Some issues to consider when buying real estate
The Sunday Nation
Nairobi,
23 December 2012
“If buying a house is such a bad investment as you depicted it in your article, how come so many people continue buying? How can you explain the boom in this sector?” Those questions came from Patrick Migwi and they capture the general reaction that I got from several readers after last week’s column.
The answer is simply price appreciation. You buy a house today and you will almost certainly be able to sell it at a higher price next year! How much higher depends on many factors, including the location, infrastructure development etc.
If you deposited the Sh5 million into a high-interest account that pays, say, 10 per cent, you will have Sh5.5m at the end of one year. However, the person who chooses to buy the house with the same money will get Sh360,000 in rent but will probably be able to dispose of the house at Sh6m thus ending up with Sh6.3m –she’s better off than you!
But, the process of buying and selling the house is a lot more complicated than that of depositing and withdrawing cash into and out of an account. Thus it is unlikely that a person will sell a house in just one year – unless she is a real estate trader; not investors.
Still, it is important to mention that as house prices go up so too do
rents, albeit at slower rate. In the
One reader commented that “land does not rot”! In other words, it has no expiry date. Well, that is not exactly accurate. If you have a “lease hold” plot, then your ownership will expire at the end of the lease.
The question of the possibility of renewing the lease is outside the scope of this column, nevertheless, it may be prudent to assume that it will not be renewed. In that case, the value should be depreciated over the remaining period of the lease.
Thus if you buy a Sh5m house with, say 50 years remaining on the lease, you should bear in mind that the value drops by Sh100,000 each year. Therefore, the Sh360,000 rental income should be really be seen ash260,000!
Of course, the re-sale value of this house will continue rising until the time when the lease is “dangerously close” to its end. And while you may be confident that you can renew a lease that expires today, who knows what economic policies will be operating in 2062?
Finally, I must clarify that this is not intended to discourage people from buying houses. By all means NO! I am a house and land owner myself. My intention is to highlight some issues that are usually overlooked in the “mad-rush’ that has characterised the real estate market in recent years.
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