My name is Susan. I am single, in my mid-30s and have no children. I earn Sh131,000 after statutory deductions. However, after other deductions, I am left with about Sh25,000. I took a Sh2 million bank loan with a repayment period of about three years. I am deducted about Sh65,000, and I have paid this loan for nine months so far. I used this money to buy a 40X80 plot of land in Kiambu County for Sh800,000, a personal vehicle for Sh900,000, mum’s fence for Sh200,000 and the rest to indulge myself. My household budget is as follows: Rent Sh16,000, food Sh12,000, fuel Sh8,000, airtime Sh1,500, KPLC and water Sh2,000, salon Sh5,000, clothes Sh5,000, mum Sh6,000, merry-go-round chama Sh3,000. I am eyeing a plot of the same size next to mine. This plot is priced at Sh1 million because it touches the main road. My goal is to combine the two plots and start building rental houses, but I don’t know how I can afford to do this with the loan on my back. Please advise me on what I need to do to achieve my goals.
Emmanuel Mbogholi, founder of PlanWise LLC, a consulting firm that educates, strategises and guides clients to financial independence and success.
It seems to me that you are in a situation where despite the significant investments you have made, your loan repayments are putting a strain on your cash flow. You need a financial plan to help you get a grip on the current situation before you embark on your goals of buying the additional land and renting out the building.
Let’s assess your current expenditure. From an income of Sh131,000, you are left with Sh7,500 after your loan repayment of Sh65,000 and other expenses totalling Sh58,500. This is not enough to work towards your goals. You need to re-evaluate your budget.
I propose you make the following adjustments. First, consider reducing your salon and clothing expenses. For example, if you reduce each by Sh2,000, you will have freed up an additional Sh4,000 per month. Second, find a way to reduce your fuel expenditure. You could do this by either reducing the number of journeys you make or by carpooling with others. Alternatively, you could generate some cash flow from your vehicle by using it in taxi-hailing services, where you can get a driver to operate the vehicle while you’re at work, or you can operate it when you’re off work in the evenings and at weekends. Research shows that taxi-hailing in Kenya can earn you anywhere between Sh30,000 to Sh70,000, and even more, per month, depending on various factors such as time spent.
If you decide to reduce the number of times you drive or carpool, you should aim to save at least another Sh2,000 from your current fuel expenditure. This will bring your total savings to Sh13,500. Thirdly, consider either reducing or stopping your contribution to the merry-go-round chama to free up Sh3,000. These adjustments alone could increase your remaining income to Sh16,500 per month.
As for the loan repayment, which is your largest single expense, consider approaching your bank to negotiate a restructuring by extending the repayment period. This will reduce your instalments and further ease your cash flow. The other option would be to join a sacco and save the Sh16,500 from your budget adjustments for a year, while still paying the usual bank deduction, at which point your loan balance should be around Sh635,000. You will have contributed about Sh198,000 by then, and going by the borrowing limit of most saccos, you could access a loan of Sh594,000 or more, depending on the rules of the sacco, most of which allow you to borrow anywhere from three times your share contribution.
The advantage of switching to a Sacco loan is that the interest rate is lower than that of commercial banks, which means that you will have a lower monthly instalment to pay compared to the current situation. There’s also the possibility of approaching the same Sacco for a loan to purchase the additional land you have in mind, again at a much lower interest rate than a traditional bank loan.
As for your goal of building rental properties, which is a fantastic long-term investment but requires significant capital, I suggest you redouble your efforts to increase your income. You could do this by considering freelance work in your spare time, renting out your vehicle when it’s not in use, or even starting a business that matches your skills and interests. If you decide to start a business, make sure you do your research on what the market needs before you invest in a business. You could also equip yourself with the skills to become a better entrepreneur by taking a short course, thereby increasing your chances of success should you choose this route.
Also, consider whether the land you currently own could be made productive, either by leasing it out as an event space or in some other way — for example, by erecting temporary structures. When the time comes for you to start building, you may want to consider building in phases, or one unit at a time, once the basic structures are in place. Once you have cleared your debts, you may wish to consider infrastructure finance from a Sacco or bank. There are financing options available on the market for the construction of houses at lower interest rates.
Ultimately, it may be necessary to extend your timeline for buying the additional land and starting construction until you have at least paid off your current outstanding loan. Financial stability should be your priority, despite your good intentions to take advantage of the opportunity you see. Focus on managing your expenses, pursuing loan restructuring and saving diligently for any further investments. It will take patience and discipline, but in the end you will be in a better position to achieve your goals without compromising your financial stability.
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