Most investors looking for a passive income often consider Real Estate. Despite Real Estate being a good investment channel, it is liable to low rental revenue and fluctuating occupancy rates. To invest in Real Estate, it boils down to research on the subject considering factors like, occupancy rates, location, financing channel, future cash flow, market trends and risk management.
Data by Cytonn Investments shows that the rate of return on residential properties ranges from 5.0% to 7.0% while commercial properties range between 9.0% to 12.0%. The rate of return is mostly affected by the economic climate with changes in inflation rates, fluctuating currencies and GDP growth. Location, government policies like taxation, infrastructure development and property management play a key role in determining the rate of return. To counter currency fluctuation, some investors, especially foreign have their rent paid in dollars, especially in upscale neighborhoods like Kilimani and Westlands.
As of January 2024, rental income in Kenya was subject to a 7.5% tax monthly. This is a drop from 10.0% in 2023. The tax is payable by investors earning between KES 280,000 and KES 15.0 million annually. The landlords are expected to file monthly rental returns on their properties. Since rental income tax is not new in Kenya, it is not a basis for landlords to increase rent. The tax is also paid after deductions on expenses; maintenance costs, management costs, insurance and agency rates.
Capital gains advantage is key in Real Estate investment. The possibility of a property appreciating with time (capital gains) is affected by location, demand and overall economic conditions. Investors should be strategic with their property selection. Properties in prime locations tend to appreciate over time due to increased demand. However, properties are prone to depreciation due to wear and tear so maintenance and renovation costs should be factored in the expected rate of return. Investors should also factor in occupancy rates and tenants who default on rent.
Most Real Estate projects are capital intensive. Sometimes, loans are required to finance the projects extending the payback period and the time required to break even. Real Estate is generally a secure long-term investment plan despite the risks. Real Estate Investment Trusts (REIT) in the NSE allow investors to invest in real estate. Real Estate provides cash flow consistency, income generation, portfolio diversification and wealth preservation. Kenya is generally attractive for real estate but investors should carry out intensive research before investing in properties.
