Financing your real estate investment

It is one of the major issues faced by Kenyan investors. The real estate market has become one of the key investment options dues to its ability to caution investors against economic turbulence like inflation. Ask anyone thinking of investment and they will shoot that old saying that goes “investment? Don’t wait and buy, buy and wait”. But we all know “it takes money to make money”. The biggest impediment for developers who want to develop real estate properties or the buyers trying to secure real estate properties is how to finance the real estate investment. CommercialKe investment advisors did research and here are some of the ways developers can finance that dream real estate investment:

Equity financing

Equity financing as a means of raising money for real estate investment involves the sale of ownership in order to raise money. In these, you sell the shares of the business to investors who in return give you capital to fund the project. The key advantage in using this method to fund your real estate investment is that you have a long investment horizon. This can range between 3-7 years before you are required to give the investors their money back and the returns are primarily based on the project success.

The downside of this option is that you stand a chance to lose the decision-making rights. By selling shares or part of ownership means that you welcome other people to the decision-making body. The decision made has to be unanimous or higher count on votes and the vote weight is based on the number of shares held.

Mezzanine

This capital can be in form of debt or preferred stock. It can be said to be a hybrid of equity finance and debt where the lender is able to convert the debt to an equity interest in case of default. This kind of capital has an investment horizon of 1-3 years and works for best for developers whose cash flow is restrictive.

The downside of this is that acquiring the capital can be lengthy. This capital requires minimal or no collateral hence associated with high cost of capital meaning you may have to lose power over the company in-case of payment delays or default.

Presales financing

Presales is one of the most common financing methods in Kenya today. This is where you make early sales on the project before the project has been completed. Developers use renders (the property models and visuals) to entice investors to purchase the products before the project has been developed. This method is attractive to investors as the prices are usually lower than the actual price of the property after completion.

The downside of this funding process is that the profit margins are significantly reduced if many projects are sold off-plan with discounted prices. The sales are also unpredictable and the developer may fail to raise enough funds if this method is set as the key financing option.

Senior Debt

This is capital borrowed from investor to be paid later. This borrowed capital is usually prioritized when making payments and in the case of liquidation. In this case, the developer asses are the key collateral for the loan which usually has a very strict payment period. The advantage of this funding is that it has very low interest rates since it requires collateral which reduces the risk on the loan.

The downside of this is that it is very risky.  The capital investors or funding institutions can easily collect the developer assets to pay out the funds advanced for the real estate investment.

Savings

This is one of the rarely used funding method but one of the most efficient and risk free funding options for the developers. This involves continuously putting money aside for funding the real estate investment. Savings ensures that you have full control of the project and leverage the power of compounding where the developers can use savings for future funding.

The downside of this approach as a means of funding a real estate project is that it can take time if the devellper income is not that good. The invest is required to save a high percentage of disposable income to manage to fund a real estate investment.

Structured investment products

In this structure, developers usually package products or investment solution which the investors buy in. The products promise the investors high returns based on the performance of the real estate investment. Usually, this investment gets a better deal that investing in the normal investment in the market.

The downside of this is that the developer receives minimal profits as compared to the other option.

Joint Ventures

Location is key when making a real estate investment decision. Getting land at a strategic point is expensive and may deplete the developers ability to finance the rest of the project. Doing joint ventures which involve including another person into the project who has the ability or resources needed is key. The simplest and common form of join ventures is where the developer partners with the land owner to construct the project. The land owner can get payment by either getting units from the finished project or getting a share of the profits from the finished project.