Tips to help you recover the money you invest quickly

Garden City Mall situated along Thika Road. When putting up commercial or residential property to let, seek advice from your agent and do your calculation in such a way that, when the property is occupied, the money you receive as monthly rent is always more than 1 per cent of the total investment cost. PHOTO| FILE| NATION MEDIA GROUP

What you need to know:

  • To recoup an investment in the shortest  time possible and avoid burning your  fingers, you should  conduct an objective and rational feasibility study.

  • What this means is that you must assess  the viability of your proposed investment.

  • If possible, go for a mixed-use project. By having a diversified project that comprises say a commercial section and a residential one, the mixed-use concept helps reduce the risks involved.

When putting up commercial or residential property to let, seek advice from your agent and do your calculation in such a way that, when the property is occupied, the money you receive as monthly rent is always more than 1 per cent of the total investment cost.

This is known as the 1 per cent rule, Mr Gilbert Kibire, the CEO of real estate firm Icon Valuers Ltd, told the DN2 in a past interview.

However, apart from the 1 per cent rule, Mr Kibire says,  there are other factors you can consider to help you recoup your money in the shortest time possible. They include:

FEASIBILITY STUDY

To recoup an investment in the shortest  time possible and avoid burning your  fingers, you should  conduct an objective and rational feasibility study. What this means is that you must assess  the viability of your proposed investment.

“The feasibility study should give you the supply and demand information on your proposed investment, the general risks involved and measures to mitigate these  risks. It should  also give you alternative ventures and cost-cutting measures to employ,” he says. 

Mr Kibire likens a feasibility study to a market survey that paints an overall picture of your investment. It also communicates the marketability of the product in question.

For instance, if you are constructing rental apartments in Kilimani, you need to know the expected rent, selling prices and the attractiveness of that product to prospective clients in that area. With this information, it is easier to calculate the payback period.

One of the most important characteristics of a feasibility study, Mr Kibire says, is its futuristic approach. “Since you have in mind a product that must give returns in less than 10 years, you need to look into the future and be cautious about the prevailing market trends.

There could be an overwhelming demand for your product at the onset, which might be deceptive.

However, an overview of the future trend will tell you whether that demand is sustainable or not,” he says, adding that that will be informed by the population dynamics and the absorption rate of the product, not just now, but in the future as well.

GO FOR MIXED-USE PROJECTS

If possible, go for a mixed-use project. By having a diversified project that comprises say a commercial section and a residential one, the mixed-use concept helps reduce the risks involved. For instance, if offices are not letting fast, you will get returns from the fast-moving apartments,” says the valuer.

While emphasising  the need to seek professional advice before making an investment, Mr Kibire says, “Instead of constructing rental apartments without adequate information on the prevailing market demands, a real estate investor should hire a professional to do a market survey. After conducting a survey, the professional might establish that guest houses are in high greater demand compared to rental apartments.”

PRODUCT DIFFERENTIATION

This is all about standing out from the rest, and involves dealing with the competition. If you want to invest in a gated community project, for instance, you should look at what is currently on the market. “You should understand your competitors and their products, and then improve your product so that it is better than theirs. Customers will prefer it to theirs and you will recoup your investment in good time.”

On-site team and method used

Having a competent team on site will go a long way in ensuring that the project stays within the budget. An incompetent contractor and workers, for instance, can lead to cost overruns.

“Say you have a budget of Sh10 million and an inept contractor spends all the money and does a shoddy job, then six months after the project’s takeover, cracks start to emerge. Remember, any defect liability for a contractor is six months. This means you will have to dig deep into your pockets to salvage the situation. Therefore, it becomes impossible to recoup your money in good time because the project has taken up more resources at a time when it was supposed to be raking in returns,” he says.

Instead of going for the decades-old stone and mortar construction method, Mr Kibire say, new construction technologies such as prefab technology can come in handy as a cheaper time-saving alternative.

“If you have a cheaper product, it means you can recoup your money faster. With prefab technology, the time taken to build is shorter because one uses factory-made products, some of which do not require concrete; you just buy and assemble them on site.

Ordinarily, you would spend Sh40,000 per square metre with stone and mortar construction but with the prefab technology you can achieve Sh15,000 per square metre,” says Mr Kibire.

RIGHT LOCATION

The importance of location in property development cannot be over emphasised.  This is because a wrongly placed project will neither attract clients nor get the right rental rates.

“Location is the key determinant of the success or failure of a project. You cannot put up a maisonette in a slum and expect to rake in returns in thousands. Always seek advice from a professional on the right location for your investment,” he advises.