Why Real Estate Is Not Always a Wise Investment Idea
If you were given Ksh 10,000,000 (ten million) to invest, what would you do? Many people would answer “buy a plot and build rental houses.” However, it turns out that investing in real estate might not be as profitable as it seems. The return on investment may take a long time to make business sense, even a lifetime.
Let’s take a look at the numbers to better understand the situation.
To build rental units, you need land in a fast-growing area with easy access to transportation. In places like Utawala, Ruai, or Ongata Rongai, the cost of buying land is about Ksh 2 million. However, these places are on the outskirts of the city and are less attractive to high-income tenants who can pay higher rent. The traffic jam situation, lack of basic amenities such as tarmacked roads, municipal council water, poor drainage, etc., also makes these areas less attractive to high-income tenants.
Building a typical one-bedroom house apartment costs about Ksh 1.5 million. As you’re doing it for business, you would want to build several. So let’s say you start with five houses. By the time you finish, you will have spent Ksh 7.5 million. If you use a bank loan to finance the construction, the figure will be much higher. Add the Ksh 2 million for buying the plot, and you’re already at Ksh 9.5 million. You also need to install water, sewerage, perimeter wall, and other miscellaneous expenses, which can cost about Ksh 1 million. To make it easier for the math, let’s round it off at Ksh 11 million.
Once you’ve built the houses, you will need to find good tenants. Not all tenants are good, so this can be a hassle. Assuming you charge a maximum of Ksh 13,000 per month in rent (based on current rental prices in Utawala, Ongata Rongai, and Ruai), and all units are occupied, you can earn Ksh 65,000. However, achieving 100% occupancy throughout the year is rare, and the most you can expect is an 80% occupancy rate.
Assuming an 80% occupancy rate per year, your total annual income would be close to Ksh 624,000. But remember that out of this money, you have to deduct land rates, the cost of maintaining and repairing the house, electricity bills for security lights, paying the caretaker, and cost of handling sewage waste, among others.
If you took a loan to construct the houses (which is highly likely unless you won a betting jackpot), your expenses would go up because you’d have to clear the loan and pay the interest rate.
Realistically speaking, your four one-bedroom apartments would bring you about Ksh 624,000 per year. Even if you didn’t touch a single penny of the rent and used it to repay the loan, it would still take you a minimum of 20 years to get out of debt.
In summary, investing in real estate may not be a wise investment option, especially if capital is a concern.
A case study by Hass Consult in 2022 showed that rental prices in Nairobi’s satellite towns, such as Ngong, Ruaka, Kiserian, and Thika, fell. Mlolongo and Athi River experienced a fall in both land and rental prices. This alone confirms that there’s no guarantee of a better future ahead for a small-scale real estate investor in this part of the world.
The notion that rent prices tend to rise over time is also misinformed. Tenants tend to prefer newer apartments to old ones. Therefore, the houses might have go for longer periods without occupancy.
Conclusion
From the above insights and a case study, we can see why real estate is not always a wise investment idea. Before you sink your money in an investment that might tie your money for a long time, research on other business ideas you can venture into. Biashara Poa is a great resource for those who want to learn about different business ideas they can venture into. Keep it here for great business ideas and tips.