I went back to school. Shocking I know, but that’s what happened. It is not as bad as you think – I am actually enjoying it. Anyway, last week we had an interesting discussion in class.
Let us consider the following scenario. You’re an investor. You have some 5 million shillings that you want to invest somewhere. You are a Kenyan living in Kenya. Now, the last assumption is important because we all know what all your friends and family will tell you to do: buy a house, get paid rent monthly.
So let us say that you buy a 5 million house in Mlolongo. How much rent can you get for such a property? I would argue that you will get nothing more than KES 25,000/- per month for a house in Mlolongo that costs KES 5,000,000 to buy. Am I wrong? Contest that in the comments below.
So you’ll be getting 25000 x 12 = 300,000 a year. 300k per year is a 6% return on your investment. Nice eh? Nope. It is actually a shockingly bad return on investment.
Right now (the link leads to a PDF document) you can invest in a Kenya government bond which will give you about 12% returns per year. DOUBLE what you get from a rental real estate investment. This is crazy.
Government bonds are generally thought of as “risk free” investments because the government will always, always pay up. This may not be true everywhere in the world but you get what I mean, right? if an investor is a rational investor (i.e. not stupid) then they will never invest in anything if it returns less than the risk free government bond. Why would you take any risk anywhere if you have a guaranteed 0 risk investment as an option?
If you follow this train of thought then it means that any other good investment simply HAS TO yield a higher level of returns than the government rate. Why? Because it is higher risk. A house can burn down but the government can never “burn down”… see what I mean? Why would you invest in something higher risk, for less returns? It simply doesn’t make sense. Any right-thinking person would never ever do it.
And yet Kenyan “investors” do it all the time. Why is this? Are we crazy??
Small note
I know, I know, there exists governments out there (maybe even in here) that can and do default. But: 1) we’re assuming this is not the case and 2) if a government defaults then all the houses and other investments in that country also go up in smoke.
We have a big problem that suffocates Kenyans. It’s called the “Me too syndrome”. Kamau ako na nyumba mlolongo, hata mimi. Omolo ako na Galaxy 5, hata mimi. Margret ako na MPesa shop, hata mimi. Njoroge ako Multi media university, hata mimi, Susan watches tujuane, hata mimi, Salome anaenda masaku 7s, hata mimi, Paul amenunua Toyota wish, hata mimi. The herd mentality is one of the most tragic thing about our society and culture and sadly it affects major life decisions; investments, marriage, politics etc. It is the same reason why a kenyan uses 300,000 in fare and miscellaneous fees to go work as a slave in Saudi Arabia for a one year contract with a salary of an equivalent of 20K per month.
That’s very well put 🙂
If you look at the capital gains that the owner of that house will make over the same period then youll arrive at a different conclusion. In those 5 years in addition to the peanuts he’s been getting as rent he’ll now be sitting on a property whose value has appreciated to 9-10M (conservatively). I like how youre thinking though, our love for property has stifled all other investments and made lenders very riske averse…
now help me…how much can 300,000 government treasury bonds will for ten years.
What you forgot to take into account is that with a house its value will probably increase over time. Rents will more likely than not increase by about 10% every four years so by the end of year four you will be collecting 330k a year end of year 8 360k and 378 k at the end of ten years now add up the increased value of the house and that rents will always be going up and you got a very nice investment
Interesting point of view