Chachanomics' Advice Published in Saturday Nation on 17th Dec. 2022

Should I use Sh1.25 million to build my house or start a business?

My name is Kennedy. I am married with two children. My wife is a trained P1 teacher working at a private primary school. We live in Nyandarua. I am employed on a permanent & pensionable terms with a net salary is Sh36,000 and my expenses are as follows: school fees 6,500, wife 2000, househelp 4000,, shopping 6500, food 3000. I don't pay rent as  I have set up temporary house on my plot. I also have savings of 240k at a Sacco. I want to take a loan of Sh1.25 million and the following projects are running through my mind:

1). Build a 3 bedroomed house worth Sh2.5 million that I have bought materials of approximately Sh370,000 for I sourced thses funds through my monthly salary for the past two years. These materials are at my plot where I live and intend to build a permanent house.

I'm dead set against building the house through loans and as such, I was thinking of building the said house using my monthly salary.

2). Buy a piece of land through loan at a place  where an acre goes at about Sh800,000 and then purchase some bulls and sheep and keep them at the farm, and hire a cowboy to look after them. They will probably be grazing at the Kenya forest since the land is just at the cut line.

3). Through the same loan for the land purchase, I will purchase a 50 by 100 plot at approximately Sh220,000 from a not so busy rural roadside that I believe will get busy as its tarmarcking is under plan. I would like to set up rentals or a petrol station here.

4). Start a phone and accessories shop business in the town's CBD with a capital of Sh400,000. 

Where should I start? How do I attain financial freedom out of this?

Expert Advice

Your total expenses is Sh22,000 against an income of Sh36,000; a balance of Sh14,000 which is unaccounted for. You have indicated that you are eligible for a loan of Sh1,250,000. Your total loan repayment and duration will vary  depending on whether you take a bank or Sacco loan. At a bank  interest rate of 14%, the loan will attract an additional sum of Sh175,000 per year and in five years you will pay Sh875,000 which  totals to Sh2,125,000. Your payslip cannot sustain this huge amount in a period less than seven years.

Let us examine each of the investment options to determine their respective profitability or potential to generate an additional stream of income.

Option 1: Building a three-bed-roomed house worth Sh2.5M. This is a very expensive non-profit making project with zero returns on investment. It will require more funds to construct and furnish the house. This implies a loan of Sh1,250,000 will not be enough. It may take five to ten years to complete it. A residential house is a painstaking liability which will not only tie your money for a long period of time but also make you stagnate by forgoing other profitable ventures.

Option 2: Purchasing a an acre at Sh800,000 to rear bulls and sheep.This will leave you with a balance of Sh450,000. You need to determine the kind of bulls and sheep you want to keep. That is whether local breed, exotic or mixture. Assuming you spend Sh300,000 to buy emaciated and underweight bulls at an average cost of Sh20,000, you will be able to purchase 14 bulls. If well fed through a system called "feedlotting" - fattening bulls (through optimum feeding) for purposes of selling them for slaughtering,you will sell them at triple the price in three to five months of intensive feeding at a cost is Sh50,000. You may realise approximately Sh840,000 within five months and repeat the same procedure so that in a year you will realise Sh1,680,000. Spend the remaining balance of Sh100,000 to buy a good breed of rams and ewes at an average price of Sh5,000 which will translate to 20 sheep. In 6 months, you will triple the amount to Sh300,000, and once you repeat the same, you will realise Sh600,000 in a year. In total, you will accumulate around Sh2,280,000 in a year of doing bull and sheep rearing. This amount will be sufficient to clear your loan and set you on a path to a very profitable livestock keeping agribusiness enterprise worth emulating.

Option 3: Purchasing a 50 by 100 feet plot at Sh220,000. This will leave you with a balance of Sh1,030,000 which may neither be enough to construct more than two single rental units nor start a petrol station unless you get more funds. But as for rental units you can build and rent them gradually as your financial situation improves. This option will not generate a good amount of money within a period of one or two years. Your income growth will be slow but steady over the medium and long-term in case you opt for rentals.

Option 4: Starting a phone and accessories shop business at Sh400,000. This will leave you with a balance of Sh850,000 which can be invested in other profitable ventures like buying three plots at Sh220,000 (as envisaged by option 3) and letting them appreciate with time before disposing them off at double the price or even more. The phone and accessory business seems easy to start off but requires good management and customer care. It is a very profitable venture that you can run both physically and online if well planned. There is a high demand of electronics in Kenya thus making the electronics business very lucrative.

In sum, the best way to start off yourself on a journey towards attaining financial freedom is to adopt a three-fold strategem: have a spending plan that you can follow, set  SMARTER goals to give you a clear roadmap of where you are heading and develop a saving and investing scheme to ensure your goals are achieved within the set time frame.