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From the blog

To buy a car or land?

First published on June 15, 2011

To buy a car or land?

Budget: Kshs. 1 000 000

Car: cost of purchase + Insurance +  Registration + other charges = 1 000 000

Net annual income( assume a car rental deal with a car hire company)

INCOME                                                                   DEPRECIATION
Year 1                                                                         Year 1
                                                                                    Original value   = 1 000 000
Net monthly income. 40 000                                      30% * 1000000 = (300 000)
Net annual income. 40000*12= 480 000                    Value                  = 700 000
Year 2                                                                         Year 2
Net monthly income. 35 000                                      Value                 = 700 000
Net annual income. 35000*12= 420 000                     30% * 700000  =(210 000)
                                                                                      Value                = 490 000
Year 3                                                                         Year 3
Net monthly income. 30 000                                      Value                 = 490 000
Net annual income. 30000*12= 360 000                    30%*490 000    = 150 000
                                                                                     Value                = 340 000
Year 4                                                                          Year 4
Net monthly income. 25 000                                        Value                 = 340 000
Net annual income. 25000*12= 300 000                     30%*340 000   = 100 000
                                                                                     Value                 = 240 000
Year 5                                                                           Year 5
Net monthly income. 20 000                                       Value                 = 240 000
Net annual income. 20000*12= 240 000                     30%*240 000   =   70 000
                                                                                     Value                 = 170 000
Year 6                                                                          Year 6
Net monthly income. 20 000                                        Value                 = 170 000
Net annual income. 20000*12= 240 000                      30%*240 000   =   50 000
                                                                                       Value                 = 120 000
Total Net income:         = 2 040 000             Salvage value   = 120 000

 

 

 

Total net income after 6years                       = Ksh 2 040 000

Less original price of the car                       = Ksh 1 000 000

                                                                                    1 040 000

Add car Scrap Value                                    = Kshs  120 000

 

Profit from the use of the car for 6years    = Kshs.  1 160 000

 

Say Kshs. 1.2 Million

 

Assumptions:

  1. A constant depreciation (loss of value) of 30% PA (every year) mainly due to wear and tear, and obsolescence.  A general assumption is that a vehicle used for car hire (self drive) is normally overused, misused and abused.
  2. The REAL value of income per month reduces by a constant Kshs. 5000 PA  till the 5th year where this income is assumed to remain constant.
  3. That after the 6th year the car will be valued at scrap value.
  4. That the car was on car hire continuously for the 6 years.
  5. That the vehicle was bought for cash therefore all income from the car is profit to the investor.

LAND

Scenario A

Original price Kshs. 1 000 000

Appreciation rate: 10% PA

After 6 years the value of the land will be 1 000 000 * (1+10/100)= 1 800 000

“Profit”= 1 800 000 – 1 000 000 = 800 000

Or

Scenario B

Original price: Kshs. 1 000 000

Appreciation Rate: 20% PA

After 6 years the value of the land will be 1 000 000 * (1+20/100)= 3 000 000

“Profit”= 3 000 000 – 1 000 000 = 2 000 000

The inflation rate in Kenya in April 2011 was 6.5% according to Kenya National Bureau of Statistics (KNBS)

 

Assumptions:

Since real estate investment is known to form a hedge against inflation, the appreciation rates have to be higher than the inflation rate.

Scenario A: Appreciation rate of 10% PA in places with moderate demand for land.

Scenario B: Appreciation rate of 20% PA in places with High demand for land.

For the purposes of cash flow and a constant income, buying a car is a good idea but the income should be invested in a more stable investment or in the purchase of another car.

For those who are risk averse, they can purchase a parcel of land in an area where demand is high then they sell it at will.

Extract from The book:

The ABC  of REAL ESTATE investment in Kenya

       “The Law, The Logic, The Math”

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