Investment Financing in Kenya Real Estate

Rick Magliano

Real-estate investments in Kenya have the potential to double and even triple in value per year-with the right property. So, how does an investor finance a property investment? There are at-least two main options available in Kenya: group investments and mortgages.

Other than being able to prevaricate against risks such as rising inflation, real-estate investors are able to enhance their net worth, generate high capital gains and potentially register quick rates of appreciation.

Property Investment Financing Options

1.Group Investments

This is the most efficient and commonly used financing option by lower-middle class and those in informal employment who cannot qualify for bank mortgages and loans owing to their irregular source of income.

Group investments, locally referred to as ‘Chamas’, hold more than Ksh80 billion of wealth in Kenya in terms of savings and investment, with one adult in every three being an active member of a group investment club. They have registered the greatest success among women, youths and self-employed people.

  • To function, members make daily, weekly or monthly contributions for a specified duration of time and with a specific financial target. Once targets are reached, they identify a potential property, buy it and either start saving towards developing it or splitting it into equal portions among group members.
  • Alternatively, banks develop investment groups and invite interested parties to make monthly contributions. If the group member wishes to buy a property, they simply borrow (with interest rates applying) from the group based on their contribution. Group members co-sign the loans and they bear the cost of repaying the loan if one of the group members defaults.

The success of group investment is powerfully driven by a cultural impetus to pool funds together to invest and to borrow.

  • Most banking institutions and building societies in Kenya have realized the potential the option has and have developed programs targeted to boost group investments – it is based on the idea of creating a savings and investment opportunities.

2.Property Loans & Mortgages

There is a thin line between loans and mortgages in Kenya, and people often use the two terms synonymously.

These are facilities offered by various financial and lending institutions, such as banks and building societies, to help you buy property:

  • Loans and mortgages are given to successful loan applicants who meet the minimum loan-qualification requirements.
  • Loans and mortgages can be fully or partly financed by you. The majority of lenders, however, finance the property up to 90%.
  • Various lenders have varying interest rates and income-generating loans being charged a 15% interest rate per year and estate development attracting 13% p.a.
  • Property for owner-occupation may receive 80% financing while for investment property, such as rental units or holiday homes, may receive up to 70% financing.

Repayment duration for loans and mortgages

Maximum of:

  • 15 years for individual borrowers
  • 10 years for limited companies
  • 2 years per phase for real-estate development

Additional Costs

Most loan and mortgage applicants in Kenya are oblivious to the hidden charges that come with taking loans and mortgages.

  • Stamp duty

Currently at 4% of the cost of property.

  • Valuation fees

Fees vary depending on the valuation surveyor, and it is crucial you have your own prior to the property being valued.

  • Legal charges

Determined by mortgage amount. Higher loan amounts attract higher legal fees. Banks have their preferred law firms they deal with, so ensure you learn from the lender their preferred law firm.

  • Bank facility charges

Varies between banks and is meant to cover loan facilitation

  • Penalties

Charges for clearing the mortgage before the agreed time; varies between

  • Property insurance

It is not mandatory and it is paid per year. It protects the property during loan repayment period.

  • Mortgage life policy

Varies between lenders and covers your outstanding balance in case you die.

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