Real estate has always been considered to be one of the top-notch investment options. However, if you are thinking of acquiring a rental property through mortgage, you and your Chama members must be very vigilant, lest you make a poor investment decision.
Today in Kenya, the mortgage rates are very high thus they have raised the repayment rates on house loans to double the rental earnings on property, a survey by real estate firm The Mortgage Company has showed.
“Rents and mortgage payments are now running at typically twice prevailing rents, which is a deterrent for investors buying mortgage-financed properties for rental.” Says Carol Kariuki of The Mortgage Company.
The company says that the breakeven rate at which house loan repayments are at par with rental income is about 4.7 per cent, which is far lower than the current average mortgage cost of 18 percent.
Carol says that only one bank; The Co-operative Bank has cut its rates. The bank has reduced its mortgage rate to 15.75 percent, making it second to Barclays Bank’s 15.5 percent. Banks have been slow to lower their lending rates arguing that they were still paying high interest rates to fixed account deposit holders who provide the bulk of their funds. Other mortgage lenders are said to be planning to follow suit including Housing Finance, CFC Bank as they fall over themselves to grab the mortgage market share. But a significant change is yet to be seen and the current rates remain way too high to make a sound investment for rental properties.
The Mortgage Company says that rental yields have remained flat at 6.22 per cent, making mortgage financed rental properties a loss making asset at the moment. “Those who buy to let are losing money.
Building materials and land are the main components of the high costs. Hass Consult a reputable real estate firm has proposed a review of the Building Act to allow use of cost effective modern technologies, and setting up a system where financiers can obtain funding from the capital markets.
“The cost of infrastructure adds 20 to 30 percent to the cost of homes. If this could be addressed through infrastructure bonds serviced through utility payments, we could achieve a significant reduction to the cost of homes in the country.” Said Carol.
Currently some of the cheap properties in Nairobi are available in Komarock estate where they cost Kshs.4.1 million and Tena at Kshs.4.9 milliion. At the cheapest available rate of 15.5 per cent over a period of 15 years a mortgage buyer will be required to pay Kshs.55,000 monthly installments. So if you want to rent out the same property, it would mean that you would have to rent it at 30,000 shillings which is the going rate of the area; thus you make a loss of Kshs.25,000 per month. Think about that for a moment.
It seems a good idea would be to construct your own rental property or sit and observe the market and when the time is right invest through the mortgage route.
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