By Maryann Zita
Many of us dream of earning extra income when employed. Some of us have ventured into side businesses which we have aptly closed after some time due to lack of time to run the business whilst still working. Also, a side business can be quite demanding for an employed person and risky too. You could easily lose all your savings in such ventures.
A better idea is to get involved in something that gives you passive income. You don’t have to lift a finger. That’s where real estate comes into play. Investing in real estate can be an effective way to take advantage of capital appreciation and create passive income. All you need is to make the initial investment, and then years to come you continue earning from it.
The truth is, though real estate is such a good idea, it is way out of reach for many of us individually. However, if you join hands with other people, you can do it. Partnering up with your friends in the chama can be an effective way to increase your buying power and get into deals that you could not otherwise pursue. For instance a good property in a nice area in the city would be at least Kshs.10 million. And the good news is it appreciates at a whopping 25 percent every year. In five years, just imagine the value of that property. But few of us can qualify for a mortgage to buy this type of property alone. You need others.
That’s why it’s a good idea to do this as a chama. As a group, you increase your investment capital. Housing Finance, a local mortgage company continues to encourage chamas to invest in real estate and reap the rewards. Nixon Otieno, Mortgage Relationship Officer at Housing Finance says when you invest by yourself, you have limited capacity and you may not even qualify for a mortgage. However, through a chama you can increase the amount of money for which you qualify, which will help you buy more properties and larger ones as well which translates to higher returns on your investment. Moreover, you can reach your investment goal faster through your chama than alone.
“Before you get into real estate investment mode, as a chama, all of you need to sit down and agree if you are all ready to invest in real estate.” Advises Otieno. You must make sure that all the members are interested in this opportunity before moving forward. Members must be made to understand that this is a long term investment that may not bring instant earnings but will be lucrative as the years go by. There is a mortgage to be serviced and all members must be committed to this. Otieno says that since real estate is a long term investment; all of you in the chama must be in it for the long haul. Once the mortgage has been approved, the chama must keep its commitment to service the mortgage through thick and thin. He says the drawback of getting into this type of investment with people who haven’t bought the idea fully would mean lack of commitment in future causing wrangles in the chama or even loss of the investment.
Once you are all in agreement, you need to set some criteria for your chama. This should be done on a formal document in which you outline the individual features of the agreement. For example, you need to outline the objectives of the investment. You can specify the types of properties in which you want to invest as well as how much each person should contribute to the group. You may wish to create a legal entity for your chama. According to Otieno, for you to access a mortgage, you must be a registered group with the Ministry of Gender and Social Services. You must be able to show the bank your registration certificate, document of chama agreement before you can open a chama bank account that will enable you to access a mortgage.
Otieno says that a chama can open a bank account with only Kshs.5, 000 and start saving. Based on their monthly, savings, the bank will be able to assess the mortgage product they can afford. As a chama you can get financing for house or plot. For plots, the bank offers 70 percent of buying price and the chama should be able to raise 30 percent. If the chama wants to build on the plot, then the bank can give a construction loan at the same terms. When it comes to plots, keep in mind that you need to select one with a clean title, within a city, municipality or township. Rural land will not get financing. Also, to get the construction loan you much be able to show approved building plans and structural drawings, contractor’s agreement. This loan has a repayment period of a maximum of five years. For ready commercial/house property, the bank covers 80 percent loan and the chama should raise the 20 percent deposit. These loans go up to a maximum of 10 years. What about interest? The chama can expect to pay 16 percent on reducing balance which has been lowered from 23 percent.
To start on real estate, start your chama savings keeping in mind that you should have enough to put a 30 percent down payment on your first real estate investment. Otieno gives pearls of wisdom. “When you are ready to invest, remember bigger is better plus location, location, location are the hallmarks of sound real estate investment.”
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