to ensure you are complying with the applicable legal requirements when dealing with land.
The Sectional Properties Act governs the ownership and management of sectional properties such as apartments, flats, and townhouses. When investing in real estate in Kenya, you should familiarize yourself with this regulation to ensure compliance.
e. Acquire Legally Binding Documents
Acquiring legally binding documents is crucial when investing in Kenya’s real estate. These documents serve as proof of ownership and are important in legal disputes.
Sale agreements, title deeds, tax paperwork, and payment transactions are essential documents to have.
Sale agreements outline the terms and conditions of the sale; title deeds prove ownership; tax paperwork includes clearance certificates and receipts for property transfer taxes; and payment transactions provide proof of payment.
f. Making Payments and Rights Transfer
To transfer property rights in Kenya, it is necessary to verify the legitimacy of the property and documents, then make payments through legitimate channels. A legal representative or conveyancer is typically present during the transfer process to ensure its legality.
The process begins at the commissioner for lands office, which handles land transactions. Adherence to legal procedures, verification of documents, and patience are essential to avoid legal disputes.
g. Find the Ideal Property Insurer
To protect your real estate investment, finding an ideal insurer that covers a range of risks such as burglary, fire, and consequential loss is important. Look for a specialized insurer with industry-specific knowledge mandated by relevant bodies and reasonable insurance premiums.
Doing so helps ensure your insurer understands your property’s specific associated risks and meets regulatory standards while offering suitable coverage within your budget.
When evaluating financing for an investment property, it is important to remember that a larger down payment will be required compared to owner-occupied properties. You should consult a mortgage advisor and research different options to find a bank with minimal interest rates and the shortest payback period. Your capital outlay, risks, and returns will depend on how big your project is.
It is also important to factor in additional expenses such as maintenance costs, agency fees, property purchase tax, and closing costs. To determine whether the rental property makes financial sense, assess the capital growth potential and calculate the rental yield by dividing the estimated annual rental income by the cost of acquiring the property to ensure it can cover expenses and still earn a profit.
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