Why Invest in Real Estate?

Published on 26th June 2007

One commonly held assumption in Kenya is that any person who invests in real estate is well-off. This notion is widely held especially with the costs associated with it, for example if one is investing in real estate, one has to keep in mind acquisition of land, valuers, developers, construction material, employees and insurance among others. This has made people to shy away from investors.

 

While speaking to a real estate investor in Nairobi, what came out clearly was the risk and fear involved in it. “It took me over half a year to gather courage to apply for a mortgage,” she explained. Her greatest fear was the consistency in paying the premiums per month as the profits are minimal during the first few months, and the fact that she worked for a corporate firm that had been retrenching employees every month.

 

Investment involves risks at any given time. Having bought a residential house worth Ksh. 6.5 million in Westlands – Nairobi in the mid 90s, Mary Nguu, rented it out at Ksh.30,000 per month. With time the rent went on increasing after every three years and today the same house goes at Ksh.50,000 per month. In less than six years, Mary had cleared her mortgage. This motivated her to own more real estate, and today she is proud to have cleared paying mortgage for five other residential houses and is now settling for two more. She concentrated on the prime estates and is now making on average a profit of Ksh.300,000 per month.

 

However, one of the questions that is frequently asked is: Is it worth investing in real estate? Sample this: Kenya’s value in real estate has been increasing over the past years. In Kenya for example, the annual urban demand of 150,000 units cannot be met by the supply averaging only 30,000. An investor may consider filling this gap. However, it is always advisable to invest in those areas that have shown rise in real estate value over years.

 

Some people may argue the value of real estate is too high to afford. However, one does not need to purchase real estate in cash on the first day. One can opt to take up a mortgage. Financial institutions and mortgage finance institutions are always willing to lend money secured against property. There are many institutions in the market offering products to meet investors’ demands. Investors ought to conduct a research and go for the best offers in the market, and that which they can afford. “What investors need to know is that in real estate investment one does not need the lump sum at ago. Depending on your finances, one should pick a mortgage that one feels is comfortable with. This will leave one at ease as one settles the outstanding balances,” Mary observes. Besides, individuals can join efforts and form investment groups where they can save together and own real estate. Mortgages are tax free!

 

While most things depreciate in value hence affecting the cost of the item or product, in real estate this is different. Real estate is rarely replaced. Once a computer, cell phone, or vehicle depreciates, one is unlikely to sell the same product at the value one bought it  and with time one may dump it. However, for real estate, the cost is not likely to be affected. The value is likely to keep increasing due to demand. Real estate may last for long. While real estate may be destroyed in the event of a calamity such as floods, earthquake or fire, if one has insured it, then he is sure of compensation. Real estate can also be redeveloped hence increasing its value.

 

Real estate prices tend to increase smoothly and consistently, unlike in other investment where this is not certain. Other investments are likely to be affected by issues such as change of management, and bankruptcy among others.

 

Real estate today continues to attract fairly great interest in all democratic republics where citizens are allowed to own land. In Kenya for example, an individual can own, or have an interest in land in mainly two forms: Freehold, usually known as absolute ownership and leasehold where you hold the land for a specified period in most cases 99 years. As the population continues to increase, the demand for land continues to go up. This coupled with inflationary trends forces land values to raise as it is "a diminishing resource."  In this regard, it becomes very difficult for any real estate investor to lose his investment.


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