Everyone wants to own a home some day, and here in Kenya, we seem to have a particular attachment to land and buildings, even when it doesn’t make economic sense to own either. To make matters worse, we have experienced a house market boom that has seen real estate prices quadruple or even more in less than 5 years, making housing a great investment (or is it?). I must admit owning a home gives peace of mind, especially for people with families, and in some cases is a good investment. However, that’s not always the case, it sometimes make sense to rent a home.
Investing in a home isn’t a small decision, it requires significant monetary and time investment, and it’s wise to ensure that you are in a position to make and keep the commitment. While sometimes it may make economic (or emotional) sense to buy or build a house, there are certain situations which if you are in, then you should rent, and not buy:
1. It doesn’t make sense to buy a house in your preferred neighborhood: If the cost of a mortgage in your preferred neighborhood is higher than your rent in the same neighborhood, and you don’t have spare cash to cater for the mortgage repayments, it’s probably a good idea to keep renting, or choose to buy a home in a cheaper neighborhood. For example, a 2 bedroom apartment in Kileleshwa probably goes for about Kshs 11 million today, which translates to Kshs 153,000 per month in mortgage repayments (16% interest, 20 year mortgage). The same house probably rents for Kshs 70,000 – Kshs 85,000. It doesn’t make sense to pay almost double for the house, bearing in mind that markets fluctuate, fortunes change, you cannot be absolutely certain that your apartment will be worth over Kshs 36 million in 20 years (YES! That’s how much you will have paid out to the bank in 20 years). However, if you have extra income that can comfortably settle the excess payment, then go for it. If not, get a Kshs 6 million mortgage, which will fit comfortably within your current rental payments.
2.If you have no desire to engage in home upkeep: When you buy a home, you are responsible for it’s upkeep, unlike a rented house where if something leaks, all you need to do is call your landlord/lady to fix it up. It’s easy to keep maintenance costs low if you’re building a home, because you are in control of the quality of works, and the fittings in the house. However when buying a home, you are not in control of the house’s fittings, and most developers will take the easy route here, by buying good looking but easily damaged fittings, or sub standard wiring and plumbing, things that become obvious after living in a house for a year or so. In addition to this, if your house is in it’s own compound, you have to think about landscaping and such other aspects, not to mention neighborhood associations and all. If all this doesn’t appeal to you, you’re better off with a rented house.
3. Your job is your sole source of income: For most of us in our 20s and 30s, our jobs are our main income sources, and we are living in increasingly volatile times for businesses. Internationally, previous stable companies such as Sony Inc have announced lay offs, and locally, Kenya Airways is doing the same, citing increasing costs of doing business. Unless you are completely sure you will have a job for 20 years, you’re better off not taking a 20 year mortgage to buy a house. One could argue that should you lose your job, you can sell your house, pay off the mortgage and have money to spare. However, this doesn’t always work out in your favour. For example, if you have to sell your house after paying for it for 5 years (using the Kileleshwa example above), you will only have paid Kshs 745 959 towards your mortgage principle, and will still owe over Kshs 10 million to the bank. If the market isn’t tilted to your favour at that point, you could actually lose money and a home.
4. You have to cash in on your retirement savings to buy the house: Having a home doesn’t insulate you against retirement needs or even other emergencies. If anything, it only increases your need for an emergency fund; home expenses unlike rent are unpredictable. If you have to empty all your coffers to buy a home, please keep renting while you save up for a home.
5. If you’re unsure of your relationship with your significant other: We are seeing an increase in divorce cases in our courts, where property and investments are hot issues. If you are unsure of the life of your marriage, you’re better off holding off on a home purchase, until the situation stabilizes. You wouldn’t want to invest everything in a home, then lose it in a divorce, then have to start all over again.
6. If the home you are considering won’t serve you for a long time: A home is likely to be the biggest investment you make in a life time, it doesn’t make sense to buy a house that your family will outgrow in a couple of years, unless there is a likelihood that you will be able to rent it out at a good rate later in life. Again, this pegs on the market favouring you.
Have you ever considered the rent buy decision? Which side do you lean on?
Next post, we look at the economics of taking a mortgage, and if it’s a good decision.