By Godfrey Kenneth Gobba
A Salary Loan is one of the greatest opportunities that employed people have to start creating wealth for themselves, but many often squander this opportunity.
Anyone that has ever approached a bank seeking a loan knows for a fact that qualifying for credit is indeed no simple task. However, salaried people have access to salary loans which puts them in an extremely advantageous position although many don’t take up the chance because they are not Investment Literate.
Chances are that 8 out of the 10 “corporate people” you see driving have been bank rolled. A fresh graduate will land a good job and 12 months down the road they will be driving a Shs20 million car.
You will most probably find people in middle or top management positions constructing posh “family homes” courtesy of a salary loan.
It is also common place for an average employed person to construct their home courtesy of a salary loan all in the name of “security”.
I personally find this course of action out rightly insane and completely ridiculous.
This is like going to a money lender and borrowing money so you can buy a really good rope to hang yourself well.
Why don’t you just save yourself the trouble and go jump into the River Nile? At least the Croc’s will remember you as the easiest lunch they ever had.
Don’t get me wrong here.
I believe salaried people have been endowed with an amazing opportunity to create wealth using OPM (Other People’s Money) even if they probably don’t know it yet and are unknowingly misusing it.
They are just not Investment Literate enough, otherwise they would respect the simplest and most fundamental principle in Investments Literacy:
“An Asset puts money into your pocket and a Liability takes money out of your pocket.”
So why on earth would you go borrow money, to “invest” in a bunch of liabilities that are only going to suck you dry?
Why would you go use OPM that you have to pay a hefty interest on, to buy a fuel guzzling #vampire that you are going to have to service, eventually repair and even pay police fines for?
Likewise, why would you squander an opportunity to use OPM to create wealth for yourself, on building a house you are going to live in rent free?
I totally respect the need to create security for ourselves and our beloved families. But I deeply believe that there is a better way.
If only we had the courage to consider other possibilities and to think out of the box, we would be able to create even much greater financial security for our families.
I believe that there needs to be some serious mindset debugging and attitude reprogramming amongst our employed folks as regards to their usage of salary loans.
Why not get that salary loan to set up a rental property? This would be an asset that would put extra money into your pocket every month.
Not only would you have created an extra income stream, but your tenants will be paying back that salary loan for you, every month.
And for heaven’s sake if you are going to be using OPM to set up rental properties, perhaps you should consider building for the mass market. Try not to use OPM to set up posh 1000 dollars a month apartments that have limited demand.
It could take a while for low and middle income earners to run out of supply. Hence these are the people you should be developing property for. They are the masses.
And as they pay you rent, they will gladly (although unknowingly of course) pay back your loan, pay back the interest, buy you a cash flow asset and even help you qualify for a bigger OPM bank roll so you can repeat the process over and over and over again.
If only you could silence that natural need for short term gratification and short term security. If only you could see the bigger picture. If only you could endure using public transportation just a little bit longer. If only you could put up with your land lord a little bit longer.
If you are employed and you have access to salary loans, you are immensely blessed. Maximize that opportunity. Use OPM to buy Assets.
Let tenants buy you that car you desire. Keep renting until tenants can build you your dream house.
If you are lucky enough to qualify for a salary loan, use it to create wealth, not to hang yourself like a blind goat jumping off a cliff. Besides property, there are many asset classes you can invest in for wealth creation.
But this is just my obviously rigid opinion.
Whether it makes sense or not depends entirely on your perception.
Does it make sense to you?
(I would love to hear from you. Share your opinion in the comments section below.)
The author is CEO, African Investor Academy
Email: godfrey@theinvestmentguru.co.ug
thought provoking article
First of all thank you Godfrey for sharing for what for many is a master plan. We needn’t forget that one mans meat is another mans poison. This whole theory is based on various assumptions some of which are: Firstly that the person earns enough to make them credit worthy to take out a loan amount that is sufficient enough to cover the required initial investment for example if the safest most feasible investment given the prevailing economics requires an investment of 60million and the most the banks can give me is 20million? Secondly the nature of work is permanent, what would you then say to someone who is working on a 1 year or less renewable contract the kind that can not allow him / her to plan further than the contractual period? would you advise them to take 1 year loans? what ratio’s of his income would the loan repayments be eating into? This has worked for many people but can not be used as a bench mark afterall there is no guaranteed road to success.
I agree with you 100% on all the aspects, my only question to you is what advise do you have for non salary earners in regards to investment. Allow me also take this advantage to pass on my request “Am a professional electrical technician with a class C installation(wiring) permit. i do fresh house installation for both residential and commercial buildings and electrical maintenance for properties”. Your considerations are highly appreciated in advance.
contact is. 0779450364
Stephen
I do get the need for people to invest and supplement their incomes. But I feel that this here may be driving more people to suicide than you think.
First of all i don’t think it’s wise for anybody to be getting a loan to “Start” a business. This is most likely the path to crashing and burning. Usually it would be better for someone to start small with whatever savings they have to test out the business and investment world. Learn how things work, know the do’s and dont’s involved.
For example, one other popular idea is for people to start farming businesses. It’s this usually ends badly for most people because farming is a full time and requires a lot of attention and effort. You can’t rely on someone to do it for you, even if you are paying them. Somebody once did the math that if a tray of eggs costs 9000 on the open market, then possibly as the farmer or supplier you could be looking at 8000 per tray. So if you were able to supply 500 trays a month, that’s 4 million extra income at the end of the month. That’s all some people need to start poultry farms. However if you have no idea how to look after poultry then you are doomed. A quick crash course on Google or YouTube will not be enough. You need to start small. Look after maybe 10 birds. See how it goes. Slowly work up to increase your capacity as you gain more experience. The chances of this business growing and living up to be a good investment will be much higher than if you started with the loan.
Regarding the idea of getting a loan to set up rentals, my opinion is that real estate is best left for those that have reserve funds they aren’t using. Let’s assume you want to build 4 modest rental apartments that can return 250k each. (You would have to weigh the kind of clients you are targeting. Very low income earns are the majority, but then the risk of a tenant defaulting is quite high in the lower income brackets. 250k give or take is a reasonable range in my opinion) That would be 1 million shillings income per month. To construct these you would be looking at more than 100 million. So let’s assume you only need a loan of 100 million at an interest of 21% to top up your savings. Let’s also assume you are planning to pay back the loan in 4 years (Just an average duration though many people take upto 5 years and others less). To service this loan you would have to make monthly payments of about 2.7 million and at the end you would pay back a total of about 148 million. So if you were able to somehow collect rent from each of the units without missing any month you would have 48 million from the rentals and that would cover the interest. If the loan duration is longer, the interest is also higher. In this context it would be almost impossible for the rental income alone to service the loan if you want to keep the interest as low as possible. So from your monthly paycheck you would have to cut at least 1.7 million. So to do this one has to make sure they can survive on whatever is left after servicing the loan.
Eventually for the rentals to return the initial investment, it would take you atleast 100 months which is about 8 years (without counting the initial savings and interest paid on the loan, also assuming the rentals are occupied every month and the tenants pay their dues).
In conclusion, rentals seem like an easy investment. Invest then sit back and collect the returns. However if you don’t do your maths right or have required finances outside the loan, you may bury yourself. All in all, people should really think hard and do their ground work before investing in any business. There is no easy ride. Stay away from loans as startup capital. You need to have some experience running your business before you go in for a loan.
I love this article. This is what I have been doing and still doing. People keep laughing at me that am a loan person. I have managed to put up one unit ( four houses) storied building where am getting rent. I have another loan until March next year and am putting up three rental which I will complete in the next few months. I take advantage of every contract I sign and make sure that the duration of the loan is not very long.
Hi. Pauline. I would be very glad if you broke it down for me to see how you actually manage it all. Maybe my eyes will be opened because I think it’s close to impossible.
Hi Pauline, I love your response. Kindly assist me with your contact or write to me jessicatusiime@gmail.com
I have been snoring for the last 20years.
I agree with you on some aspects as regards to investment but ad per my research any person without stable base can never plan well…i mean if u dont have ur own home however small it might be….its entirely impossible to lie your self that you can invest in rentals when your renting
i just did that – i mean am renting but also own rental units(4 – 2 bedrooms with 1 parking slot each)in Mbuya i built using a salary loan- this article is head on and as Ugandans we need to change our mind, gone are days when one worked for life,then retired in poverty with a huge house, i see these huge houses being liabilities to their owners… move around and see…
keep informing those that can i hear… good job Godfrey
FYI – am working on another OPM to now scale but still targeting multifamily low to middle class, my creed is simple: instead of building 1 unit to charge 2 million, i build 2 or 3 units and charge 1 million or less….
Hello Andrew, I hope this mail finds you in good spirits. I was impressed by your comment on a story on Business Focus website. I am wondering whether we can interview you so that we can further show the world that loans are not bad, but also highlight the fact that there are many unexploited opportunities in real estate sector.
I will be grateful with your positive response,
Yours Sincerely,
Taddewo William Senyonyi
Managing Editor
http://www.businessfocus.co.ug
0775170346/0703828741
you really have an idea. this is a good article. its so inspiring and an eye opener. thax vry much