Last week a Kenyan writing on X formerly Twitter, seemed to put the age old question “to build/buy a house or rent” to rest.
The writer, Martin Tairo Maseghe, argued that if he wanted
to buy a kshs7m (sh200m) house in Embakasi a Nairobi suburb, he would have to
raise 20 percent or kshs1.4m as down payment, then at a mortgage rate of 12
percent payable over 20 years he would fork out kshs61,660 a month.
This did not make sense, he continued, pointing out that
typical rents in the area for the similar house were Kshs35,000. It did not
make sense to pay almost 80 percent more than the rent in the area to pay off
the house.
In fact he thought, it made better sense to take the
Kshs7million and buy a seven year bond, and at 13 percent earn himself
Kshs76,000 a month and with that rent himself
a better house in the higher end suburbs of Kileleshwa and Lavington, a better environment
than the Embakasi house that he would have bought.
The logic seems obvious until you scratch the surface a
little.
But first, wealth accumulation is the outcome of winning the contest between investment and consumption. Consumption in the short term makes you look rich – living in Lavington versus living in Embakasi; while investment will mean delaying consumption for a future date as you accumulate assets, income generating assets in the present.
If you are not impressed with your financial status, check
on how you spend your money, do you consume more of your money than invest it. You
are suffering now because your decisions over the last five, ten, 20 years have
been biased towards consumption and away from investment.
Back to Mr Maseghe. To
simplify his argument he overlooks two things.
One, that the rent in Embakasi or Kileleshwa for that matter
will not remain the same for the next 20 years. While interest payments will
remain stable at kshs61,600 a month more or less. And the bond coupon is
guaranteed to remain at kshs76,000 a month for the next seven years.
Straight out of campus I landed on a two bedroom house for
which I paid sh200,000 a month. That was 30 years ago. That same house today is
renting for sh1.2m a month, the rent went up six fold in the last 30 years.
The second thing he overlooked is that the value of the
property will most likely rise during the duration of the mortgage. With few
exceptions, the stock of land is not increasing, but with growing populations
the need for land is increasing. A simple supply and demand equation points to
increasing property values over time. Its an almost mathematical certainty.
Again when I left university, to buy a bungalow in the out
of the way Naalya estate one needed to put down sh27m. Yes!
Today with the benfit of improved infrastructure, Naalya is
no longer a Kampala back water and for those same bungalows, you will be lucky
to raise any interest with the current owners if you offer sh150m.
While property appreciation is not immediate cashflow, it
still is an improvement in value from the original price and can be liquidated
or even better, remortgaged to extract more money.
"Wealth is more about what you own than what you earn, the
accumulation of which takes time and sacrifice. A big salary is good, but if you
have dreams of being wealthy, the question has to be how much of that salary
are you keeping for yourself ie buying assets?
If all our spending decisions are weighed against whether
one is spending to consume or invest, we can hopefully make decisions that will
be better for us in the long run.
While you will immediately impress the little brown girls
with your move to Kileleshwa, in the long run the guy in down market Embakasi
will come out on top, as when your bond matures and they return your Kshs7m,
there will be no property in Embakasi leave alone Kileshwa that the money is
good for.
While your friend who bought in Embakasi, bit the bullet for
a few years, when there was a deficit between the prevailing rent and his
interest payments, will be laughing all the way to bank, maybe having rented
out the Embakasi house and with a new mortgage bought a house in a pricier
location.
There are really no short cuts to building enduring wealth. There will always be some discomfort at the beginning of the journey, especially because you cannot hang out with your look-rich friends on Bandali rise, but you will get used to the pain in a few months and it will not matter in a few years...
So, it should be back
to the drawing board for Mr Maseghe, especially if he is interested in living
in Kileleshwa one day.
