I earn Sh131,000 net. How can I pay off a Sh2m loan quickly and build rentals?

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 bank loan of Sh2 million with a repayment period of about three years. About Sh65,000 was deducted and I have been paying off this loan for nine months so far. I used the money to buy a 40×80 plot of land in Kiambu County for Sh800,000, a personal car for Sh900,000, my mother’s fence for Sh200,000 and the rest is for me to enjoy. My household budget is as follows: Rent 16,000 shillings, Food 12,000 shillings, Fuel 8,000 shillings, Phone credit 1,500 shillings, KPLC and water 2,000 shillings, Saloon 5,000 shillings, Clothes 5,000 shillings, Mum 6,000 shillings, Carousel 3,000 shillings. I am looking for a similar sized plot of land next to my plot. The price of this plot is 1 million shillings because it touches the main road. My aim is to combine the two plots of land and start building houses for rent, but I don’t know how I can afford to do that with the loan on my shoulders. Kindly advise me on what I should do to achieve my goals.

It sounds to me like you are in a situation where despite the significant investments you have made, paying off your loan is putting pressure on your cash flow. You need a financial plan to help you get a handle on the current situation before you can embark on your goals of purchasing additional land and leasing the building.

Let’s evaluate your current expenses. From an income of Sh131,000, you are left with Sh7,500 after paying off your loan of Sh65,000 and other expenses totaling Sh58,500. This is not enough to work towards your goals. You need to reevaluate your budget.

I suggest you make the following adjustments. Firstly, consider cutting down on your salon and clothing expenses. For example, if you cut each by Sh2,000, you will have saved an additional Sh4,000 per month. Secondly, find a way to cut down on fuel expenses. You can do this either by reducing the number of trips you make or by sharing the car with others. Alternatively, you can generate some cash flow from your car by using it for taxi hailing services, where you can get a driver to operate the car while you are at work, or you can operate it when you are away from work in the evenings and on weekends. Research shows that taxi hailing in Kenya can earn you 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 on your current fuel expenses. This will bring your total savings to Sh13,500. Third, consider reducing or stopping your contribution to the carousel to save Sh3,000. These adjustments alone could increase your residual income to Sh16,500 per month.

As for repaying your loan, which is your largest individual expense, consider approaching your bank to negotiate a restructuring by extending the repayment period. This will reduce your repayments and further ease your cash flow. Another option is to join a savings association and save Sh16,500 from your budget adjustments for a year, while continuing to pay the usual bank discount, at which point your loan balance should be around Sh635,000. You will have contributed around Sh198,000 by then, and depending on the borrowing limit of most savings associations, you could be able to borrow up to Sh594,000 or more, depending on the rules of the savings association, most of which allow you to borrow any amount from three times your equity contribution.

The advantage of switching to a SACO loan is that the interest rate is lower than that of commercial banks, which means you will have to pay a lower monthly installment compared to the current situation. There is also the possibility of going to the same SACO to get a loan to buy the additional land you are considering, again at a much lower interest rate than a traditional bank loan.

As for your goal of building rental properties, which is a great long-term investment but requires a lot of capital, I suggest you double down on your efforts to increase your income. You can do this by considering freelancing in your spare time, renting out your car when it’s not in use, or even starting a business that suits your skills and interests. If you decide to start a business, make sure you do your research on the market needs before investing in a business. You can also equip yourself with the skills to become a better entrepreneur by taking a short training course, thus increasing your chances of success if you choose this path.

You should also consider converting the land you currently own into productive land, either by leasing it out as an event space or in some other way – for example, by erecting temporary structures. When it comes time to start building, you may want to consider building in stages, or one unit at a time, once the infrastructure is in place. Once your debt is paid off, you may want to consider financing the infrastructure from a co-op or bank. There are financing options available on the market for home construction with lower interest rates.

Ultimately, it may be necessary to extend the timeline for purchasing 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 other 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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