A rented house better than your own house? I posted this on my Facebook wall and it generated a heated debate, went viral and screenshots of the same were shared widely through WhatsApp messaging. People did not understand why a rented house is better than your own.
One of the most notable reactions was that such sentiments should not be coming from me. As an architect, I should be advising people to build, not stay in a rented house. Or how will I get business?
Yet this is a debate I feel we must have, which I hope will enable people make better choices and investment decisions especially on matters regarding housing.
I considered a scenario where I was to buy a house either in cash or through a mortgage. For the purposes of this illustration, I settled for the NSSF houses popularly known as Nyayo Estate – Embakasi as a case study.
Houses in this estate sell at between Kshs 7.5 Million to upwards of Kshs 8 Million. Monthly rents in the same area are in the region of Kshs 30,000 to Kshs 35,000. At best, one will earn a gross income of Kshs 420,000 annually.
A cash buyer on a best case scenario where they buy the house at the cheapest price of Kshs 7.5 Million and get a tenant to pay the highest rent of Kshs 420,000 per year. The annual rate of return is 5.6%
Compare this with a risk free investment in treasury bills whose interest has ranged between 8% and 11% this year. Worst case scenario would earn someone an income of Kshs 600,000 per year.
Many would argue that the house will have a capital gain during the same time. Fair enough. I would equate the capital gain, if any, to the additional interest you will earn from the alternative investment in this case, Kshs 180,000.
The capital gain on real estate is also usually exaggerated on paper. For it to be realized, a successful sale must happen and this is usually a tough task. Liquidating a treasury bill when it matures is easy.
For a mortgage buyer, you will have to raise the initial deposit of 10% of the value of the house. The higher deposit raised, the better.
Taking a mortgage on the balance of Kshs 6.75Million at a very optimistic rate of 15% p.a. with a 20 year repayment duration, the monthly repayment will be Kshs 88,385.
If this were to be a business venture, you will need to raise an additional Kshs 53,385 above the rent of Kshs 35,000 that you will receive to service the mortgage. This does not consider maintenance that must be carried out in the house.
In the debt option, capital gains also do not make sense. They all get swallowed in the interest paid. They are non existent.
What this therefore means is that real estate is a bad investment for both the cash buyer and the one who buys using debt.
Looking at it literally, it means that when you buy a house through debt, you will be paying almost 2.5 times the ‘rent’ you should ideally be paying where you will be living. Through cash, it simply means you are making a bad investment and makes better sense if you stayed in the same as a rented house.
My opinion is that housing works well as a business, where one builds to sell. Margins are in the range of 50% to 200% depending on where you are building and the price at which the land was purchased.
But obviously, those who build to sell must get customers for their products. Someone will need to buy.