Real estate property is a lucrative investment, but often it takes time before the profits start coming in. Since lenders offer different terms and benefits, knowing where to get a loan to build rental property in Kenya for a real estate development project is important.
Rental property appreciates over time, making it a suitable long-term investment which increases its viability as a speculative investment.
However, developing a property is a cost-intensive project for which the owner may lack adequate personal financial resources to complete the project.
Some turn to lending institutions such as banks and building financing organizations for financial support for their rental construction projects.
Deciding Where to Get a Loan to Build Rental Property in Kenya
Many financing options include cheap construction loans in Kenya for putting up rental houses. Such options include:
- Sacco savings and loans
- Accumulated personal savings
- Bank loans
- Joint ventures
- Rent- to –own arrangements
- Seller financing
- Development loans moratorium
- Pension funds
- Investment trusts
- Insurance companies
Some of those lenders leverage the savings made by the potential developer where the loaned amount is a multiple of the savings accrued and depending on the ability to pay.
Other lenders, such as banks, give construction loans depending on the projected value of the project.
Considering that construction projects require a substantial amount of money, in the case of a loan, the interest rates guide when deciding where to get a loan to build rental property in Kenya.
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Banks offer the cheapest loans, with the loaning period stretching beyond 30 years.
Their low-interest rates are a trick to staying ahead of competing lenders, but this advantage involves an extensive underwriting process.
The following steps give a road map on how to acquire a loan to build rental property in Kenya:
- Review your financial status and expected profits from the project to see how much you should borrow.
- Give the investors or lenders a candid breakdown of expected timelines for project completion, possible profits, when to expect returns or when it is possible to start making payouts for the loan, the loan amount required, and their level of involvement in the project.
- Be ready to share your financial and project portfolio with financiers.
Bank Loans for Construction Projects in Kenya
Loans for construction projects cover building costs.
Depending on the borrower’s needs and the loan facility’s terms and conditions, the loan may cover more than the building costs.
Some cater for the purchase of land, permits, and building materials.
Commercial banks that offer construction financing have varying terms and conditions, some set by the lending market regulators, and some bank-based.
Some products, like those under the Equity Bank construction loan, can be traditional business loans; or products tailored for construction, such as mortgages.
The differences in terms and conditions from one bank to another appear in:
- The interest rates
- Duration of the loan
- Consideration of the borrower’s credit score
- Loan processing fees
- Loan insurance fees
- The type and size of project requiring financing
Some financiers limit the number of rental properties they intend to support with their loans.
Lenders offering property development loans in Kenya can limit the contract to one rental property per loan.
The Procedure Involved in Seeking Rental Property Development Financing
Taking out a loan to build rental property in Kenya often requires a lot of documentation and site visits.
The application process requires a borrower to submit duly filled application documents to the lender.
Some banks have special teams that conduct the lender appraisal process, so for instance, if you apply for a KCB construction loan, you will deal with such a team.
Once the appraiser approves the application and the bank releases funds to the developer, the bank follows up on the step-by-step progression of the project up to its completion.
The borrower accesses funds per phase of the project upon the bank’s approval after the inspection of the project.
Upon project completion, the borrower receives a certificate of occupancy, after which the loan facility converts to a mortgage product.
The borrower now makes payments to clear the principal and the accrued interest.
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REITs: An Alternative Investing Method of Investing in Rental Property
Although there are many options when thinking about where to get a loan to build rental property in Kenya, Real Estate Investment Trusts (REITs) are another upcoming option.
These trusts are regulated investment vehicles inviting investors to pool specific amounts of resources to construct rental properties.
They then sell or rent the property and share the proceeds with investors.
REITs may lock out individual investors who cannot raise the minimum investment amount, often set at Kshs 5 million.
The idea of pooling resources for construction exists though it comes at risk when the group lacks the monitoring of a regulator.
In such settings, investors may lose money. Nevertheless, many other financing options are relatively affordable, accessible, and viable for the discerning investor.
