Is Rentals Building Always a Wise Investment?
“So John and your chama what are you going to invest in if you win this Ksh.5 Million cheque?” Asked the TV programme presenter.
John, like most us would do, grinned and responded “We are planning to buy a plot and construct rentals.”
I had been watching this Chama show for about one month and 90% of those interviewed said that if they managed to win the overall prize they would definitely aspire to become landlords.
Well, as it turns out, real estate as an investment is quite overrated. The return on investment, if any, is not guaranteed.
Worse still it might take you a whole lifetime to turn around the venture to make business sense.
Let’s Do Some Math.
In order to build rentals, you obviously need land in a fast-growing area where tenants can easily commute to work. Typically that would cost you Ksh.2 million in a place like Utawala, Ruai or Ongata Rongai.
Keep in mind that those places are on the outskirts of the city and may therefore be less attractive to tenants given the traffic jam situation, lack of basic amenities etc.
Constructing a typical 1 bedroom house would cost you about Ksh 1 Million and since you are doing it for business, you would certainly want to build several.
So let’s say you start by constructing 4 houses. By the time you finish, you will have already coughed out Ksh.6 Million (this figure will be much higher if you use a bank loan to finance).
So from that point, the hassle of finding good tenants (because obviously not all tenants are good) starts.
If current rental prices in Utawala, Ongata Rongai and Ruai are anything to go by, then you will expect to charge Ksh.10,000 per month in rent.
Assuming 80% occupancy per year, your total annual income will be something close to Ksh.380,000. Don’t forget, out of this money you will have to deduct land rates, cost of maintaining and repairing the house, electricity bills for security lights, paying the care-taker and cost of handling sewage waste.
If you took a loan to construct the houses (it’s highly unlikely you would undertake such a project on cash basis unless you won a betting jackpot), then your expenses would go up because you would have to clear the loan plus the interest rate.
Realistically speaking, your four 1 bedroom apartments would bring you about Ksh.300,000 per year. Of which, even if you decided not to touch a single penny of the rent so that you can repay the loan, it would still take you a minimum of 30 years to get out of debt.
So long story short, that would not be a wise investment option especially if capital is a concern.
A recent study by Hass Consult, showed that rental prices in Nairobi’s satellite towns e.g. Ngong, Ruaka, Kiserian and Thika fell.
Mlolongo and Athi River experienced a fall in both land and rental prices. That alone confirms that there’s no guarantee of a better future ahead for a small-scale real estate investor in this part of the world.
The notion that rent prices tend to rise over time is therefore misinformed. Moreover, tenants tend to prefer newer apartments to old ones.
Going by this observation, it is therefore likely that the houses you build today will be struggling to get good tenants 20 years down the line. And remember, even then, you will still be having 10 more years to clear your loan.
Even if you had the cash, why would you want to pump 6 Million just to be earning Ksh.40,000 every month?
Aren’t there far better investments that you can a tenth of that amount and make much better returns?
So Is Real Estate A Good Investment In Kenya?
First let me say that real estate is such a good industry. It offers long-term security to investors.
In fact, no other industry has made more billionaires than this one.
But times are changing.
The high cost of construction against dwindling fortunes means that you might easily get caught up in a debt trap.
In terms of return on investment, real estate does not offer the best deal.
It would therefore be unwise to jump into real estate especialy if you are employed (depend on a salary) or bank loan with the notion that is it the goose that lays golden eggs.
Instead start a profitable business and invest your surplus profits in real estate.
Take a look at most billionaires in Kenya and in the rest of the world. You will notice that they started from scratch with virtually no money but they invested their little resources and time equity in building a business first.
So if you have little money or excess money; my advice is start a business first and let your business buy your investments e.g real estate, stocks, bonds e.t.c
Also don’t forget to join our training on Business Marketing.
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By
Timothy Angwenyi
Business Consultant
Justine Nyachieo
Business Man & Mentor
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