Guide to Investing in Rental Property in Kenya

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Are you thinking about boosting your investment portfolio? Investing in the Kenyan rental market can provide a steady income flow compared to other volatile investment options like shares.

Like all investments, there are risks that could negatively affect your returns as an investor. It is therefore important to conduct detailed research beforehand.

In the guide below, we look at the important factors to consider before investing in a rental property.

Evaluate Your Reason for Investing

is investment property a good idea?The first step is to understand what your goals are. Are you planning on buying property for short term rentals, long-term, vacation rentals or student housing?

The purpose of investment will affect other related factors like financing and location. A vacation rental would be more expensive because of the finishing and amenities. For instance, an infinity pool in a vacation rental in Watamu would make the place stand out. Vacation spots are usually outside the city which is peaceful and away from the chaos. Student housing is more simplistic hence less expensive but will need to be close to a campus/ institution for accessibility.

Find property with features that would be appealing to your target tenants. A perfect combination of valuable investment is finding property that matches your investment strategy while fulfilling the needs of your potential tenants.

Research on the Location

Once you have a clear insight on your reasons for investment, it’s time to consider potential areas to invest in. Finding the perfect location to invest in can be a minefield. Look for places with high growth potential for example satellite towns which are within a commutable distance to the Central Business District (CBD) like Ruaka.

Research the neighbourhood to find out if the property has access to infrastructure and conducive social amenities e.g a good transport system, schools, shopping malls and good hospitals.

Another important factor is to look at market saturation. Find out if there is an oversupply of the kind of property you want to invest in the area. If you are looking to invest in one-bedroom units in an over-saturated location, this will affect the occupancy rate of the property. You can start researching the current rental inventory on online property portals like BuyRentKenya to have an idea of the supply of the property type you are thinking of investing in.

Evaluate your Finances

how do you buy a rental property with a mortgage?The next step is to understand how to finance your investment. How much money do you have? Most banks in Kenya require an average of 20% – 30% of the value of the property as a down payment for a mortgage.

You also have an option to use NCBA which is a mortgage company regulated by the Central Bank of Kenya. Speak to a mortgage adviser to find out the available options keeping in mind the interest rates and durations for the mortgage approval process.

Do not settle on your first mortgage offer. It’s possible to get a lower interest rate or more money from your bank. You will need to prove your credit-worthiness and possibly bring lower quotes from different sources to give you better-negotiating power. The key is to shop around for different offers before you settle on your choice.

Apart from the cost of acquiring the rental property, keep in mind other costs that you need to cover before renting out the property. Additional costs that will not be covered by your financier include; maintenance costs, agency fees, property purchase tax and closing costs which could be fairly high. This means you need to have a good reserve despite getting funding.

Work out Expected Returns – Rental Yield

Regardless of how you will finance your property, you should know whether the investment makes financial sense or not. Find out the capital growth potential; (whether the value of your property is likely to grow over time) and estimated rental return.

Study the average rental prices of similar properties in the area you want to invest in to calculate the rental yield of your property. Rental yield is a percentage of estimated annual rental income divided by the cost of acquiring the property. Use this figure to estimate whether the rent you will receive can take care of the cost of maintaining the property while still making a profit.

is being a landlord profitable?A good rental yield is 7% and above. Use this figure to compare with other investments options like Government bonds, T-bills, money markets and shares in the Nairobi Stock Exchange (NSE).

You also need to ensure that you can afford maintenance costs when the rental property is empty. As a landlord, this is not something you can avoid as it could take days, weeks or even months to get a replacement when someone moves out. However, this is something that you can take care of with proper risk management.

How Will You Manage Risks?

Like any other investment, rental property has risks. You need to consider potential problems that might occur and ensure you have contingency plans in place to minimise these risks.

Some of the important questions to ask and find answers to are:

  • Do you have a plan in case you have unoccupied rental units?
  • How do you handle renters who default to pay their dues?
  • What do you do with difficult tenants?
  • Under what circumstances are you allowed to increase rental prices?

While landlord insurance is not mandatory under Kenyan Law, it is, however, an important safety net to have. Some banks will also have insurance as a condition for financing your mortgage. Insurance will cover against damage to building fixing and fixtures, loss of rental income and loss of property content (for furnished apartments). It will also cover third-party liability and your mortgage monthly instalment payment.

Research tenant rights to know what you are allowed to do and what you can’t do, for example, under what circumstances tenant evictions are permitted under Kenyan law. Speak to potential lawyers to handle your unforeseen legal matters as well as draw up and authenticate your Tenancy Agreements.

Summary

Like any other market, the Kenyan property market operates in cycles of demand peaks and falls. Investing in rental property provides a great opportunity to diversify your investment portfolio but does not come without risks. Be sure to have realistic expectations, do due diligence and assess your finances before committing to investing.

Jill Abura
Jill is a content writer at ROAM, passionate about green building and a future tiny house advocate.