Leveraging in Real estate

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…..you 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????????…..

Marty – Wazua Forum.

DENNIS. G. MAINA,
B .A LAND ECONOMICS (HONS), U.O.N, G.M.I.S.K, V.S, CCM

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ZONING AND PLOT SIZES

What is zoning?

Zoning is a device of land use planning by local governments in most developed countries. The word is derived from the practice of designating permitted uses of land based on mapped zones which separate one set of land use from another. Zoning will involve regulating the uses to which land may be put, regulating building height (i.e how many levels/floors can be built), or some combination of these.

The common zones that a parcel may fall under can be;
• Agricultural land use;
• Residential land use;
• Commercial land use; and
• Industrial land use.
Putting a parcel in another use apart from the zone under which it falls would therefore be illegal. This practice may cause adverse economical loses to an investor e.g pulling down of a large commercial building in an agricultural zone.

The size of land will most definitely determine the use into which that piece of land may be put into. e.g any piece of land that is below I acre (0.4047 ha) cannot be effectively used as an agricultural parcel of land but instead would qualify for residential use. In areas that have been zoned for agricultural use, subdivision of land to portions that are uneconomical will generally be discouraged.

Is 1/8 acre equal to the commonly known 50 * 100 plots?

If you look at a title deed, you’ll notice that the approximate area of the plot/land is normally indicated in hectares and not acres which most people use when referring to a given piece of land.

1Ha = 2.47105381 Acres = 10,000 Square Meters
1cre = 0.404685Ha
1 Meter = 3.2808399 feet
1 sq.m = 10.76 sq. ft

The commonly known 50 * 100 plots are usually measured in feet. Hence, the 50*100 (exact measurements), would translate to 15.24M*30.48M=464.5sqm=0.0464Ha

In real circumstances, it is very hard to find a plot which exactly measurements 50ft by 100ft and thus the most important thing to look at is the area as long as the width of the plot is not too narrow for your purposes/use

A 1/8th of an acre will therefore be 0.404685/8 = 0.5058Ha. You will thus notice that 1/8th acre is a slight difference in terms of the area/size from 50*100. However, the difference in size is not very large henceforth people normally refer to 50ft * 100ft plots as 1/8 acre plots.

D. G. MAINA,
B.A LAND ECONOMICS (HONS), UON. G.M.I.S.K, CCM.
+254 722 483 414.

CERTIFICATE OF OFFICIAL SEARCH “Official Search”

An official search is a confirmation by the respective land registry on behalf of the government giving details of the ownership and status of a particular title (pertaining to a given piece of land).

Details contained in the search document will include:
1. Title number, search number and the date the search was done;
2. Nature of title: Absolute/freehold or leasehold;
3. Approximate Area in hectares;
4. Name and address of proprietor and whether a title deed has been issued to the proprietor;
5. A section on inhibitions, cautions and restrictions;
6. Encumbrances section (leases, charges etc);
7. Pending applications.
The search document details are filled based on the content of the green card and must be signed and sealed by the Registrar.

For a title to be clean, then No.s 5, 6 & 7 must be nil. If not, and especially No. 6, a charge entry must have a corresponding discharge entry to free the charge. A title with any unresolved issues in Nos 5 to 7 is not transferrable.

D.G. MAINA,

B.A. LAND ECON. (HONS) UON, G.M.I.S.K, (V.S), CCM.

+254 722 483 414.

A FAKE TITLE DEED

What is a FAKE TITLE DEED?

A deed is a signed agreement especially about the ownership of property or legal rights. A Title deed is a legal document providing somebody’s right to property and subsequently ownership.

Then what is a deed plan? This is a signed plan by the Director of Surveys showing the precise particulars of a surveyed piece of land. It shows the details as in the shape of the plot, the distances and bearings all round the plot, scale of plotting, Deed plan number, land reference no., size of the plot in hectares, signature of the Director of Surveys, the date of authentication by the Director of Surveys and above all it shows if the plot is a New Grant or an extension of lease. This is practice is under the provisions of Registration of Titles Act. This deed plan once it is duly prepared, it is attached to a certificate defining the current owner and any endorsements by the relevant Registrar in the event the property has changed hands or there are encumbrances therein whatsoever relating to the plot.

What about a mutation? Under the Registered Land Act (commonly referred to as Cap 300) the mutation form shows how a bigger land (mother) mutated into smaller pieces and the details of the proprietor (Names, ID, box number and signature). It further shows the date the surveying was done. It also details the subdivision details (existing roads, LR numbers of the resultant plots, the exact measurements of the plots and their areas in hectares). Other signatures therein include the one of a licensed / district surveyor and the land registrar who prepared the resultant titles. This document is ordinarily forwarded to survey of Kenya for purposes of amending the RIM (Registry Index map) which basically keeps track of all subdivisions in a specific area.

Then what is the meaning of the word “fake”? To make something false appear genuine.

From the foregoing therefore a fake title deed is a false replica of a genuine Title deed where it could have all the attachments but does not relate to any physical piece of land. Equally it purports to confer a right that doesn’t exist.

In early 1990s there was the infamous 13th floor of Ardhi House where false documentation was done to support surveys and issuance of Title deeds by the unsuspecting authorities. This floor was in reference of a room in River Road Nairobi. After all Ardhi house goes up to 12th floor. The fraudsters could therefore generate documents including allotment letters, Part Development Plans (PDP) and all that appertains to excision of land from the Government land (GL). They could even go ahead and file these documents in the files of the Ministry of lands using inner house staff of the Ministry at a small fee. That is the point where corruption sets in the process. It even becomes difficult for the Ministry to trace the entry point of the fake documents in the Ministry’s genuine files. Where allocation of a genuine plot is substituted with the “fake” one it becomes even more complex to unearth the conversion stage from a genuine Title deed to a fake one.

Would a naked eye be able to identify a fake title? From the aforementioned info, it gets very tricky coz most fake titles are replicas of the original, meaning the details therein are the same. How then can you tell it is fake? It is pretty hard, but the easier approach is to tell a fake owner coz obviously the ‘owner’ should have other document especially the ID card. We also have document experts who can verify the title. Most security companies / experts can verify IDs. Banks when financing land deals use experts to detect forgeries of titles and IDs. If you carry out proper due diligence you should get to know if the owner is the real one and if the documentation is proper.

By the way, other than fake titles, whenever then you transact with plots, take time to carry out proper due diligence to establish the history and more importantly the conception process of the plot. Only then you will tell the plot was grabbed or was acquired the right way. Else you could invest on a road reserve where caterpillars of the Ministry of roads will be your obvious guests. In this case no compensation by the state will come your way as the rights of the society surpasses individual interest.

Finally, do u know that an official search at the land registry office is not sufficient due diligence?? I’ll expound more in the next post as we look at how to carry out a comprehensive due diligence you can carry purchasing land.

By Marty, Wazua Forum.

D. G. MAINA,

B.A LAND ECONOMICS (HONS), UON, G.M.I.S.K, CCM,

+254 722 483 414.

kariuki waweru

Construction of what will be another tall building in Nairobi rivaling the Times Tower is set kick off before year-end once a pending court case is resolved. The National Social Security (NSSF) which will develop the 36-storey building at Hazina Trade Centre hopes the court will resolve the dispute next month to give it the go-ahead. The Times Tower, which houses the Kenya Revenue Authority (KRA), is the tallest building in East Africa at 140 metres high. “We are waiting for the High Court to determine the case on June 7,” acting managing trustee Tom Odongo told the Star on Monday.

“We are expecting two outcomes: the court could allow the NSSF to use Cementers or it could nullify the tender, in which case we will re-tender within a week and the winner will be known within 30 days,” he said.

Odongo said whatever the court’s decision will be, the…

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A VALUER

A valuer should be able to verify the Identity of the property you are dealing in to avert the probability of the client he is dealing with being conned.

D. G. MAINA,

B.A LAND ECONOMICS (HONS), UON. G.M.I.S.K, CCM.

+254 722 483 414.