INVESTING IN REAL ESTATE: the basics!!!#UjenziBora

At some point in time, all of us who are ambitious will have the desire to invest in Real Estate. Whether the desire will materialize or not depends on many factors but I thought it cool to share a few basics of the game.

For which of you,intending to build a tower, sitteth not down first, and counteth the cost, whether he has sufficiency to finish it?

Lest perhaps,after he has laid the foundation, and is not able to finish it,all that behold it begin to mock him. Saying, this man began to build,and was not able to finish!!-Luke 14;28-30

Every profession has a language. In this brief piece I wish to set out a basic outline of investing in a simple 7 Number Bungalows Construction Project in a peri-urban location in Place Z. The purpose is to set out the Basics. What are the things to look out for?

  1. The Developers Budget
  2. The Market Prospect
  3. The return on Investment

The Developers Budget

As a developer or investor, you need to know the following factors that are key components in your investment.

  1. What is the number of houses you need to put up and what is the floor area of each house. Details are important in budgeting. For example, a typical 3 Bedroomed saleable Bungalow might have a Floor Area of say 107 square metres. This is important for projecting the construction cost and the Architectural Design. Using a simple calculation, the approximate cost of constructing such 7 number 3Bdr. Bungalows would be 7 X 107 X Per Unit Construction Cost.                                                                                                                    Supposing the Per Unit Construction Cost is Kshs.30, 700.00 per square metres, this would give you a Per Unit Construction Cost of Kshs.3,284,900.00 (i.e 107×30,700) and a projected Total Construction Cost of Kshs.22,994,300.00
  2. What is the Cost of Land Purchase? You have to factor this in your Budget as it must be considered in determining the selling price of the houses.
  3. What are the Administrative Costs of the Project? You shall most definitely incur costs in setting up the project team and the general course of doing business. Remember you are in business for the money and every cost must be factored and optimized.
  4. What is the Cost of Finance? Talk to your bankers and negotiate a financing deal for your project. This is mainly the interest rate on the loan for the project and could be in the range of 10%- 15% or lower depending on the source of finance. The cost of finance is usually amortized (The paying off of debt in regular installments over a period of time.)
  5. What are the Professional Fees for the Project? Many business people do not realize the vital importance professionals play in securing a sound building project. You must factor the cost for hiring professionals as prescribed by Law e.g Cap 525 Scale of Fees for Architects/Quantity Surveyors, Fees for Environmental Impact Assessment Experts , Structural engineers, Civil Engineers, Project Managers etc. As a general guide, you can set this at 9% of the project cost for a simplistic project like constructing 7 Three Bedroomed Bungalows. However, seek professional advice as this depends on complexity and nature of the Project. An Architect or Quantity Surveyor would be an ideal stating point for guidance. The minimum Fees to charge are regulated by an Act of Parliament (Cap 525 in case of Architects/QSs). It is prudent practice to set aside 3% of the Construction Cost for Project Management Fees.
  6. What is the Marketing Cost for the Project? It is wise to set aside approximately 3% of the Construction Cost and device a Marketing and Advertising Plan for the Bungalows.
  7. What is the Total Cost for the Project? This will include summation of items (1) to (6) as enumerated above and would be Key in setting the Selling Price of the Houses.

The Market Prospect

After developing your Developers Budget with the help of a professional in the Building Industry, you have to consider the Total Cost of the Project vs. The Prevailing market Price for similar Houses. This is why selection of Location in which you want to construct the houses is important. Do not just wake up one morning and start your project in the-middle-of-nowhere!  A good housing project will more often be sold off before even the Construction is completed. Choose the neighborhood carefully and wisely!!

Once you make a right judgment on the prospect of selling the house, you can approximate the Best and Worst Case Scenarios that would leave you with a good Net Profit for your Project. For example, if you sold each 3Bedroomed house for about Kshs.6, 000,000.00, you can easily make a Net Profit of KShs. 1,000,000.00 minimum (this being your worst scenario). The forces of housing demand and supply will determine your fate but it’s possible to stick to the basics and make a decent Profit.

The Return on Investment

Before you venture into real estate business, do your maths well with the help of sober professionals. Find out what is the Percentage return on your investment (ROI) in terms of % age and do your Business Case Professionally. If the ROI is good, you can adjudge the project to be feasible and lucrative.  Wish you all the Best!!! Remember you are in it for the Sound Business Practice and not to strike gold….if you keep it Professional, you shall reap what you sow!!

David Nahinga

The End of Blog

Disclaimer of Professional Advice:

The information provided through this website is not a substitute for legal and other professional advice where the facts and circumstances warrant. If any user/reader requires legal advice or other professional assistance, each such user/reader should always consult his or her own legal or other professional advisors and discuss the facts and circumstances that apply to the user.

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~ by ujenzibora on April 27, 2010.

9 Responses to “INVESTING IN REAL ESTATE: the basics!!!#UjenziBora”

  1. Great advice on here! Haven’t the costs of construction gone up of late! One wonders how profitable it is to build to rent.

    • Hi Kellie,
      Thank you for your comment. Indeed it is true the cost of construction has gone up generally due to many factors including the cost of inputs. However, this cost is generally relative to the prevailing economic environment (Things like cost of finance, taxes , cost of labour etc)

      The scenario I painted here was that of “Build & Sell” and I perceive I may need to capture other cases like Building a house for Rental purposes. The basics remain the same only that the Payback period varies for the case of “Build-to-Rent”.
      This will also depend on what type of facility one is building i.e Residential Rentals, Industrial Facility, Office Apartments , Luxury Hotel and the like would all have different Payback Period and “Business Case”

      The Joint Building Council & the Institute of Quantity Surveyors of Kenya publish regularly the current construction costs and this can be obtained from “The Quantity Surveyor” magazine.

      Every Building is “Unique” and a “Project” in its own right. This means that a similar building may not necessarily have the same cost implications since “each building stands in its own soil”. Your professional can assist in computing the Construction Cost for your Building Project. Location of the building will play a key role in its overall cost!
      Best Regards
      Nahinga

      • You can obtain an extract of the Current Construction Costs by clicking this LINK or scrolling to the “RESOURCES” box to the right of the UjenziBora Blog!!
        Nahinga

  2. educative! keep up
    lawey

  3. Great piece of information! Couldn’t agree more with what you have to say. I should be visiting here more often. 🙂

  4. you have tried to break it down quite well I must say..just have to get used a bit more to the technical part of the language but its a great piece with good helpful insights.props!!

    • Thank you much for your comment. I must admit my mind had gathered bits of rust and had in time attracted a lot of technical terms.
      However, It dawned on me and the last two parts are simply easy reads!!! Enjoy
      Thanks for keeping your word!!!
      Nahinga

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