Choosing between a complete & incomplete house

By MUNGAI KIHANYA

The Sunday Nation

Nairobi,

03 October 2021

After reading my response to John Koros’s question last week, John Kiarie (yes, another John!) sent a different conundrum: he plans to buy a house and a developer has offered two choices. The first is in a complete and already occupied project and the price is Sh14 million. Tenants in this building are paying Sh75,000 per month.

The second house is in a project by the same developer that has just broken ground and is expected to be completed in two years time. It is the same size and in the same general region of the Nairobi.

The price here Sh11M and also with expected rent of Sh75,000. Buyers are required to pay a 20 per cent deposit to reserve the house. The balance is paid in four installments of 20 per cent every six months.

John’s question is: which is the better deal, financially? He adds that he has the money in his savings and so will not require any bank financing. He is also quite confident that the new project will be completed since it is the third one by the same developer.

Now, in the two years that it will take to complete the second project, the first house will have earned a total of Sh1.8M in rent. Therefore, John will be Sh12.2M net out of pocket.

Over the same period, John would have paid a total of Sh11 million for the second house. Thus, he would be about Sh1.1M better off. But this payment is not made all at once - it is done in five installments.

Suppose John placed the cash at hand of the money in a unit trust earning a moderate net return of 7 per cent. In the first 6 months, the Sh8.8M balance would earn Sh308,000; in the second period the Sh6.6 remaining earns Sh231,000; and so, on up to the final payment on the 24th month. Cumulatively, the interest comes to a total of Sh770,000.

So, even though the price of the house is Sh11M, it will, effectively, cost John Sh10.23M. This is almost Sh2M less than the Sh12.2M effective cost of the first house. Indeed, even if he is not able to get a tenant immediately on completion, he’d still be better off for another two years before the balance tips in favour of the first house.