Why You Shouldn’t Listen to Maina Kageni on Property

I was recently listening to Classic 105 and Maina Kageni was advertising properties for sale in Race Course, off Ngong Road, Nairobi. The mortgage monthly repayment was Ksh.65,000 while the prospective rent income was Ksh.44,000 per month. Maina Kageni can be forgiven for urging people to buy a loss making property since he was reading an advertisement as part of his work. I suppose the savvy investor he is wouldn’t put his money in such a bad investment.

This brought back to memory an article published in Focus On Property, May 2014 issue; penned by Martin Dias, CEO of Financial And Property Consultants LTD (FAPCL), under the title “Buying Your Home With Mortgage Finance-Start Early”.

Here are the two scenarios he offered. In the first one “Jane an Accountant earning a salary of Kshs 300,000 per month is purchasing an apartment for Kshs 12 M at 100% mortgage finance repayable in 15 years at 15% per annum interest rate. Monthly installment will be Kshs 167,950. Being her second home, she intends to rent out this apartment for Kshs 80,000 per month.” In the second scenario “Jimmy an Advocate earning a salary of Kshs 200,000 per month is purchasing a maisonette for Kshs 5 M at 100% mortgage finance repayable in 15 years at 15% per annum interest rate. Monthly installment will be Kshs 69,980. Being his second home he intends to rent out this mansionette for Kshs 35,000 per month.”

In both scenarios, since they are planning to rent the houses out, taking up the mortgage will not be wise as they will be losing money monthly, Ksh.87,950 for Jane and Ksh.34,980 for Jimmy. I was surprised that a property advisor could literally tell the public “This is how you will be ripped off if you take up this kind of an investment, and it’s OK”!

If you want to purchase a property, here are the 3 rules of thumb you should follow, according to Robert Yawe of Quadrant Shift Africa:

• If the property can’t pay its own debt, don’t touch it
  In the scenarios above, Jane and Jimmy would need to go back to their pockets to service their mortgages. It’s not hard to imagine what would happen should they find themselves in a situation where they were unable to service their loans. Unfortunately most property buyers purchase out of emotions, for the feeling of being called a property owner; or to be like everybody else who is buying a house of their own. Don’t be one of them.

• Always factor in only 80% of debt repayment
  This is critical since at some point the house will need repairs or a fresh coat of paint. These should be taken care of by some of the rental income. In our example, Jane and Jimmy should take up mortgage plans with monthly repayments not exceeding 80% of the income they get in rental. Meaning they should either go for properties that won’t cost them more than Ksh.64,000 and Ksh.35,200 respectively in loan repayments or collect rents of Ksh.209,938 and Ksh.87,475 from these properties they have settled on.

• Single unit properties don’t make business sense
  If your goal is to build a real estate business, you need to consider buying several units instead of singles. Some realtors are open to requests for preferential rates from bulk buyers.

Purchasing a house is one of the most important investments you’ll make in your life. Take your time and analyse the property market. Investments guru Robert Kiyosaki advises that you shouldn’t buy a house before you have analysed 100 properties. Too tedious? Trust me, this process will save you from bequeathing debts and misery to your children.

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