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How to start a real estate business in Kenya

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Starting with the right real estate business in Kenya is something that may not be as easy as it sounds. However, once you get the right tips about it, you can be sure of making quite a profit. There will always be a demand for property, no matter where you are. This is the key reason many businessmen are interested in the real estate business.

When it comes to making money from property, there are several different ways. 

Deciding on what path to take depends on various factors, including (but not limited to) the available capital, risk appetite, location constraints (if any) and so on.

If you are looking to start a real estate business in Kenya, then you have already taken the first step towards a profit- that of making the right choice.

The Kenyan real estate market is one of their most promising investment avenues right now.

For any investor on the hunt for a good opportunity, this is the place to start.

Before entering the property market, it is vital to understand different property offerings and what to look for in those.

Let’s first go over some precautions and must know points before getting into a real estate business in Kenya.

After that, the next thing is to understand the various types of real estate property in Kenya.

Along with that, knowing what factors influence them will help in getting a complete picture of the market before entering it.

What should one know before getting into Kenya’s Real Estate business?

Kenya has a very promising real estate market, and it is slowly expanding from the big cities to tier-II and III cities as well.

This is one of the best times to get into a real estate business in Kenya, that does not mean that it is all easy.

Recent market trends, as mentioned, have favoured growth in Kenya’s real estate and property market.

Opportunities are abundant for both domestic and foreign investors looking to start their real estate business in Kenya.

The most important thing with starting a real estate business in Kenya is to do significant research.

With the market growing at such a pace, there is a lot of competition, and that brings in people looking to make a quick buck.

Reading about those who sell a property three or four times the buying price in less than a day (more on that ahead) makes it sound like it is easy money.

However, it is important to understand that a lot of research, effort, and groundwork go into such deals.

Taking time to build a team

Often, people spend months just scouting the market for a property, performing analysis and speaking to owners & buyers before investing anything into it.

For one’s first time in starting a real estate business in Kenya, speaking to seasoned investors and agents in the market is a good way to understand the ground reality of the property.

Next, one must have a trusted lawyer or someone who specializes in real estate and property law.

Property contracts can be complex, especially in Kenya, and one must know what he or she is getting into.

A contract that lists all the agreed-upon terms and protects your assets and interests is a must-have before any money goes through.

Contract

Along with a fair and binding contract, performing due diligence before purchasing any real estate business in Kenya is a must-do.

Especially in residential real estate such as homes, there is no way to ‘return it’ if the property is not as expected.

Due diligence, paying a little extra for the right set of inspections and home-owners’ insurance are some of the small yet highly effective instruments in protecting land and property.

Understanding the Market-Types of real estate to invest in

Start with a home of your own

This may sound like an obvious thing, but its importance cannot be stressed enough.

For those preparing to enter the real estate business in Kenya, the first step is to invest in a home for self.

It serves as the base property element for a real estate portfolio.

A residential property in a prime location adds to one’s assets.

Also, this is one of the best guarantees in terms of property for taking loans for any business.

For those who cannot afford to buy out a home, mortgaging at an affordable rate is the smart step.

Monthly mortgages increase your equity in the home over time, contrary to rent payments that go to the landlord.

Once completed, these mortgage payments will add up to give you ownership of the property.

Property insurance

It’s the most important thing while buying a home for yourself.

This protects the house as well as the owner. It protects damages to the property as well as any injuries that may be caused by staying in it.

This, along with a qualified inspection before purchasing the house, provide a great deal of peace of mind and security.

These are not just ‘extras’, but essentials that one must get before purchasing any residential property in Kenya.

Additionally, having these things helps sell the home quickly as the next buyer knows that the home was protected and covered.

Having one’s own home also gives peace and security.

These two things are quite important while starting any new venture, including a real estate business in Kenya.

Once this is taken care of, the risk of venturing into other forms of real estate decreases slightly, for one investment is already secured.

Residential Real Estate

After setting up one’s property, investing in other residential property is another good option.

As per the National Housing Corporation stats, there is a deficit of 200,000 houses in Kenya currently.

This gap in demand and supply is one of the reasons why developers hold on to properties indefinitely in many cases.

Even after earning back the principal and a profit, many owners do not further sell their residential properties.

Residential properties are comparatively easy to rent out.

Depending on the type of area the property is located in, you can include suitable facilities.

With this, you can also market it accordingly for bachelors, families, students, etc.

Study the market, demands of the area, average rent and type of population before you invest in real estate for rentals.

Having a large residential real estate also doubles up as a home for the owner can also stay in one of them.

This makes property management easier and allows for a better understanding of the area for more opportunities.

Real estate properties

Further, any property sale or purchase will consist of over 10-12 people, right from the bank to buyers’ agents, inspection agencies and many others.

For those who cannot afford the time or effort to do it all, having a trusted real estate agent is a good step.

Investing in multiple real estate properties will increase the need to have an agent or more to manage these with ease.

It is important to know that handling residential property and tenants isn’t as easy as it seems.

Just because it was easy being a tenant doesn’t mean managing one (or several) will be easy too.

A couple of basic things like signed contracts, background checks on tenants, following all local regulations and laws should be taken care of before venturing into this.

Industrial Real Estate

Industrial property investment is simpler and comes with fewer capital requirements.

It does not require complex designs or construction, which may be the case in residential properties.

With industrial property in Kenya, location is the most important factor.

Distribution centres, depots, warehouses, and the likes requite less capital.

Also, these are hassle-free to set up, unlike residential property.

Light industries like bakeries require several of these, so investing in an area where bakeries are in demand or already doing well is a good move.

Some of the best aspects of investing in industrial real estate are the type of tenants and the agreements involved.

Most such real estate is rented for a long duration, which is a relief for both the owner and tenant.

In Kenya, the minimum period for industry rentals stands at 5 years and 1 month.

All these factors come together to make this a good option for smaller developers.

While this may sound like an easy market to break into, it does have its own set of issues.

There is quite a lot of bureaucracy involved in changing of owners as well as in getting permits.

Instances, where investors had to face issues even after all permits were in place, are not rare.

More so, there are cases of local bodies interfering in the same.

Commercial Real Estate

Shopping malls are all the rage in Kenya right now, and this opens up the investment channels of commercial real estate.

This involves using a property to lease out to different business owners.

Currently, retail property is among the most lucrative real estate avenues out there.

However, this is easier said than done and is not for those who are just starting in the business.

Commercial real estate requires high capital.

Often, the advisable strategy in this avenue is to have a contract with an anchor tenant.

This anchor tenant, in simple words, is nothing but a popular large-scale retailer.

The size and popularity of this business should serve as the base for drawing other commercial tenants.

Additionally, anchor tenants also finance some part of the construction.

Their return is in the form of rent-free premises for a suitable number of years.

Raw Land

For the seasoned real estate business in Kenya, raw land is where the big profits lie.

This is nothing more than a piece of land that does not have any development.

Raw land buying should involve a catalyst- which could be any event that would push up the price.

Common catalysts including an upcoming development plan, such as the construction of a major road or highway.

Renting or leasing out land by dividing it into smaller plots is also a suitable approach.

With raw land, bank appraisals may not be the most accurate way to get an idea of the price.

It involves gathering knowledge about the local government, reading about their development plans and advice of the locals to know what the next potential catalyst will be.

Property agents who have been in the area for years can help get a better idea of this.

The Factors

The key to making a profitable investment in any property in Kenya is knowing the market and its trends.

Over the last 20 years, there has been a lot of growth in the real estate segment.

Kenyan real estate has become a major part of their total GDP.

While recent trends have seen some decline, experts say that it will be able to recover over the coming years.

As of 2019, the Kenyan real estate sector stands at number 6 in terms of contributions towards the Kenyan GDP.

A brief look at some of the factors that one should look out for will help understand this market and its property better.

Interest rates

Investing in real estate has 2 basic needs- capital and attractive interest rates.

Kenyan banks have strict rules when it comes to giving out loans for real estate investment.

There have been attempts by the Kenyan government to help people with that.

At present, Kenya’s Central Bank has lowered the interest rate to 9%.

There is also a limit of 4 points on these lending rates.

The City & Area

As mentioned earlier, knowing the area is key to any real estate investment.

Major cities like Nairobi have seen a sharp rise in land prices, which has made small and mid-sized investors and buyers both look for other avenues.

Nairobi was the fastest growing real estate market around 2012, ahead of the likes of Monaco and Miami.

However, for those without high capital, mid-sized cities are the smart choice now.

In these cities, the rates have not increased that much, and there is enough demand, which is steadily growing.

However, these prices need to be combined with the type of land to get the complete picture.

For instance, the Kenyan retail market has seen decentralized growth, and it has spread from major hubs like Nairobi and Mombasa to Kisomo and Eldoret.

For industrial lands, rents are still affordable even along Mombasa road.

Residential lands have already seen a sharp increase along the Greater Nairobi area, as well as in cities like Kisumu and Naivasha.

In terms of offices and business spaces, Nairobi continues to be the hub.

This market had a trend of oversupply of retail land, but this is slowly coming towards stabilization.

What should be the next step?

Once one gets an idea of the market, the next obvious question is how to go about investing in a suitable land?

There are several ways of investing in this market. A look over some of those can serve as a starting point for the savvy investor.

Construct and Transfer – The VC Approach

Owning land in a prime area is one thing but developing something on it is another.

It may seem like there is no approach other than selling it if one does not have the capital to develop on it, but that is not so.

One approach that can be utilized here is finding a VC or Venture Capitalist who would develop on that land.

There is an agreement between the owner and the VC developer, which lets the VC operate it for a suitable number of years.

This allows them to get a return on the investment and recover it. After that, it is transferred to the landowner.

This investing strategy has gotten a significant boost over the past few years.

Nairobi was recently ranked as the top FDI (Foreign Direct Investment) destination Africa.

Land investors from outside Africa are on the lookout for getting into partnerships with local owners of lands in prominent areas.

This opens opportunities for investors both in and outside of Africa.

Additionally, since capital gains are low in Europe as well as Asia, investors from those regions look to invest in Nairobi and surrounding lands for better gains.

These investors require ‘ready land’ that allows them to start working on for a span of a few years.

Most such investors operate and cash out after this period with significant profits.

Real Estate Investment Trusts- REITs

For those investors who wish to get into this market but do not have the time or resources to manage it actively, REITs provide a great solution.

REIT refers to the process wherein several investors (generally small investors) buy stakes in some entity. This entity then proceeds to buy commercial lands or developed real estate.

The investors get income from this entity in the form of monthly or yearly payments, depending on the individual contribution.

REITs are a part of the Nairobi Securities Exchange as well.

This can thus be thought of as the meeting point of the stock market and real estate.

Since the risk involved in REITs is quite low, the returns are also lower than other avenues.

However, the benefit of REIT is that it allows those with low capital to invest in Kenya real estate without too much hassle.

‘Chama‘ (Property Groups)

This approach involves investment groups, in most cases from different professions and experiences.

It may also include land agents too.

They are provided with much-needed expertise and help avoid high consultation fees.

Such an investment group should form clear guidelines on what the investment plan will be.

While there is a high possibility of disagreements in Chamas, they do have a benefit too.

Discussion and disagreements are helping to forecast risks and further critical analysis.

Weeding out bad investments is even more important in real estate, and Chamas can do just that if operated efficiently.

Short Term Buying-Selling (Flipping)

Property flipping involves investing in and then selling a property for profit within a short period.

Often, this short span is not more than a few weeks. 

While it sounds highly lucrative, it is not as easy an invest as it may seem.

There is a lot of effort and time that needs to be dedicated to accomplishing this.

Some people have made entire careers from property flipping.

However, bad deals are also not uncommon, hence the caution.

The key here, as stated by many professionals, is to make a profit before you even buy.

This means that one should have an idea of to whom the property will be sold before buying it.

The real estate market has an imperfect nature, which is what allows one to buy land for Sh1 million shillings and sell the same piece of land for Sh3 million or even more within a day.

It is important to discuss with seasoned real estate valuers to know the highest value of the property with accuracy.

Wholesaling

Wholesaling sounds like property flipping, but if done right, it can be done with little capital investment.

In this method, a speculator enters a contract to buy all the property from a seller with little or no down payment.

This contract is then sold to another buyer by the speculator.

Whatever the difference is between the wholesalers buying and selling price becomes the profit.

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The gains coming through this can be quite high, but so are the risks.

Wholesalers often include a clause in the contract that allows them to get out of it if there are no buyers found by some fixed date.

Wholesaling has been gaining popularity in Kenya lately.

Speculators commit to purchasing the property, and then find buyers as its construction progresses.

This makes it possible for them to do a lot with limited investment.

Real estate business in Kenya what next?

This brief yet detailed study into the Kenyan property and investment market can serve as the starting point for one looking to start a real estate business in Kenya.

However- that is not all there is to it. As Kenya continues to grow and evolve, so does its real estate sector and the potential investment one can do in it.

For those who want to make the right set of investments into it, research and knowledge are the way to go about it.

How to start a real estate business in Kenya can be as easy as one wants it to be with the right facts and choices!