Your Chama, like many others in Kenya and across Africa, is a vital part of the financial landscape. Chamas offer a way for people to save money, access credit, and invest in opportunities often out of reach for individuals. Typically made up of friends, family, or colleagues, these groups pool resources to invest collectively, promoting financial inclusion and empowerment.

While Chamas have helped many achieve financial goals, there’s a growing awareness of the limitations and risks of this model. Investment goals are deeply personal. The challenge of promoting selfless thinking in a group often undermines the success of Chamas.

There are, however, notable success stories. Some Chamas have grown beyond their founders’ visions and gained national recognition. Centum, for instance, is now a publicly traded investment company that began as an investment club in 1967. TransCentury is another success, starting in 1997 with a group of friends who pooled resources to invest in infrastructure and energy projects across Africa.

The saying goes, “If you want to go far, go with others.” But it doesn’t mention the importance of choosing the right companions. Your journey shouldn’t be shared with just anyone. Even a family member can be the wrong choice for a fellow traveler.

Given the risks Chama members face, how can they reduce their individual risks when investing in real estate through their groups?

There may not be foolproof rules, but here are some steps they can take:

Your Chama and Due Diligence

Real estate investments are illiquid, high-stakes investments, and the importance of thorough due diligence cannot be overstated. Your Chama should ensure that the property is thoroughly vetted before committing to any real estate investments. This includes assessing the property’s legal status, verifying ownership, checking for any encumbrances, and understanding the local market conditions. Engaging a reputable lawyer and real estate expert can help avoid costly mistakes.

Align on Investment Strategy

Real estate investments can vary widely—from buying and holding residential properties to developing commercial real estate. Your Chama members should align on the specific real estate investment strategy. Whether the goal is long-term appreciation, rental income, or quick flips, everyone needs to agree on the approach to avoid conflicts down the road. Not the silent head nods, rather, an active engagement and commitment to the strategy.

Your Chama Must Establish Clear Ownership and Exit Strategies

When investing in real estate as a group, it’s essential to establish clear ownership structures and exit strategies. Your Chama members should decide in advance how ownership will be divided, how profits will be shared, and what the process will be if a member wants to exit the Chama or liquidate their share. This prevents disputes and ensures that everyone knows their rights and obligations. Adopt strategies that allow for exiting members to transition away as seamlessly as possible.

Consideration of Financing Options

Real estate often requires significant capital, and Chamas may consider financing options such as loans or mortgages. It’s important to carefully evaluate the terms of any financing, including interest rates, repayment schedules, and the impact on the group’s cash flow. Avoid over-leveraging the group, as this can increase risk and strain the Chama’s finances if the property does not generate expected returns.

Your Chama Should Consider Diversification

While real estate can be a lucrative investment, it’s also important not to put all your eggs in one basket. If your Chama holds its entire portfolio in a single property or a specific type of real estate, it becomes vulnerable to market downturns or other unforeseen challenges. Consider diversifying within real estate (e.g., residential, commercial, land, income-generating and capital gains properties) or balancing real estate investments with other asset classes, especially those that are more easily convertible to cash.

Your Chama Must Set Realistic Expectations

Real estate investments typically take time to mature, and returns may not be immediate. Chama members need to set realistic expectations about timelines, potential returns, and the risks involved. Ensure everyone understands that real estate is often a long-term investment and that patience may be required before seeing significant gains.

Prioritize Regular Communication and Updates

Given the significant financial commitments involved in real estate, it’s crucial to maintain regular communication among Chama members. Provide frequent updates on the status of the investment, any challenges or delays, and financial performance. This transparency helps to build trust and ensures that everyone remains informed and engaged in the investment process.

Plan for Property Management

Once a real estate investment is made, managing the property becomes an ongoing responsibility. Whether it’s finding tenants, handling maintenance, or dealing with legal issues, property management can be time-consuming and complex. Decide in advance who will be responsible for property management tasks or consider hiring a professional property management company if the Chama lacks the expertise or time to handle it effectively.

Understand the Legal and Tax Implications

Real estate investments come with specific legal and tax obligations. Your Chama should be aware of the tax implications of buying, holding, and selling property, including zoning, applicable property taxes, capital gains taxes on disposal, and any applicable fees. Consulting with a tax advisor or accountant can help the group navigate these complexities and avoid any legal or financial pitfalls.

Your Chama Must Have a Contingency Plan

Real estate investments can be unpredictable, with potential issues ranging from market downturns to unexpected repairs or vacancies. The Chama needs to have a contingency plan in place, including a financial reserve to cover unexpected costs. Planning for worst-case scenarios can help the group weather challenges without resorting to panic decisions that could harm the investment.

Conclusion

These measures are tailored to the specific challenges and opportunities of real estate investing, helping to ensure that Chama members approach such investments with a clear, strategic mindset. Members of Chamas should consider them as having applicability to the Chama broadly, but also to themselves specifically so that they take “joint and several” ownership for their investments. They won’t preclude the many pitfalls that Chamas face in building the “collective”. But they will guide the mindset that members ought to apply in their collaborative efforts.

Inevitably, the success of Chamas investing in real estate will be determined by how best they will navigate their internal group dynamics, and by factors not entirely within the control or responsibility of any of the members individually.