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How building a mansion can make you more money than building rentals

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Building Rental Houses in Kenya: In 2016, Mr Paul Ogembo, a senior civil servant, decided use all his life savings to build executive rental apartments in Gwa-Kairu in Ruiru Town. Topping up the money with a loan running into millions shillings from his bank, Mr Ogembo was sure that the rental income from letting the apartments would serve as the perfect retirement plan.

However, four years after he completed construction, only half of the houses in the building are occupied.

“When I started letting out the apartments in 2012, I was charging Sh15,000 rent for a bedsitter, and Sh24,000 and Sh30,000 for one- and two-bedroom houses respectively,” he recounts.

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“People would come and look around the apartments, but would go for good after I  told them what I was charging. It became apparent that those looking for houses in the area could not afford the rent.”

Ironically, what had served as inspiration for Mr Ogembo is what turned out to be his bane.

“I  had looked around the area and noticed that it lacked premium apartments which could house the upper middle-class. Most of the buildings here are low-rent bedsitters meant to serve university students from the nearby institutions. By building high-class apartments, I thought I was filling a gap in the area’s housing sector,” he said.

Even though he has since reduced the rents to almost half the initial prices, he still has trouble getting tenants.

“The people who can afford living in these apartments are simply not interested in living in around here,” he says dejectedly, ruing that at the current rate, it will take him decades to recoup the money he spent putting up the building.

MISPLACED HOUSES

Mr Ogembo’s predicament is not unique. According to a Nairobi real estate valuer, Mr Paul Kiome Matumbi, many people are making the mistake of putting up investments that exceed the values of other property in the area

“Investors do not seem to grasp the fact that every neighbourhood has a price ceiling, irrespective of how good their building might seem. They thus end up putting houses and apartments that are overbuilt for a certain locality,” explains Mr Matumbi, who is also the CEO of Prudential Valuers, a registered valuation company with a wide network in the country.

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When building houses either for sale or rent, one cannot afford to ignore the value of other properties in the area. Buyers, Mr Matumbi says, tend to be willing to pay only a certain amount of money in a particular neighbourhood before moving on to other suburbs they consider better. So, while a person earning monthly Sh100,000 can afford to pay a monthly rent of Sh25,000 for a one-bedroom apartment, he or she will be hesitant to cough up the amount if the apartment is located in, say, some sections of Eastlands in Nairobi.

“The situation of overbuilt houses is getting worse all across the country, but the metropolitan areas around Nairobi seem to be most affected. Areas such as Kitengela, Ruiru and Isinya have the highest number of misplaced houses,” says the realtor.

To drive the point home, Mr Matumbi gives the example of two home people who build houses  in different locations. The first individual buys a plot at Sh1.5 million in Mwihoko, off Githurai and builds a palatial, 10-bedroom mansion at a cost of Sh30 million. The second one buys a smaller plot in Kileleshwa for Sh20 million and puts up a three-bedroom house  at a cost of about Sh5 million.

After 10 years, when both homeowners are looking to sell their homes, the individual with the palatial home will be shocked to find that his mansion has hardly appreciated in value, and will be lucky to find a buyer to give him Sh50 million. Meanwhile, the person who invested in Kileleshwa will break little sweat finding a buyer willing to fork well over Sh120 million for his modest property.

The first owner, despite his property occupying a larger area, ends up suffering economic loss because buyers don’t expect such a large home in that neighbourhood and aren’t willing to pay a big premium for the extra space.

To avoid overbuilding, Mr Matumbi suggests, investors should consult real estate valuers at the designing phase of the construction.

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“The real estate agent will be able to give the potential builder a comparative market analysis (CMA) report, which gives you information about similar investments in the area and factors in the neighbourhood while determining your returns,” he says.

Building Rental Houses in Kenya: This feature was first published in the DN2. The DN2 is a publication of the Nation Media Group.

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