Benefits and downsides to your construction financing plans

Commercial real estate investment is one of the most sought investment options in East Africa. The returns are implied to be certain and very rewarding to the investor. However, the way your investment will perform will depend on conditions, both within and out of your control. To judge if you are set to have good returns through the real estate business, you will need to know what kinds of leverage you have in place for risks faced in the industry.

Your source of financing leverages you against such risk. Before you take insurance, I would like to be of the view that how you are financing the construction has both long term or short term implications on returns and what options you have in case of the unforeseen dangers to your constructions project. These risks include when a building collapses, land wrangles in the midst of the construction, falsified land sale and natural disasters, among others.

Construction off your savings
Constructing off hard-earned savings implies a debt free project but foregoing other opportunities where you could have used that money as compared to using bank credit. But all wouldn’t be lost because in case of any risks, bank credit would come in handy. The strength of a small or multi time investor is determined from their ability to bounce back in case of a disastrous loss. In the long run, however, using your savings and later bank credit is not a good financial decision. The reverse however is a financially sound decision. Your savings are leverage for further credit facilities

Construction using bank credit
Whether it’s simply business financing or a mortgage financing bank, credit has an upside to property financing through credit extensions. High risk projects like construction should be under taken with solid financing like bank credit.

But this facility should be undertaken with precaution so that you don’t end up a high risk borrower whose equity or capital investments are debt financed.

The reason you undertake such investment is to create wealth. So if you are highly indebted, the revenue will margins fall and the near likelihood of a takeover from the institutions will affect you terribly.

Group financing
Group financing in property investments is another option that combines two above, to create unlimited growth and opportunities. Group or society building initiatives give you leverage against unforeseen factors because of the consolidated resources available and unlimited enterprises. The fact that we either finance construction either on debt or equity means that the factors to overhaul in form of risk are certain.

At whatever level, the risks are the same but what makes the difference is the aptitude with which your investment financing decisions are made. It’s only wise to consider both long term cost implication and unforeseen shortcoming as constant reminders of the nature of your financing decisions.

Financing from other income sources
Finally, you can finance your construction plans off a stream of revenue from another income source. With such financing, you may have the ability to easily recover from any damages. This revenue may come from other properties you own a well paying job or a business you own. However this can easily cause a financial setback for you. This is because you will not be realising the value for the money.

Even if you are investing in property, the current value of the money can never be regained and your financial position will not be the same either. Using direct cash financing from your business to finance your construction initiatives means you are foregoing re-investing into that business. You are foregoing creating new investment opportunities or acquiring a new investment.

Your financial position is set back by not realising that housing construction is an independent project requiring meaning that financinghas to be planned and set apart for that purpose. Don’t mix up the two, great companies fall at this point.

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