How to finance your mortgage with rental income
The Sunday Nation
Nairobi,
16 December 2012
Here is a question that I get from many readers: Is it possible to buy a house on mortgage and then recover the monthly instalments from the rent? The answer is both yes and no!
Let’s consider a house going Sh5 million. In the
Now, the current mortgage rates are about 16 per cent per year for loans of 10 to 20 years. Typically, banks will finance about 80 per cent of the property price; this comes to Sh4 million in our example.
The monthly instalment on a Sh4 million mortgage at 16 per cent over 10 years is about Sh67,000. This is about twice the amount that the house can raise from rent.
The same amount borrowed over 20 years at the same rate will attract Sh55,650 in monthly instalments – still much more than the Sh35,000 maximum rent.
Where is the disconnect? Is it that the property prices are too high or that the rents are too low or that the interest rates are too high?
Suppose you have the Sh5 million and you purchased the house in cash, would it be a worthy investment? Well, you will be getting returns at the rate of Sh30,000 per month, that it Sh360,000 per year.
Your rate of return on investment is Sh360,000 divided by Sh5 million. This is equal to 7.2 per cent – a pretty bad performance! You can get better earnings by simply putting the money in a deposit account – for example: the 91-day Treasury Bill, is currently paying 8.44 per cent and Unit Trusts are ranging between 9 and 11 per cent. Therefore, the property prices are too high for the rents – or vice versa
How about the mortgage interest rates: are they too high? My bank is currently paying 9 per cent interest for three-month deposits of Sh4 million while charging 16 per cent mortgage loans of over 10 years. I suspect that others have similar rates and I would rate the difference as “moderately high” – certainly not “too high”.
So, where is the problem? I think there are too many people looking to buy houses thus creating a shortage and pushing up the property prices. At the same time, these buyers are borrowing heavily from the banks and creating a shortage of money thus raising both saving and lending interest rates.
Tenants do not feature in that money cycle, therefore they are not able to support the inflated prices. Therefore rents have remained too low for the property prices and interest rates.
Nevertheless, the only way that you can get enough rent to repay the mortgage instalments is if you pay a higher initial deposit. In the current example, the buyer would have to fork out about Sh3.25m in cash and the borrow Sh1.75m.
At 16 per cent over 10 years, the repayments would be Sh29,300 per month – just about the same as the expected rent. But then there is the little matter of tax on rental income…
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