Real Estate Investments and financial markets like government bonds are some of the key drivers of the economic growth in Kenya.
For the past two decades, the Kenyan real estate market has grown exponentially as evidenced by its contribution to the country’s GDP which grew from 10.5 percent in 2000 to 12.6 percent in 2012 and 13.8 percent in 2016.
Today the Real Estate market is flooded and investors are having a hard time getting customers for the complete property units.
A Real estate property of 10 million shillings with 15 units each paying 10,000 shillings will earn a Rental income of 150,000 shillings monthly.
The gross rental income will amount to 1.8 million shillings. There are extra costs associated with properties like Agent Fees, Water Bills, Electricity Bills, Security, and repair costs.
In Real estate costs incurred are estimated to be 30 percent of the gross rental income. So in this case the property management expenses are 540,000 shillings annually reducing the rental income to 1.2 million shillings.
Remember this has to be subjected to the flat rate of 10 percent income tax per month. The Net Rental Income is 1,080,000 shillings per annum. The annual return on investment is 10.8 percent.
“Residential rental income is charged at a flat rate of 10 percent on gross rent received per month. It is payable when landlords receive rent from their tenants either monthly, quarterly, semi-annually, or annually. However, returns must be filed monthly.
Rental Income is filed on or before the 20th of the following month. For example, rent received in January is declared and tax paid on or before 20th February. Complete a monthly tax return online via iTax by declaring the gross rent and tax payable will be computed automatically at a rate of 10%.” As published by KRA.
The same amount of Ksh 10M can invest in 5-year government bonds earning a yield of 13 percent P.A. The return is exempted from income tax.
The annual returns will be 1,300,000 shillings which are paid out semi-annually (650,000 shillings every 6 months). Bonds are highly liquid and attract higher returns of 13 percent Per Annum.
Every investment has risks. Just like any other investment, there are risks associated with both Real Estate and government bonds.
Real estate has high risks while bonds are low-risk investments that are more secure. In Real Estate Investors will encounter risks like high inflation rate, market risks (low demand), and properties that are highly illiquid especially when the market is flooded.
The market is highly unpredictable. Most Real Estate companies had property units during covid 19 but no one to sell them to. Considering the time value of money an investor who bought government bonds made higher returns during the period.
Government bonds are considered safe but there are risks associated with them like interest rate risks, inflation rate, and liquidity risk which affect the bond prices. These risks are controlled by the government and since they want to build the investors’ confidence in bonds they do so favorably without hurting the market.
The Government bonds investments beat Real Estate investment by 2.2 percent which is Ksh 220,000 annually. Many investors prefer buying government bonds because they have low risks, higher returns, are secure, and highly liquid.
Real Estate can be a good addition to your asset portfolio but you need to identify, assess, evaluate and mitigate the risks. If you manage to do so then you will earn good returns from your properties.
By Frank Waruhiu