Most people FEAR debt…I bet you do…
But what you should worry most about is BAD DEBT…
Get this: Not all debt is terrible..
In other words, if you’re clever, you can use debt to get into real estate…and build a massive asset.
That’s what wealthy people do. They leverage GOOD debt to build huge wealth.
In real estate.
And elsewhere.
You too could use GOOD debt to fast track your journey to real estate riches. Good debt won’t take you into the feared debt trap..
Instead, it will bring you to long-term wealth
Let me show you how to use debt to get into real estate in Kenya and make money…and start building wealth
How To Use Debt to Make Money in Real Estate In Kenya
Flipping Houses (or homes)
Flipping houses -which is not known to many- is one amazing way to use debt/loan to make good money if you want to invest in real estate.
See, all you have to do shop around for a potentially good house/home to buy, get a loan, buy it, renovate it, then sell the renovated property (home/house) at a much higher price.
You pocket the difference, as profit…
Now, house flippers can get between 70 – 80% of the quoted purchase price as debt and sometimes 100% of the property’s total cost of repairs.
You, on the other hand, as the flipper deposit between 20- 30% (of the purchasing price).
As mentioned, you get a good fundi to give the house an uplift, then sell the property..use what you get to pay off debt, then repeat the process.
And who knows?
Before long, you could be looking at good wealth in your hands..
BRRR (Buy, Renovate, Rent, Re-finance) Strategy
You can also try BRRR strategy using debt….as you saw above, BRRR means Buy, Renovate, Rent, Re-finance.
It is important to note that this strategy works in an almost same way as previous strategy-flipping houses.
So, how does it go?
You shop around for a house/home that is on sale…usually these properties will not be in the best condition.
Then, approach your sacco/bank and get a big enough loan to buy it..
Then once you have purchased a house, go ahead and renovate it..
You then proceed to rent the property out.
You can get money to buy and renovate a house through borrowing.
Not it is time to refinance the property by taking a longer-term mortgage.
That way, you get a way to settle the high-interest loan you originally took.
Bear in mind that the refinance loan will be valued depending on the house value after renovation, and not its original purchase price.
Meaning?
It means that you’re able to withdraw your original deposit (down payment) after refinancing.
So you can keep buying other real estate properties that way.
Rich people do it..
Question is, why not you?
Buy Good Rental Properties
The next way you can use debt to buy into real estate is borrowing a mortgage to purchase rental properties/apartments that have good income.
In fact, you can easily qualify for a mortgage of 15 – 30 years and then re-pay it from the cash (rental income) you will be earning from the rental property.
Again, your lender advances 70- 80% of the property price meaning you usually deposit 20- 30% of quoted property price.
This is how you make money to repay off:
Once you have purchased the house, you rent it out as an Airbnb or to tenants.
Buy Land in a prime area
This one is common: buy raw land with a loan, subdivide it and subsequently sell it – you will definitely make great profit, especially if you had purchased land in an area with prime potential.
Towns like Nanyuki and Junja are some of the areas with massive potential, if you want to make money in real estate by buying land and subdividing it for sale as plots.
Commercial Properties
Even though commercial properties usually cost more than regular residential properties, you can still acquire them through debt.
But there’s one major downside- loans for these commercial properties have shorter loan repayment periods of 5 -20 years while personal loans repayment terms are typically 15 – 30 years.
On a brighter side, commercial building in towns such as Nairobi and Thika generate more revenue than residential properties (you rent them out).
So you can quickly pay off your loan obligations.
And move onto to a new investment..
Quick tips about using debt to invest in real estate in Kenya
#1-Check interest rates
Before borrowing, compare the interest rate (of the loan) and the ROI (rate of return on investment).
Obviously, the ROI on your real estate investment should be higher (percentage-wise) than your loan’s interest rate.
#2-Your financial position should be your main guide
*Before investing using debt, do your personal financial analysis based on own finances and personal circumstances.
Above all, go for a PROPERTY you can afford (even if you’re buying and building an asset like a student’s hostel)– and of course, the income it gives you should be adequate to clear its loan.
#3-Partner with others
Good credit DOESN’T always have to be your own solely.
So you could partner with a friend who has a good credit rating then share the risks.
For example, you can use other people’s money to pay for the deposit, and finance the remainder of the amount with a loan from a SACCO/bank.*
#4- Steer clear of high-interest rates debts like shylock loans
Avoid loans with insanely high-interest rates such as shylock loans.
I don’t know how you can legitimately pay off such loans…unless you are superman.
#5- Have a good plan
you must have a very clear plan of repaying you loan.
So, don’t borrow just because I’ve said it’s good if you have a solid investment plan….have a plan B of repaying, just in case your asset takes time to start paying you.
What is bad debt?
Bad debt is debt that you take on without having sufficient INCOME to re-pay it.
I can’t blame you for doing this – after all, we have all grown up seeing friends and everyone else borrow money for consumable items, a home to live in, a car to move around in, and even education.
Issue is, they often treat these things as assets… yet they’re not.
Why?
Because none of them – none at all- produce any income for them.
The result?
These people end up not having enough income to re-pay these debts.
What is good debt?
This is simply debt you get into and invest in an asset…recall, an asset is not a house, car, or land…
Here we like helping you improve your financial standing…and so we define an asset as anything that gives you cash flow.
Meaning, good debt is debt you use to invest in a cashflow generating thing like a rental property, land you’re using for agribusiness, etc.
Most importantly, the money coming from this asset must be sufficient to pay off your monthly loan installment.
Recall:
Wealthy Kenyans are taking out more and more debt, and they then use the loans to strategically multiply their riches.
It’s called LEVERAGE….
Leverage can enable any smart, savvy investor in real estate to grab the massive investments opportunities in real estate NOW – instead of waiting long years or decades to make their dream to own real estate become true.
In short, by utilizing debt (leveraging debt) correctly, you can potentially accumulate an impressive collection of real estate properties (all paying you) – and build significant wealth to help you retire– within a short time frame, and without using your own resources.*
Do not forget that Real estate assets such as rental houses or student hostels can be an awesome source of reasonable passive income.
So don’t just be scared of “debt”… it can be game changing, when used right.
Written By: John Gitahi
Real Estate Aficianado & Investment Consultant
+254797532345