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How to start a real estate business

Posted by Vension on April 11, 2019
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How to start a real estate business in Kenya: Investing right in the property business is a skill that takes time to learn but  which, if mastered,  can guarantee you a comfortable life because you will be able to successfully manipulate your assets to get maximum profits. However, a common problem many first-timers have is deciding on the type of real estate they should put their money in.

“We get many clients who have spent the better part of their adult lives savings with the hope of investing in the property sector but when the time comes, they are often unsure how to go about it since they do not fully understand the dynami­cs of the industry,” says Mr Gilbert Kibire, the CEO of Icon Valuers Ltd, a real estate firm based in Westlands, Nairobi.

“There are different ways of making  money when dealing in property,” notes Mr. Kibire’s colleague, Martin Cheboror. “It is up to the investor to choose a niche they are comfortable enough with to sink their teeth in.”

According to valuer Paul Kiome Matumbi, when deciding on the type of real estate to venture into, you need to consider the location and size of the land, as well as the envisaged profits and the time you are willing to wait to recoup your principal capital.

When deciding on the niche to invest in, the three real estate insiders told DN2, it helps if an aspiring investor understands the two ways in which property pays back. The first, current income, refers to the money you will be collecting from your property monthly or yearly as rent after you have deducted all the expenses.

Second, a good investment should also appreciate handsomely with time so that you can always make a considerable profit if you decide to sell it later on. So it is advisable to consider both the expected current income and appreciation rates before entering into a property deal.  However, avoid the temptation to invest in too many areas.

“The most successful investors are those who choose one or two niches and take time to master them,” says Mr. Kiome, the CEO of Nairobi-based real estate firm Prudential Valuers.

Below are some investment options the local real estate market has to offer:

  1. 1. Your own home

According to Mr. Matumbi, building one’s home should be the stepping stone to creating a budding real estate portfolio.

“Even the birds of the air and the ants on the ground build their own nests, so why should a human being continue paying rent for the rest of his life?” he wonders.

“A home is a wise investment because even if you do not plan on selling it soon, it still has monetary value and it can be used as leverage when seeking loans from financial institutions. The appreciation aspect of it cannot be ignored because if you decide to sell your home, later on, it will certainly be a worthy investment,” Mr. Matumbi adds.

Even when you don’t have enough money to buy or build your home, consider taking a mortgage. Rent payments go to the landlord’s pockets and at the beginning of the month, one doesn’t have anything to show for it. Mortgages, on the other hand, go towards increasing your equity in your home and in the end you will have a house to show for it.

“The comfort of having your own home gives you peace of mind that enables you to confidently venture into other real estate investments,” the valuer says.

  1. Residential houses

According to the National Housing Corporation estimates released last year, Kenya has an annual housing deficit of more than 200,000 units. To ease the problem, 150,000 new units are needed per year. If you decide to spend your money easing this deficit and say, build an apartment complex, you will be making hay while the sun shines.

“Residential property,” Mr. Cheboror says, “is one of the best real estate investments when it comes to long-term income. Even after recouping the principal investment, most developers prefer to hold on to their property indefinitely.”

Noting that residential units are easy to rent, sell and finance, Mr. Kibire says that they can serve as both solid investments as well as personal residences because the investor could decide to live in one of the units.

However, do not let your experience as a tenant fool you that it is easy to manage rental houses. According to Mr. Kibire, some developers end up under-estimating the costs it will take to manage their building.

“Carefully screening your tenants and appointing a competent manager will go a long way in shielding you from losses,” he says.

3. Commercial investments

Mr . atumbi defines this as putting up property with the aim of leasing it to business outlets. He points out that, with shopping malls now the craze, retail property is proving increasingly more lucrative than residential property. However, he is quick to caution that the sector is not recommended for beginners, unless one has a solid financial base.

To get it right, Mr Matumbi advises, you should approach an anchor tenant for a contracted deal before the construction begins. An anchor tenant, usually a large-scale retailer, is a big business whose presence on your property will draw other commercial tenants.

“Most investors negotiate with anchor tenants so that they (the anchor tenants) finance part of the construction costs. The anchor tenant then recoups  their contribution by not paying rent for a number of years,” he explains.

  1. Industrial property

These include depots, warehouses, distribution centres and other property set up for use by light industries such as creameries and bakeries.

Mr Kibire points out that industrial property requires relatively smaller capital to set up since their designs are usually not complicated.“Provided you get the location right, they are particularly lucrative because the landlord thrives on long-term leases with a single big tenant, so the problem of defaulting  on rent is minimised,” he adds.

While noting that the minimum period for leasing industrial property in Kenya is five years and a month, Mr Matumbi concurs that it is a viable option for “small” developers because county governments are currently encouraging industrialisation. However, he notes that the bureaucracy involved in change of user and getting the relevant permits can be discouraging. “There have even been cases where, after an investor has got all the relevant permits, local residents have lobbied the authorities to veto the setting up of the industrial property,” he says.

  1. 5. Raw land

This is just a parcel of land without any development on it. When buying raw land, it is important for speculators to watch out for catalysts that  can work in their favour in pushing  up the price. Mr Cheboror says a catalyst could  be an upcoming external development, most often a road.

Raw land can also be leased or rented to provide cash flow. To get even more from it, you can subdivide it and sell it in smaller units.

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Investment vehicles in real estate

AN ASPIRING REAL estate investor can use a number of strategies to gain a foothold in the industry.

  1. 1. The REIT way

Real Estate Investment Trusts (REITs) are an indirect way of investing in real estate and ideal for those who do not wish to be actively involved in the management of the property.

“A REIT is an investment entity that brings together many small investors who buy shares in the entity. The entity then purchases commercial real estate and distributes most of its income to the investors on a monthly or yearly basis according to individual contributions,” explains Mr Martin Cheboror, a valuer.

Since they are listed in the Nairobi Securities Exchange (NSE), it is in REITs that real estate and the stock market meet.

“The returns with REITs are relatively low since they involve less risk, but REITs are recommended for people who want to invest in property with minimal capital,” Mr Matumbi offers. 

  1. The build, operate and transfer method

Sometimes, the owners of prime land find themselves disadvantaged in that do not have enough capital to optimally develop their land. In such cases, Mr Cheboror suggests that the land owners  consider the build, operate and transfer approach. This is where the land owner partners with a venture capitalist who  builds on the land. The two parties then enter into an agreement whereby  the venture capitalist operates the property for a number of years to recoup his investment, after which ownership of the property reverts to the land owner.

Citing a recent report that ranked Nairobi as Africa’s top foreign direct investment (FDI) destination,  Mr Gilbert Kibire, Icon Valuers Ltd CEO, explains that foreign investors are increasingly looking to get into joint ventures with local land owners.

“In foreign markets such as Asia and Europe, capital gain is low and unattractive. Investors from these countries bring their money to Nairobi with the hope of making bigger returns and when they come here, they look for ready land where they can operate for a few years before cashing out and exiting the market,” he reveals.

  1. The ‘chama’ approach

“There is power in numbers,” notes Mr Kibire, who acknowledges that his job has made him a member of several chamas that have invested heavily in real estate as joint ventures.

“What I have learnt is that when putting together an investment group, it helps to have a diverse membership, ranging from lawyers to accountants and even real estate agents. This will provide you with a ready pool of crucial expertise and save you a fortune on consultation fees,” he offers.

A good investment group should have a constitution with clear guidelines explaining the methods through which the group plans to invest its money.

He says although disagreements are inevitable in chamas, they should be encouraged since they help forestall risks and assist in critically analysing a deal to filter out bad investments.”

  1. Property flipping

Flipping involves buying real estate with the  intention of selling it within a short time (usually a few weeks) for profit. It is a lucrative field but it can be taxing in terms of time and effort as it requires a wholly hands-on approach.

“People have made successful careers out of this highly speculative trade, but bad deals are rampant as well,” says  Mr Kibire. To avoid bad deals, he advises those getting into the flipping business to begin with the end in mind.

“We teach our clients the principle of making profits before they even buy the property. With flipping, you need to have an idea as to whom you’ll sell the property to before you even buy it,” he explains.

To reap maximum financial gain from flipping, an investor needs to understand the imperfect nature of the property market. While an investor can find a land owner willing to sell his land for Sh2 million shillings, he or she can resell the same land for Sh5 million the very next day.

Speculators should consult with real estate valuers to determine the highest amount for which they can dispose of their property.

  1. 5. Wholesaling

In real estate circles, wholesaling refers to the practice where a speculator spots a real estate deal and enters into a binding contract to acquire the property from the seller after putting down a little or no money at all. The speculator then sells the contract to another buyer. The difference between the contracted price and the amount paid by the buyer constitutes the wholesaler’s profit.

A vital tip for a wholesaler is to add a clause in the purchase contract that allows him  or her to back out of the deal if he icannot find a buyer by a certain date.

According to Mr Matumbi, the practice is gaining momentum with houses that are selling off-plan, with speculators only commiting to buy the property and then hunting for buyers as the property comes up.

Wholesaling can be a great way for those with limited capital to gain entry into real estate.

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