Mbale Property Management: 5 Tips to help identify housing potential areas
New Year with new plans, ideas and investment prospects. One of the areas of investment in housing. As a property management company, we have witnessed a lot in the housing sector and would wish to share some tips to help you identify areas of housing potential for investment purposes.
When you want to invest in housing, it’s important to look at the location of the land and come up with an investment that will suit the area. For example, a plot situated close to a public institution of learning is good for different types of housing projects such as a rental apartment, student hostels or a possible shopping mall. Once you have identified those possible housing investment areas, then evaluate each option and see if its suitable in your plot. You can have a plot here a public learning institution like a university but the landscape does not make it possible to a vehicle to move in there and if even if they move, then a limited number. In such a case, for example, a student hostel may be more suitable.
Growth prospect of an area
This is also a factor to consider. As Mbale Property Management Company, we have observed that there are areas with growth opportunity due to the current activities there and the plans for more activities. For example, a place like Vihiga County has experienced a limited investment in the real estate sector but the coming of county government has changed the fortune. The influx of county staff and national government staffs working at the county levels plus other non-governmental organizations has created demand for more housings.
As the county continues to grow, there is a greater prospect of more demand coming up in the near future. This should drive housing in sub-county locations or centres like Chavakali, Majengo and Luanda. As the county seeks to develop those centres, more demand is created.
New Devolved Areas
Devolution instantly created a demand for housing. County officials brought demand for housing in areas which traditionally had no appetite for housing. Hotel and conference facilities became inadequate for the demand and this has caused the neighboring counties occasionally hosts visitors attending functions in other counties. Kisumu, for example, has hosted visitors attending functions in Vihiga and Kakamega because of lack of adequate accommodation.
During the devolution conference in Kakamega in April 2018, hotels in Kisumu were fully booked yet the conference was taking place in Kakamega. Vihiga did not benefit much though it is situated roughly 25Km from Kakamega compared to Kisumu which nearly double the distance from Vihiga to Kakamega. More housing projects are needed in Vihiga especially Mbale and Chavakali to cash on the excess demand from both Kisumu and Kakamega which are situated roughly the same distance on both sides.
Supply and Demand
This is an old economic principle that requires an equilibrium to be attained at all times. In real estate, the demand for housing should be met by supply sufficient to cover the demand. To invest in housing, you need to identify where there is no equilibrium and particularly see where the demand is more than supply.
What normally drives demand is the establishment of new centres of government as well as public institutions such as hospital or university. Any time a new hospital is being built somewhere, begin to think of medical staff who will work there as well as support services to the hospital like consultant doctors, pharmacies as well as resting places for families visiting their sick ones. You can always come to us to help you study the market to identify where the demand exists.
Rate of Return
All investment requires a good rate of return. If you want to invest in a housing project, you should also study the possibility of getting your return. A good rate of return varies from one industry to another and also with the economic life of the investment. Study the industry rate of return and ask yourself if where you want to invest has the potential to give a good return for money.
3 Ways to Measure Return on Real Estate Investment
1. Return on Investment (ROI)
The simplest and most basic way to measure the rate of return and evaluate the efficiency of an investment is the return on investment metric. Successful real estate investors consider ROI the most important number when it comes to the rate of return on investment.
The formula for measuring ROI is: ROI = Annual rental income/Total cash investment
For example, a real estate investor purchased a rental property for Ksh400, 000 and paid another Ksh15, 000 in closing fees, maintenance costs, etc. This real estate investor charges a monthly rent of Ksh2, 500. The ROI for this rental property is:
ROI = 12 x Ksh2, 500/(Ksh400,000 + Ksh15,000) = 7.2%
2. Capitalization Rate
The capitalization rate (or cap rate, for short) is another popular metric for calculating the rate of return on real estate investments. It describes the rate of return on a rental property that the real estate investor paid for fully in cash.
The formula for calculating cap rate is easy; you simply take the net operating income (NOI) and divide it by the purchase price. For example, let’s say it costs a real estate investor a total of Ksh170, 000 to buy an investment property, and he/she decides to rent it out for Ksh1,500 per month. All annual costs related to the investment property sum up to Ksh3, 000. Thus, the cap rate calculation would be:
Cap Rate = (12 x Ksh1, 500 – Ksh3,000)/Ksh170,000 = 8.82%
3. Cash on Cash Return
A third widely used (probably the most popular) metric for determining the profitability of a real estate investment property is the cash on cash (or CoC) return. CoC return measures the rate of return on your investment property if you paid for it through a mortgage. To calculate it, divide the NOI by the total cash actually invested (down payment).
Let’s say you purchased a Ksh350,000 rental property through a mortgage, with a 20% down payment (Ksh70,000). You collect Ksh1,700 monthly rent and your annual expenses associated with the property sum up to Ksh4,000. In this case, the cash on cash return would be:
CoC Return = (12 x Ksh1,700 – Ksh4,000)/Ksh70,000 = 23.4%
What Is a Good Rate of Return on Investment? It’s up to you to pick a good one for you though there are some considerations to look into when picking a good rate of return on Investment.
Having looked at all these tips, it’s time to venture into a housing development. Look for a developer or contractor to guide you through the process and develop your property. We at West Kenya Real Estate offer construction and management services. We are a full package company develops and manage a property. By partnering with us, you not only get a qualified real estate development company but also an experienced property management company who will transition with you from development to management. We will take the burden of looking for services like garbage collection, security and cleaning services. Talk to us today.