In 2012, Rose* bought a plot in Buffalo hills golf estate in Thika at 450,000. She was promised many things including a title deed, capital appreciation and a bypass. Today, 5 years later, she is yet to receive her title deed, the bypass is yet to be constructed and any attempts to sell her plot is met by very suspicious buyers. She however says that there are some people with plots in the same estate and they already have title deeds.
In 2011, John* bought a plot in Migaa golf estate for Kshs 2.5 Million plus an advance service charge of Kshs 1.2 Million. This means he spent Kshs 3.2 million on the land. He was very skeptical but he took a loan and bought it. Today, his plot is valued at 8.5 million. His plot is now ready for occupation.
In 2012, Salim* took a loan and bought a residential plot in Kitengela at Kshs 1,000,000. Today, his plot is valued at Kshs 1.5 million. If he had taken a loan from a SACCO at 12% for 5 years, let’s see how much he will have paid in interest. Let’s use a “mortgage calculator” from the internet or if you like, an amortization table.
- Loan amount Kshs 1,000,000
- Interest rate say 12% PA
- Loan duration say 5 years
- Monthly repayments 22,244
- Total repayments 1.34 million
- Total interest 340,000
- Title processing, loan processing fees, insurances, legal fees, stamp duty and other associated costs of say Kshs 80,000. See article on hidden cost of taking a loan http://kariukiwaweru.com/index.php/2017/07/11/the-hidden-costs-of-buying-a-plot-using-a-bank-loan/
- Brokers fee at the point of selling of say 3%. So 3% of 1.5 million = Kshs 45,000
- Miscellaneous cost e.g. transport to “check out” the land. Assume you visit the land like 4 times every year so a total of 20 visits in the 5 years and you spend Kshs 1,000 on fuel each time. You will have spent Kshs 20,000.
Total costs associated with the land = (a+b+c+d) = Kshs 485,000 + purchase price of Kshs 1,000,000 = 1,485,000
So if Salim sells the land today for Kshs 1,500,000, he will have made (1,500,000 – 1,485,000) = Kshs 15,000 from the land in 5 years. Is it really worth it?
To avoid making a “loss” like Salim, you can do the following;
- Ensure that your land is earning you some money eg greenhouse or keep chicken or goats etc
- Buy land where the seller is improving the services like roads, water etc like what John* did in the illustration above.
- Buy a larger parcel of land further away and plant trees or farm or subdivide and sell later. Someone once told me that, 3km on tarmac is closer than 1km on rough road. Do you agree?
- Don’t buy land in areas where the values have already hit the ceiling. i.e, buy land where your generation is buying, not where the previous generation bought.
From all the scenarios above, we can ask ourselves some critical questions.
- Why does the bank prefer to lend you the money to buy the plot instead of the bank buying the plot themselves? Does the bank know that capital appreciation is a mirage?
- If they had bought shares, would they have been richer?
- What is the cost of borrowing ie interest and loan processing fees?
- Did those plots earn them any money in the 5 years of being held?
What is the opportunity cost of that money? Is this the best way to invest the money? Let’s use “an investment calculator” from the internet or compound interest if you like.
What if Salim decided to put the money in a fixed deposit account let’s see how the math would look like;
Assume that instead of making the loan repayments shown above of Kshs 22,244, Salim invests the money as follows;
- Initial investment Kshs 20,000 (an assumed amount)
- Monthly savings of Kshs 22,244 (amount equal to the loan repayments above)
- Interest rate 10% compounded annually. (Invest in Treasury bills / bonds at 10% PA)
- Duration 5 years
- Total investment after 5 years will be Kshs 1.6 million.
Would Salim* have been better off investing in a fixed deposit account or in treasury bills or bonds?
So is it really worth buying that plot?
PS. Kariùki Wawerù is the author of Kenya’s ONLY real estate book called “The ABC of Real Estate Investment in Kenya”. To have the book delivered to your door step, kindly call +254 723 477 035 or email firstname.lastname@example.org