Saturday, December 22, 2012

Retiring into the unknown: Part 3

They will give you a wheelbarrow after 30 years of loyal service

We all would want to live our sunset years at peace and enjoying the money hard earned during our more youthful years. Picture watching your grandsons and daughters grow and letting your sons and daughters live comfortably without having to bog them down with your needs. Sounds good but it is not always rosy for majority occasioned by very poor planning, if any planning at all. Majority of Kenyans become dependents at old age when poor health takes a toll on them and all they can do is reminisce of the good times, recount unfulfilled financial goals and blames it on their kids, after all they utilized all the money as you educated them, clothed them and provided food for them. Sounds logical to say that they are the ones who ensured you never got rich, mind you it is a God given responsibility to take care of them. The expectation of people with such a mentality is that when the kids do well, it is payback time and they must take care of you during old age. However, we all know that it is not always the case especially when your kids start to see you as a liability.

So what do we need to do to prepare well for retirement?

1.            Understand that the Pension that you shall get (if any) will be of minimal value by the time you receive it and it will only help you keep afloat. I know of a guy who was a provincial prisons commandant (quite a big post) and all he got as lump sum payment for pension was a mere 2M and he receives monthly pension of 20k after working for 30 years. For such a guy, having not invested or even built a family house, his idea was to go to shags and use to 2M to build a house and survive on the 20k monthly pension for recurrent expenditure…wow.. What I know is that by the time you receive your retirement package (many years down the line), the amount will have been eaten up by inflation such that the value will be so minimal, and you won’t believe it. So quit relying on this amount…it should only complement your other cash if at all you’ll wait to retire at 55 years.

2.            Big Mistake: You retire and assume that you shall start a business that will keep you busy and earn you some cash? At least we know from some earlier posts that 90% of businesses fail within their first 5 years….you need lady luck to smile at you to succeed in your first attempt on business at 55 years. Succeeding on this one is like the proverbial camel going through the eye of a needle story…unless you success is written high up in the stars (one in a million chance). So brother /sister, start doing business as early as you get a chance, in your early years you can afford to fall flat in your first attempts, dust yourself and rise up…after all business is not for the faint hearted.

3.           Don’t you underestimate the power of saving and investing and especially when you are young and have all the time in this world. Picture saving consistently 5k per month (very modest) for 20 years…..simple calculations add to 1.2M …now assume you save 5k per month for the first 5 years, 10k per month for the next 5yrs, 20k per month for the next 5 years and 30k per month for the last 5yrs…..adds up to 3.9M…

Suppose then you introduce the element of investing you savings above…even if you got a modest profit of 25% per annum on you investments …compounded…I don’t want to imagine how the figures would be….20M…30M..50M perhaps.

Surely, you must do it stocks, unit trusts and Treasury Bills..whatever..but so something

4.            Remember how important it is to buy appreciating assets… I once bought a plot in Syokimau like 10yrs ago at 80k..back then there were wild animals. But where did the wild animals go to…Imagine if I bought like 6 plots at the same price. I hear the current price could be 1.5M…*6 = 9M ….sounds juicy.
Go to Maasai land….where you can get an acre at 30k and hold for 10 yrs. They might label you a speculator..whatever.. but it is the forces of demand and supply in our crazy world of real estate that makes you the money…fundamentals notwithstanding.

5.            If you are able, you might get to this level where you have some rental units. It is not so hard. Somewhere in your working life, you can afford to take a big loan, buy a nice plot somewhere. Even if it means doing a single unit per annum..for 15 years you’ll have 15 units each getting you a rent of 15k..and that means at the age of 55 and above, you’ll not need to go round your sons and daughters places with a begging bowl. Heck, you will even afford to have something they’ll inherit, small fights notwithstanding, and a few generations will remember you for your hard work. Occasionally, you will even afford to organize some get-togethers for your big family and you eat some goats. Tell those grandkids who will care to listen about how life was when you were young and how organized you were.

But look at it this way. You might get to level 5 above when you are 40 years of age. I don’t see why you should even continue working as most educated slaves do. Therein lies a smooth transition between employment life with its own challenges and an independent life where you can dictate your schedule. How sweet it is to get off the shackles of employment at around 40yrs…It is very possible only with proper planning and taking practical steps towards early retirement.

Life does not follow a straight path and am sure some of us are in our 20s, 30s, 40s and 50s. Most importantly, we need to prepare for our later years and you surely must be able to do something well in advance before the day of reckoning when they bid you goodbye and give you a wheelbarrow and some gumboots. After all, how many are even lucky to get there especially with downsizing of companies, retrenchments thereon, contractual jobs and general job insecurities all over….prepare for that rainy day because chances of it coming are much higher than you think.

We will now break for a while and resume our lessons in the new year. When we resume, we shall look at inherited land, selling the same and crazy repercussionsIt is our sincere hope and desire that we shall learn and most importantly practice what we learn.

Merry Christmas and a happy, blessed New Year 2013 to all our readers and followers. You are blessed!

Thursday, December 20, 2012

Retiring into the unknown: Part 2

John was a rather creative character and always won arguments, the type of guys who will always have a final word in any argument. However, he looked frail and was curiously listening to me. It is not easy to advise a guy who was my manager at some point because in his head he still had the mentality that am junior to him in terms of years and everything else. However, knowing his status at that point in time, I felt obliged to just say what I had in mind just to get the feeling that I did something to save the situation.

And so I asked him, “why are you so convinced that life in Taveta will be too hard for you, aren't there happy and rich men there, what is it they do?” He gazed at me and retorted, “my good friend, it is not as easy as it looks. People in the village know that I was a big shot in the Parastatal, I even assisted a few to get employment there. Going back to the village and having nothing to do there would not augur well for me. It is complicated because at the moment I am reliant on my daughter a lot who pays the rent and buys food.” he concluded.
I realized that it was even tougher for me to convince him otherwise. However, I insisted that he had to humble himself, swallow his pride and map out a way out of his quagmire. I told him to compare his current status that seemed to be inviting death and the option of going to the village where he would grow old gracefully watching his grand children grow. After all, the villagers will always talk, whether you are doing well or not. Macho ya chura hayo. After much probing, I realized that he actually owned a 3 acre piece somewhere in Taveta where his wife was residing. The land was idle. He further disclosed that his wife was working in some sisal farm as a farm hand and the last she saw of her was 2 years ago. I jokingly asked him whether he has a side dish of which he laughed uncontrollably and finally said that those things I feel them no more….whatever that meant.

The John I knew at the workplace was a creative guy who would get a solution to all manner of issues. I recounted how he used to motivate us and insisting that we should always think outside the box. I told him that it was his turn to think outside the box. You surely must get a solution to your mess. If you don’t, who will? I reminded him that in life, the biggest issue it to conquer oneself. The biggest stumbling block is what you have fed your mind. It was thus important that you start seeing yourself rising above this challenge.

Analysing his scenario, I made him realize that he was adding no value in his life by hanging around Nairobi where cost of living was really high and of course drinking off his frustrations was tantamount to burying his head in the sand. Realizing that I had no much time left before proceeding to my earlier destination, I posed and asked him the big question. “What do you think are the practical steps that you can take to get things going?”

It took him some hard thinking but he amazingly recounted what he would do. In summary he mentioned the following:
1.             That he’d go back to the village, after all he all along knew that he was doing nothing in Nairobi.
2.             That he’ll convince the daughter who has been supporting her to give her some capital injection aimed at doing something of economic value on his 3 acre piece in Taveta. Further, the few expected monthly pension amounts would go towards boosting what he’ll decide to do with at the farm and also build a simple house at the farm.
3.             Regarding drinking, he said that it would not be easy to stop but he’d at least stop taking the illicit type. Fair enough I thought.
The jokingly I asked him how he’ll deal with the villagers who thought he is a rich big man in Nairobi…He laughed and noted that he’ll distort the truth and tell them that he opted to trade his usual life of big cars and posh life in Nairobi to settling in the village now that he needed a breath of fresh air and to grow old gracefully.

I started feeling like I had achieved something, so after paying the bills, I stood and waved him goodbye but he stopped me and reminded me of the KES 100 he had earlier requested. I had been so engrossed in the conversation and had forgotten that bit. I removed a KES 1000 note, gave him and told him to mind what he had just said regarding the solution to his issues and was quick to remind him that one of the resolutions was to quit illicit brew. With the widest of grins, he said that 1k is more than enough for a few bottles of Tusker.

I took his cell phone number and quickly disappeared into the horizon hoping against hope that I he will take it upon himself to refocus his life and do something meaningful in his sunset years.

How many Johns do we have with us, some are our fathers, uncles, aunts, brothers, sisters and mothers? Troubles of the retired who never prepared well in advance. Where I come from, there is a proverb that says something to the effect that a tree is only shaped when it is small. We must plan for retirement and early enough.

In the next post we explore how best we can plan for retirement and actually retireearly.

Wednesday, December 19, 2012

Retiring into the unknown: Part 1

Guest post by Samuel G. Njenga

Around 2 years ago, I met John somewhere in Donholm Estate. At first I had not recognized him, in fact you’d not blame me for not recognizing him. John was my former boss in some Parastatal that I worked for 2 years in my early working life. He was a good boss, big bodied and exuded loads of confidence. But wait, the John I met looked much slimmer and the pot belly had shrunk and he looked much older. He smelt of cheap alcohol and I could barely stand next to him coz of the stench. I could not believe my eyes.

Boss, haki maisha imekuwa ngumu. Hebu nipatie soo kuna kitu nataka kuenda kununua”, he said. This is the guy who used to order me around and looked like he was generally doing well. What I was seeing was totally beyond me. Of course I was very keen to get to know when the rain started beating him. I requested him that we get to some food joint so that we get a chance to talk as we eat.

John’s story was as sad as they come. As soon as I left the Parastatal, he retired having reached the mandatory retirement age. John came from Taita Taveta and had worked for the Parastatal for all his working life.

“But I thought on being retrenched you got your handsome retirement package and you probably receive monthly pension”, I asked him. He confirmed that he received some cash to the tune of 1.6M lumpsum and he also was getting some monthly pension of around 15k. So I asked him what happened with the cash. “Kusema ukweli, mambo haikuniendea vile nilikuwa natarajia”, he uttered the words in his coastal accent.
I probed him further and discovered that after retirement he stuck around Nairobi, bought a matatu which was run down and which he later sold at a throw away price. The balance on the lumpsum he used to pays school fees for his daughter’s university education. Then I asked him why he is still around Nairobi whereas he could have gone to Taveta and live there. His response was totally unexpected. “Wajua huko kumekauka, hakuna cha kufanya wala sina nyumba huko so sioni haja ya kuenda huko”.

To cut the long story short, I discovered that he was in Nairobi doing nothing but drinking himself silly. In fact the 100 shillings he was asking for was most likely to end up in some changaa den. From boardrooms to the crazy matatu world and finally to the bizarre world of drunkards of illicit brew. In more likelihood, the destination of this man would be an early grave. But being a positive thinker, I felt there was a way out of his not so pleasant situation.

After all the instances of the dress downs he may have given me as my boss, his authority notwithstanding, I saw a man who had lost it and was probably just waiting to die and had to reverse the roles. After all, before I could release the few coins he so badly needed to quench his insatiable thirst of alcohol, I had to give him some harsh and hopefully helpful word. His is a classic case of a man who had lost it, one who failed to organize his life despite being in employment for long and earning some not so bad cash.

Next post will dwell on the advice I gave him and how best those in employment can prepare for retirement.

Tuesday, December 18, 2012

How to write a Will: Part 2

Raw example of a Will

This is the last Will and Testament of (Name)____

Currently residing at (Full address)__________

Made on (date)____________________________

1. I hereby revoke all my former Wills, Codicils and Testaments made by me and declare this to my last Will.

2. I testify that I am an adult female/male of sound mind and holder of national identity card

( ID. Number)__________________________

3. I hereby declare this to be my last and final will.

4. I appoint (name)_______________________Currently residing at (full address and name) ___
to be the joint executors and trustees of this my last will and testament but if anyone or more of the above named persons should refuse to act, die before me, or die before the trusts hereof have been fully performed, then I appoint

(name)________________________________Currently residing at (full __________________address)___________

to be the executor of my Will and Testament in the place and instead of anyone or more of the above named persons, and the expression “my Trustee”, used throughout include the trustee for the time being, whether original or substitutional.

5. I direct the administrator to pay my just debts (as listed in Codicil II), funeral and other testamentary expenses, all succession duties, inheritance and death taxes, and all expenses necessarily incidental thereto, to be paid and satisfied by my Trustees as soon as is convenient after my death; to collect all my debts and outstanding

6. I give, devise and bequeath all my real and personal property of every nature and kind to the following: (List) All my property as listed here, to the following; Examples of properties to be distributed;

a. Land parcel Ruiru/Block18/9999 to _________________(Name)____________________

b. Unsurveyed plot at Kinoo share No.XYZ to_________(Name)____________________

c. Shares in Kenya Airways to______________________(Name)____________________

d. Motor vehicle registration No. KXD 400 to______(Name) ___________________

e. All my clothes, jewellery, ornaments to_____________(Name)____________________

7. I give the following properties to the following defendants

a. My wife/wives/husband: (Name(s) _________

b. My father (name) _____________________

c. My mother (name)____________________

d. My son (s) (name) ________List them_____

e. My daughter(s)(name) ______List them_____

8. I nominate, constitute and appoint __________(Name)_______________________________

Currently residing at (place) _______________ to be the guardian of my minor children. I direct the guardian of my minor children to raise them as Christians/Muslims according to the rules, customs, and teachings of the Bible/Islam.

9. In the event that any of my heirs should predecease me, then my estate should be divided among my remaining heirs according to (7) above.

10. It is my most earnest request to all my heirs that if any differences of opinion should arise between them as regards any of my assets whatsoever or as the ownership, character, value or otherwise, of the same or as to the meaning or true interpretation of anything contained in my Will, or Codicils, thereto, they shall settle is amongst themselves first, if not, the Trustees before resort to court.

In witness, whereof I, the said ____(your name)______ have signed my name on this _____(date)__________

Signed by the said____________________________

Signed by the Testator and published and declared as his/her last Will and Testament, in the presence of us both present together and in his presence and in the presence of each other have hereunto subscribed our names as witnesses. (The witness can be the same person as the Executor/Trustee.)

Signature of Witness (1) ______________________

Name: ___________________________________

Address: _________________________________

Signature of Witness (2)______________________

Name: __________________________________

Address: _________________________________

For more information, consult your lawyer. In our next post, we shall look at retiringinto the unknown. 

Monday, December 17, 2012

How to write a Will: Part 1

Guest post by Samuel G. Njenga

We all know we should make a will, but it’s one of those things that many of us never seem to get round to. We keep procrastinating. In fact, it’s estimated that one in three people die without ever having made one.

Making a will now prevents a financial headache for your family when you die. But not making a will may mean chaos and financial worry for your family or dependants after you've gone. Without one, you can't be sure that your money and property will be passed on according to your wishes.

If you die without a will (called dying intestate), the intestacy rules takes over your estate. This one largely depends on how fast the family can agree and decide on a successor and the probate process starts. I may not go through the process at this stage but it gets long and winding if no agreement comes forth from the supposed heirs. What will court cases and feuds, and awaiting court’s judgements.

A will that is not properly signed and witnessed is invalid. In Kenya, at least two witnesses are required. A witness does not need any special qualification or public standing but is merely witnessing your signature. However, they must not have any beneficial interest in the will as this could make the will invalid.

It is always wise to use an advocate to prepare your will just to ensure that it is valid, sufficient and is consistent.

It's sensible to review your will every few years and consider amending it or even writing a new one if there is a change in circumstances, such as if you get married, have children or get divorced. Changes to a will can be made by codicil – an addendum to the original will – or by revoking the old will and drawing up a new one. You can revoke a will by physically destroying it. If the change is relatively simple, you can write a codicil (a supplement or appendix to a will) and get it witnessed, and keep it with your existing will. But you should not alter the original will.

If you wish to make a new will, it should begin with a clause stating that it revokes all previous wills and codicils. If the changes are complicated, such as you remarry, it is better to seek legal advice on drawing up the new will.
Most wills are made up of cash legacies, bequests and the residue. You can leave cash to relatives, friends or charities – these are usually fixed sums to named individuals. You can also bequeath your possessions (including property) and treasured objects to whoever you wish.

What’s left after all the debts, tax and fees have been paid is the ‘residue’. This can be left to one person, or it can be shared out among several individuals.

If you share ownership with a spouse or partner, your worth is half its market value, less your share of the mortgage. Property can held in two ways - either as joint tenants or tenants in common as earlier explained.

If your property is held in a joint tenancy, your half of the property will pass to the surviving joint tenant automatically.

If your property is held in a tenancy in common, you can leave your share of property to someone else in your will. They will then become a tenant in common with the other owner of your property.

For children under 18, you should say who you wish to be their guardians if both parents die, and where the money will come from to look after them. This is usually made in the form of trusts.

If children inherit money and/or property, it is held in trust until they are 18 (or until they marry if earlier). If you don't specify how the trust should be managed, it will be dealt with according to the 'trustee laws of Kenya', which let the executors deal with the fund.

Who are executors?
Executors are people that carry out your wishes in accordance with your will. It's best practice to name more than one executor (or one executor and a substitute). These can be relatives, friends or even an attorney.

In most cases (unless your estate is particularly complex) lay executors are preferable. If they need professional help to administer your estate they can commission probate services.

Beneficiaries can act as executors.
It is possible to make a will without professional assistance (DIY), and many people do so successfully, but it is also very easy to make a mistake when writing the will or signing it, which can render it invalid or ambiguous.

NB: Make sure that your beneficiaries do not access the will before you kick the bucket. Some may decide to dispatch you to your maker faster than you intend to go if they deem you more valuable when dead as opposed to alive.

In the next post, we shall feature a raw example of a will.

Saturday, December 15, 2012

Succession Planning: Part 2

Research has shown that 70% of family businesses do not survive from generation to generation. This is quite sad bearing in mind the hard work of setting up a successful business.
If you own a family business and you want to retire, it will not just be a matter of waking up one day and deciding not to go to work .So the question of what happens to the business in your absence is paramount. Who's going to manage the business when you no longer work at the business? How will ownership be transferred? Will your business even carry on or will you sell it?

Business succession planning seeks to manage these issues, setting up a smooth transition between you and the future owners of your business. With family businesses, succession planning can be especially complicated because of the relationships and emotions involved - and because most people are not that comfortable discussing topics such as aging, death, and their financial affairs.

Why do the businesses die a natural death when the big man / woman dies? In most cases, the business "killer" is poor succession planning and family discord, both issues that a good family business succession plan will cover.

Ideally, the plan must address 2 pertinent issues:
1.     Management
2.     Ownership

The two issues are not necessarily the same. For instance, you may decide to transfer management of your business to just one of your children but transfer equal shares of business ownership to all your children, whether they're actively involved in operating the business or not. You may even decide to transfer the management to professionals and let the kids be at the board level.

Important points to consider as regards the succession planning:
1.     Start it early preferably minimum 5year before the time you have earmarked for retirement. The longer you get to spend on family business succession planning, the smoother the transition process is likely to be.

2.     Involve the family in discussing the planning. Under your guidance they would definitely agree. Let them dialogue and agree, most likely they know their strengths and weaknesses and amongst themselves, they know who can lead them.

3.     Be realistic as you plan: You may want your first-born son to run the business, but does he have the business skills or even the interest to do it? Perhaps there's another family member who is more capable. It may even be that there are no family members capable of or interested in continuing the business and that it would be best to sell it or get professionals to run it. Examine the strengths of all possible successors as objectively as possible and think about what's best for the business.

4.     Train your successor(s) and work with them: How can you expect your successor to take over and run your business successfully if you haven't spent any time training him or her? Your family business succession plan will have a much better chance of success if you work with your successor(s) for several years before you hand over the reins. For solo entrepreneurs, sharing decision making and teaching business skills to someone else can be difficult, but it's definitely an effort that will pay big dividends for the business.

5.     Get outside help with your business succession planning: Lawyers, accountants, financial advisers - there are many professionals that can help you put together a successful succession plan? There are even companies that specialize in family business succession planning, who will facilitate the process of working through both family and succession plan issues.

If you want to pass your family business along to the next generation, putting off business succession planning is the worst thing you can do. A good succession plan can ensure that you have the funds you need to retire and that the business you have built continues to thrive in the hands of the next generation.

What of those tough colonial like fathers and grandfathers?

My grandfather was as tough as they come. If you dared touch what he considered his own, he’d hit you with a rungu. The mzee had all his sons and daughters in his pocket. He was kinda organized and had some hand written notes on who should inherit what. Unfortunately, upon his demise, the notes were contested and a long and tiring battle in the courts ensued. He had two wives and the younger one contested the written notes because she only had one son and the distribution of the wealth was based on the number of sons from both sides. After more than 10 years the case was concluded. Unfortunately, some of the heirs had died along the way. Quite sad. Some properties were lost midway the feuds. I remember my dad talking of some 5 prime plots in Juja that were grabbed….so sad. Some businesses were run down as the sons and wives fought. He had some coffee farms and unfortunately the bushes had to be cut off because no-one was taking care of them. He simply did not bring the sons and the wives together to plan on how he’d be succeeded. This is a pitfall we must avoid.

Next we shall talk more about writing a will.

Friday, December 14, 2012

Succession Planning: Part 1

Guest post by Samuel G. Njenga

We have seen it happening. Some hardworking chap struggles to set up a business that becomes an empire. Soon after transition, the empire collapse like a stack of dominos. Or you could have noticed a cycle in family fortunes that change from generation to generation. One generation finds nothing to inherit, and then they struggle so hard and by the time they are going home they leave massive wealth. The generation that inherits the wealth and the businesses that they got on a silver platter squander the wealth and die poor only for the next one to redo the cycle.

Succession planning is crucial for any company. Importantly so, even at a personal level it is still absolutely necessary. But trust people to keep deep lying and long standing secrets of their business away from their wives and kids where they have absolutely no idea of how to run your business after you are gone. So then, how best do you get your kids in the mix?

Proverbs 22:6 teaches us to 'train a child in the way he should go; even when he is old he will not depart from it.'

Teach them the value of hard work and that money does not come from above. Some simple things like ensuring that the small cash they receive from you is well utilized. Let them learn the good habits of managing the little they got. Being frugal becomes something they treasure. Let them know that were it not the case, they’d probably not be enjoying the good life.

Entrepreneurship starts early…enroll then to entrepreneurial courses if you must…Let them start small home businesses like rearing rabbits for sale…chicken etc if possible…Personally by the time I was in class 5 I had so many rabbits that I had raised and was selling…It taught me a few things about business at a tender age. Get them understand your business operation-wise. Give them some role in the set up. Observe and where necessary guide them. Let them graduate slowly from small roles to bigger roles gradually ability is demonstrated. At some point let them even get some shareholding in the company. Somehow they’ll understand the intricacies of the business and they’ll own it. Slowly by slowly relinquish your hold on the company but keep an eye on the manner it is being managed. In your sunset years you’ll probably own like 5% and the rest distributed amongst your heirs. Teach them the essence of teamwork and drawing into each other’s strength.

Someday I was buying some land from a company owned by the family of a big shot (former politician and cabinet minister, name withheld). When I received the completion documents, they included a CR12. This is a document that outlines the ownership of a company as per the records at the registrar of companies. I actually realized the shareholding was distributed amongst the former minister (5%) and the rest between the daughter and son. It is amazing because the daughter was only 23 at that time and the son 32. The company had expansive lands all over and the son and daughter are the ones who signed the documents and the father remained in the background. I noted that the daughter is very knowledgeable on land matter and at her age that was quite impressive.

This is an open secret among the Indian communities who run family business empires across generations. The father inducts the son or daughter in the management of the business and finally goes in the background without loosing grip of the business until the next generations can prove to him that they are capable of running on their own.  I think it is very inspiring to see your children running successfully your business empire. Others families employ a CEO to run their businesses but remain in the board. Whichever the approach, succession planning is absolutely necessary.

Next post will dwell more on succession planning and avoiding conflicts.

Thursday, December 13, 2012

In real estate location is almost everything

Learn to determine good locations

Guest post by Young

When it comes to real estate investment, it is often said that the secret to success is location, location and location. Where you invest is generally more important than how much you invest.

There is a very strong link between where your real estate investment is located and the financial success you will enjoy. There are several examples of individuals with access to a lot of money and who also invested in real estate but 10 years down the line, although their investment has appreciated, they had more feeling of regret than satisfaction because they later discovered several other locations they could have invested in that had experienced exponential appreciation.

Thus, it is important to note, that merely owning real estate is not the secret of successful investment but owning the right piece of real estate at the right price. Let’s examine a few factors to consider before you buy a piece of real estate.

Firstly, invest where growth is coming. There are areas of a state or local government where growth factors seem to be converging. For instance, imagine a location already earmarked by the government as the permanent site for a university. Often, a certain area gradually begins to attract certain kinds of businesses and opportunities. When you invest in an area where growth is coming, you cannot miss a financial breakthrough. The other advantage is that if you are a little wrong in the investment the growth will bail you out.

Secondly, observe the population or demographic trends in the state or area you are planning to invest. Population growth is one of the impetuses for the demand for real estate. All other things being equal, if you can identify areas where a lot of people are moving to you have found a place where the real estate will appreciate rapidly. The increase in population will increase the demand for accommodation and that will affect the value of land. This process will accelerate whenever there is a high influx of people into an area. So if you are planning on investing in rental property, consider areas with high population or potentially high population.

Thirdly, evaluate the social cum infrastructural advantages of the area. What is the crime rate? Does this neighbourhood have great schools that will attract families there? Are there work, retail, recreational and religious centres nearby? As you seek to answer these questions, it will give you an insight into the potential of the neighbourhood you are seeking to invest in. One of the common sense rules is that a person should avoid living in an environment that is far below his or her social grouping. When your standing is far higher than that of your neighbours you may attract undue attention which may expose you to certain security risks. And if you observe it, the more secure and better equipped an area is, the higher the rental incomes and all other real estate values. This is generally the reason why estates or Government Reserved Areas appreciate faster. Such areas are usually more organised and because they are enclosed, often have unified security arrangements.

Fourthly, proximity to centres of economic productivity. Most times, people love to live not too far from where they work. In fact, if you draw concentric circles all around certain areas where offices, industries and commercial centres are located, you will discover that fast appreciating real estate properties are not more than 5 to 15km from those areas. One good indicator to follow is the major highways or arterial roads. Somewhere along or off such areas are places that will yield good dividends for an investor. The demand for real estate often corresponds with areas with increasing wages. Traditionally, areas or cities with stable employment in the government sector, educational sector and medical sector or a combination of these sectors will enjoy rapid real estate value growth. This is why political or economic capital cities and areas close to them enjoy rapid appreciation.

Finally, if you have the required fund to invest, buy in an area with little buildable land. Often, these areas are expensive but often enjoy strong demands that often push rentals and real estate prices up thus, enhancing your profitability. Upward pressures on real estate prices are often greatest in such areas. Moreover, most of such areas are “matured” in terms of infrastructure; that is, they often have basic infrastructures, schools, accessibility, nearness to markets and commercial centres. Government presence and interest are often high and the competitions for real estate in these areas are reduced because of the high barriers to entry. Since you technically cannot manufacture any more land these areas will continue to generate faster returns on investments.

I recommend that in making a choice of where to invest, you do a comparative analysis of a few neighbourhoods, listing basic criteria and scoring them based on your observation or research. The essence of this is to ensure that you make an informed decision on where to buy and that it should be an excellent investment decision.

Advice for starters

Locate GENUINE bush or penny plots that have flexible payment plans and potentials to appreciate using LIDT;

L Location

I Infrastructure

D Demand

T Time (The earlier the cheaper)

Be bold at times to use some of your gains in stocks to invest in real estate, if you are keenly interested in diversifying your asset class.

Next, we shall talk about how best to involve your kids in your business.

Wednesday, December 12, 2012

Mitigating against leverage risks

Guest post by Samuel G. Njenga

The higher the leverage, the higher the risk but as we saw last time the higher the profit margin.

We all agree that in Kenya, a developer’s world only makes a lot of sense when the concept of OPM (Other Peoples’ Money) is utilized to the maximum. So then along the same line of thinking, developers in Kenya are clever enough to utilize the less risky of the OPM; off-plan sales.

The idea is of course to sell concepts on paper and expect that potential buyers will show up, pay deposits for yet to be built units. As the construction goes on, the buyer injects more cash and preferably by the time the construction is over, the buyer has fully paid for the unit. This is clever coz it essentially means the developer utilizes the cash from the would-be buyers and makes some coins. However, this arrangement works best when there is a show house and buyers can see how the end product will look like. In some cases even without the show house buyers could still trust the developer especially if they have a name…importance of a name?

The other very important idea that developers consider is to ensure that a loan is structured with several draw downs. Interest is normally charged on the amount drawn as opposed to the total loan amount. After the first few draw downs. A clever investor is able to gauge on the response from clients on the units. One can reasonably tell whether there is interest on the units once the ground breaking is done. Most buyers will be comfortable once they see progress on the site. And by the way, one might be very happy to see so many would be clients visiting the site and commenting on the good work done, but a seasoned investor knows that a lot of demand may not translate to effective demand.

Effective demand is quantity of a good or service that consumers are actually buying at the current market price.

Of course we also have latent demand when a customer/consumer is unable to satisfy their demand, mostly due to lack of money.

What if you already have the loan and the sales are not forthcoming? One option would be to re-negotiate the re-payment terms with the bank so that they extend the period where u service the loan interest without paying the principle and whenever a sale is done, the bank receives their cash. Kenyan banks are kinda flexible and are also alive to the market conditions.

Developers are also keen to change the prices as the construction continues. In other words, the buyer who buys off plan will always get a very good offer and the one who comes in when the unit is ready, then pays much more. Sometimes the increase would be as much as 10-15% so it is always wiser to buy off plan or at least when the ground is broken.

Next, let’s look at the importance of location when investing in real estate.

Tuesday, December 11, 2012

Leveraging in real estate

Guest post by Samuel G. Njenga

Leverage (debt) magnifies outcomes. What does this mean?

To illustrate how leverage works in a real estate investment, we'll take the following investment parameters (The figures are hypothetical but not so far from reality, just to put the points across):

•Construct 5 units for sale each at construction cost of 5M (inclusive of land)
•Financing at 14% interest (service interest during construction) and repay loan on sale of units
• Sale price of 7M per unit for total sales of 35M

Let's look now at the ROI (Return on Cash Invested) with different options:
25M utilized by the developer from his/her pocket for all the construction costs:
Profit of 10M on 25M invested = 40% (return on cash invested)

50% (12.5M) cash from developer and 50% (12.5m) construction loan:
•cash out will include interest on loan (say 1M) and full loan repayment (principal) 12.5M for a total cash out of 13.5M
•Return = 35M – cash out (13.5m) – developers cash (12.5m) = 9m
•9m/cash invested (12.5m) = 72% return
30% (7.5M) cash from developer and 70% (17.5M) construction loan
•cash out will include interest on loan (say 2M) and full loan repayment (principal) 17.5M for a total cash out of 19.5M
•Return = 35M – cash out (19.5m) – developers cash (7.5m) = 8m
•8m/cash invested (7.5m) = 106% return
As you can see, even though your risk increases with leverage, especially if the sales are not made fast enough it might be a wise choice when you can increase your ROI by as much as the margins above. A seasoned investor will actually use OPM (Other People’s Money) as much as possible. Now this is good debt.

Assuming you got the 25M and as opposed to just utilizing the same for the 5 units…and do without a loan, suppose you put the entire amount as 30% (read last option above). This means, you can now get a loan of around 60M. In other words, you can now construct 17 units.

Sell the 17 units @ 7M for total sales of 119M. If you manage to sell the units within 1 year, then you’ll have paid an interest of around 7M (coz you’ll not draw the cash all at a go).

Cash out is now 7M (interest) + loan repayment (principal (60M))
Returns = 119M-67M = 52M/25M (cash invested) = 208% return……this one will drive someone crazy……or let’s say if I made this, then I’d be off to Benidorm for a month... and switch off my phone

The above figures paint a good picture about debt if well utilized. Take note that the above example(s) are purely driven by sales in good time. This is quite an assumption and a seasoned developer will tell you that without sales, then you are doomed. Notice how crazy it can turn out if you got a 60M loan and sales are not forthcoming… will cry in the toilet… But trust investors to take huge risks….after all what would be the worst case for this type of investments??? .....

Next post we shall think along this line.