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