Buying or renting out a house is not always the best investment

There is nothing as comforting than living in your own house, but if such comfort leads to you spending more than you invested, would it still be worth it?

Having one’s own house is considered one of the greatest signs of success in Kenya, but as we are about to find out, this may not always be the case.

“Constructing one’s house to live in or building a rental apartment is a liability, because they are immovable assets that do not earn the owner an income, while the latter requires a very long time before the investor can earn a return on investment,” says Kariuki Musa, Chief Executive Officer, Gakuyo Real Estate Limited.

The current trend has seen many people build houses for their own occupation with employment as their only stable source of income. The  house then becomes a liability rather than an asset.

 “Rental apartments are stressful to  manage, and this may explain why many landlords do not look happy, and also do not live in the comfort associated with such an investment,” says Mr Musa.

Rentals come with added the responsibility of management, and if the landlord is repaying a building loan using rent collections, they may find themselves forced to use their own money to repay the loan because monthly payments may not always cover the entire payment.

“The rent repayments may come in bits and a landlord may be tempted to use them in an alternative way, and this leads to a lot of waste,” says Mr Musa.

SLOW RETURNS

He goes on to add that tenants in rental apartments are not permanent residents and when they move out, the landlord has to bear the cost of marketing the vacant unit as well as repairing or renovating it. Some tenants may also fail to remit rent payment on time because of one issue or the other, among many other problems.

“The rental apartment investment mistake is one many people are making. From the rising middle class with enough disposable income to the newly retired looking for an alternative source of income,” says Mr Musa.

The above investors make investment choices based on what they see their peers doing.

The commonly held belief is that any form of investment in real estate is profitable, and the middle class, middle aged and the retirees are developing rental apartments in cities and towns that are no different from the ones already existing.

Investing in real estate is not a bad idea, but one has to be wise, regarding the type of investment to make, adds Mr Musa. For a developer to construct a nice apartment block, they may need an investment of around Sh60 million. For such an amount, it will take years for the developer to recover their investment if they decide to rent it out. Even if one is able to recover it over a long period of time, it is not money they will get back as a lump sum.

The best investment direction for investors looking to venture into real estate would be to build apartments or even a house, with the intention of selling instead of renting out. 

“This way, the developer is able to recover their investment and profit in a short time, and invest the amount in another project elsewhere. This will not only grow their portfolio, it will make them richer,” says Mr Musa.

Investment savvy developers know the pitfalls in renting out apartments and houses and are thus building for sale and making more profits, hassle free.

“Young investors who are on their first investment are also erroneously choosing to build rentals, and many are tying the little they have in an investment that is not profiting them,” he says.

  According to Mr Kariuki Waweru, a real estate expert and author of The ABC of Real Estate Investment in Kenya, building or buying a house before the age of 40 should not be a priority, 

Mr Kariuki uses the following examples to illustrate his point: “Take the arbitrary incomes of Sh50,000 in net pay for a 25 year old single person, Sh100,000 for a thirty year old newlywed couple, Sh150,000 for a thirty five year old couple with one child and Sh200, 000 for a forty year old with two or three children, and see what can be achieved at these respective ages,” he goes on...

 “If one takes a mortgage or construction loan before they turn 40 years old, they might buy or build a house that might prove to be a liability,” says Mr Waweru. For a two bedroom apartment in Athi River, Kitengela, Kiserian, Juja,  Kikuyu, one will have to part with between Sh5,000,000 and Sh6,000,000,” says Mr Kariuki.

He points out that buying a plot and building a house in the same area, will mean spending roughly the same amount of money.

“If one takes a Sh5,000,000 loan to buy or build the house at today’s prevailing variable interest rates of about 18 per cent per annum, they will be repaying about Sh78,000 per month, for the next twenty years,” says Mr Waweru.

DUE DILIGENCE

According to Mr Waweru, if one can actually afford to repay such an amount every month, it means that between now and the time one’s child is in the second year at the university, they will be repaying Sh78,000 every month.

If one decides to move to a bigger house before the repayment period is over, they will let out the two bedroom apartment or house for about Sh30,000 per month — and this is if they are lucky.

“This means that they will be repaying the difference of Sh48,000 every month from their pocket. The person will also be paying rent because they might not qualify for another mortgage,” adds Mr Waweru.

“When they turn  forty  with two or three children, they will need to move to a bigger house and will have to pay rent- say of about Sh50,000 per month,” he adds.

The total monthly expenditure on housing will now have increased to Sh98,000, from the Sh48,000 top up from the mortgage, and the Sh50,000 from renting the three or four bedroom house.

“That is already half the net pay, and one is now left with 100,000 to cater for other expenses. At this point, one’s  parents also need more medical attention, one also wants to do that Masters degree they have been postponing, start a business and so on,” explains Mr Waweru.

One may argue that the house or plot is appreciating in value. This is true, but when one calculates the total repayment after 20 years on a reducing balance, they will have paid about Sh18.5 million- and this is assuming that the interest rate remains constant in the next 20 years, which is highly unlikely.

“For the house, I doubt that the value will have appreciated to anywhere near the Sh18.5 million. Actually, if one decides to sell the apartment or house after ten years at Sh10 million, one will make a “loss” because the amount of interest one will have paid, plus the capital cost of buying and renovating the house before selling it will be higher than the selling price,” adds Mr Waweru. He strongly advises young people against buying or building a house as yet, because one will be burying their money in an immovable asset.

Living in a rented house in an area that is  conveniently near their work place and children’s school, and one that is big enough to comfortably house their family, is a much better bet when compared to paying a lifelong mortgage.

“I have met young people who followed the hype and built their own houses, and are now selling them to start their own businesses to supplement their earning,” adds Mr Musa.

APPRECIATING PRICES

According to Mr Musa, there exists many other investment opportunities and a young investor with Sh2,000,000 can opt to develop a start up business that will supplement what they earn, and if they decide to go into construction, they can take a loan that they will pay comfortably.

Mr Musa believes young people should start their foray into real estate by buying land.

“If you are still employed and have about Sh2,000,000 that you would would like to invest in real estate, they can use the amount to buy affordable land in areas in the outskirts of Nairobi with the intention of later selling it at a profit, instead of using it to build their own house,” he says.

If one can afford it, he advises buying a  piece of land in growing areas such as Kajiado, Machakos, Kiambu, Murang’a, Nakuru with the intention of  later subdividing and selling.

Infrastructural development has also seen property rates appreciate in value, and the best time to invest in areas next to superhighways and bypasses is now.

“It is advisable to follow due diligence in acquiring property because conmen are also in the prowl and know where investment is highly valued,” says Mr Musa.

“There are young investors who are interested in housing, but I would advise them to first venture into land, and then move into housing, as the latter is tedious and capital intensive yet land is easy to acquire when due diligence is followed, and one is assured of a profit,” he says.

For those interested in housing, they may opt to buy units in a gated community, and rent them out.

“They should however remember to buy the units with the intention of later selling them when they have appreciated in value,” adds Mr Musa.

ALTERNATIVE INVESTMENTS

One can also buy land and invest in something temporary that will make more money for them, other than a permanent house that will be a liability. For instance, one can plant trees and harvest every 10 years and sell as timber.

Five acres will carry about 10,000 trees. Even if half of the trees die, the other half when sold at Sh5,000 per tree will make about Sh25 million after ten years. “Surely, one can get a very decent house with Sh25 million without the hustle of repaying from one’s pocket,” says Mr Waweru.

“Incomes are also changing and with time, the lower and upper middle class that is the target of many of these apartments are changing preferences. In time, the majority of this market will opt to move with the current trend-which is living in gated communities.

For a developer who has put up rental apartments for instance in Kahawa Wendani and is charging rent rates of Sh30,000 or Sh40,000 to this middle class, he or she may be forced by market trends to bring down the rent rates to sustain his or her tenants. According to Mr Musa, there maycome a time when people will not be renting out as they will own the houses they live in. It may even get to a point the only tenants such a developer may have are the student population that may not be able to afford higher rents.

“People should engage in real estate investments that grow them, other than limit their investment potential,” says Mr Musa.