Q. I am a communication manager at a listed company on the Nairobi Securities Exchange. I make a gross income of Sh300,000 every month as salary. Given this is the private sector, my job is not extremely stable, so I am considering buying a house for investment. I have two options. Option one is buying two houses in Eastlands both being sold by Housing Finance. A three-bedroom is about Sh6.8 million, a two bedroom Sh5.6 million. The two-bedroom fetches rental income of about Sh20,000 while the three-bedroom is Sh30,000. The second option is using the Sh12 million I have to buy a three-bedroom house on Ngong Road, whose rental income is about Sh80,000 a month. I am not sure if this income is guaranteed, but the house currently has a tenant who is paying this amount per month. What would you advise? I am financing these houses through a mortgage of Sh10 million and the rest from my personal savings.
A. The two units in Eastlands will cost you Sh11.4 million for combined rental income of Sh50,000 while the one on Ngong Road will cost you Sh12 million for Sh80,000 in rent. There are many factors to be considered which you did not provide, however we will make some assumptions to enable us offer guidance.
The advice as sought presumes that you already have some plan that you are executing. Such would have already considered your social and financial circumstances (age, family situation, social commitments, loans, and other running obligations) in arriving at the amount of long-term financial obligation you can comfortably afford. The sheer mention of the salary is not adequate information for offering a solid reliable advice. I will therefore make a few critical assumptions to be able to offer some advice. I will have assumed that you are young (not more than 35 years) and single with low or no running financial commitments, some savings habit, and without a skewed wasteful spending habit.
The very basic rule in personal lending is to consider how much of the potential borrower’s income is available for such a long-term commitment as a mortgage. A simple guide of 50 percent of your net disposable income is used to determine the proportion of your salary that can be used for both short-term and long-term borrowing. In your case, the amount of mortgage you qualify for will be less than 50 percent of your income after deducting pay as you earn tax, pension, NSSF and NHIF. Mortgage being long-term commitment (when mortgage term is more than 120 months) has a further guideline – instalments should not exceed 35 percent of gross income. Assuming you have met these guidelines without any other pre-existing loan obligation your maximum mortgage will cost about Sh91,000 per month.
The question as to whether you should buy a single mortgage on Ngong Road, or two mortgages in Eastlands is an investment decision that requires many other considerations. Key among them is the immediate cash return, and capital gains from the asset over say a 10-year period. I have taken the assumption that you already own a home, or the cost of your rent is reasonable. In which case the referenced investment will be purely for cash income stability as the main consideration in the short-term, and capital growth as the other consideration in the medium-term. Sh80,000 rent on an investment of Sh12 million represents a return of 6 percent, while Sh50,000 on an investment of Sh11.4m represents a return of 4.5 percent.
Investing in Eastlands should only be considered where the property location is easy to reach and attractive to tenants (occupancy rates above 90 percent). Ideally, the investment per square meter should be lower in Eastlands than on Ngong Road. This should be verified. There is no other fact provided to validate the capital gains potential for both locations, and stability of rental income from the Ngong Road property. Obtain the advice of a property valuer on the occupancy rates (current and reasonable future) for both locations. This determines rent stability. It is also important to verify with a valuer the level of investment made on both properties to help you see through the potential profitability.
Patrick Wameyo is a financial literacy coach at Financial Academy and Technologies, and an entrepreneurship coach at The Entrepreneurship Center EA. [email protected]