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Is Taking a Mortgage the WORST Decision Ever??
Rank: Elder Joined: 7/22/2009 Posts: 7,455
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McReggae wrote:Highrise Mabagathi Way for a two bedroomed house:
1991 - Kes 700,000
2014 - Kes 3,500,000
15% pa ni ngumu kupata!!!! Comaprison: If somebody invested 700,000/= at a return of 25% p.a. he would be having a portfolio worth 17,460,372/= today. =FV(25%/12,13*12,0,-700000,0) He/she can then use 3,500,000 to buy a similar house in cash and remain with 14,160,372/= to continue investing. Who's smarter now? NB: I believe 25% return p.a. in the stock exchange is a modest return for a serious investor. But wazuans [Na sio wa buy, buy, buy. Sell, sell, sell] can weigh in on this by quoting their annual target returns and actual returns in the NSE to see if I'm being overly optimistic/pessimistic. Never count on making a good sale. Have the purchase price be so attractive that even a mediocre sale gives good returns.
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Rank: Member Joined: 1/29/2011 Posts: 257
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Rank: Veteran Joined: 11/19/2010 Posts: 1,308 Location: nairobi metropolitan
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chip cards vs bar codes cards  hr] MaichBlack wrote:KenyanEconomist wrote:The value of the house is independent of how you financed it, mortgage or not. If we say that Real Estate property value will increase by 15% over time, then the value of the 10m house will be ~200m in 20 years:
=FV((15%/12),20*12,0,-10000000)
And since we know from your earlier calculation that the total mortgage payment will be ~31m, I will end up with ~170m of value at the end of the 20 years.
The value of a house [especially at current] cannot increase by 15% p.a. over a period of time. Land, yes if you get in early in a place that is just opening up. But not a 10m house! You need data to prove the 15% not "if we say...". We can say a lot of things! How much was the price of a house in Buruburu (for example) in the year 2000? How much is the same house going for now? Do the math. Kwani that house is on the air or water? Any land that has been developed ie with water and sewer line in place even if the hse on it is run down is worth more than land with no infrastructure in place(access to roads etc). I recommend you search for a thread by Gordon Gecko*sp here on wazua, this topic was discussed then [/quote] have you seen the houses guys are buying at 10m+ Huko 5th floor. Divide the total land area by the number of units and see how much land you can lay claim to![/quote] Democracy does not belong to the dead
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Rank: Member Joined: 1/15/2010 Posts: 625
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Taking a mortgage in Kenya is a death wish. There's a good reason why we have such few mortgages. If something happens in Kenya interest rates could hit 30%-40% and then suddenly your mortgage obligation is higher than your salary. If you want peace of mind, invest the money and once you're comfortable, buy cash or buy land and build.
@Maichblack the assumption of 25% pa over 20 years is too optimistic. I'd move that much lower to say 12%.
Here's why: you can start with 1M and get 25% a year for two years and then on the third year the stock market goes down by 50%. The result would be that you're down to 0.78M on the third year despite two stellar years.
20 years is a long time to enjoy such amazing returns especially in Kenya where something crazy could happen anytime. Also after your portfolio becomes big enough, you start running into liquidity problems and NSE capacity issues.
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Rank: New-farer Joined: 1/3/2014 Posts: 32
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Finally, guys are getting my point. The originator of this thread wants to cherry pick when it comes to share trade but not for real estate. If that is the case, lets get the statistics for 20 year period average rate of return for both real estate and NSE.
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Rank: New-farer Joined: 1/3/2014 Posts: 32
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kiwaru wrote: I met a guy who told me that he bought half an acre in Kile at 1m in 1981. Recently it was valued at 100m #dothemath Do the Maths.
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Rank: Member Joined: 9/27/2006 Posts: 503
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knight026 wrote:kiwaru wrote: I met a guy who told me that he bought half an acre in Kile at 1m in 1981. Recently it was valued at 100m #dothemath Do the Maths. Adjusted for inflation? That 1m at that time is probably worth the same as 100m now.
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Rank: New-farer Joined: 1/3/2014 Posts: 32
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Big names,not all rosy, and the assumption that one will never make a mistake is a fallacy.
KQ-11.25(1996)
Kengen-11.90(2006)
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Rank: Elder Joined: 7/22/2009 Posts: 7,455
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deadpoet wrote:knight026 wrote:kiwaru wrote: I met a guy who told me that he bought half an acre in Kile at 1m in 1981. Recently it was valued at 100m #dothemath Do the Maths. Adjusted for inflation? That 1m at that time is probably worth the same as 100m now. Using a 1981 price is extremely misleading to say the least. Have we forgotten what happened to the value of our currency in 1992?? 1 million pre 1992, not even in 1981 was one hell of a fortune! Never count on making a good sale. Have the purchase price be so attractive that even a mediocre sale gives good returns.
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Rank: Veteran Joined: 1/4/2010 Posts: 1,668 Location: nairobi
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In Kenya, commercial real estate in prime area performs better than stock due to scarcity of land/poor land laws. In developed countries eg USA, stocks outperform real estate since there is an over supply of prime land for development. As Iron Sharpens Iron, So one Man Sharpens Another.
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Rank: Elder Joined: 12/2/2009 Posts: 2,458 Location: Nairobi
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70 posts and i am still lost. with all the figures being thrown around,
Maybe we should break it down like this
If i took a morgage of, say, 5million what would be my monthly payments ?
How much more would i have paid the bank as interest on the 5million?
How much will the land (say an 1/8th) have appreciated in the given time
What are the pros and cons in the repayment period? Fluctuating interest rates, etc
Then lets do this other maths
Say i bought 1/4 acre right besides my mortgaged house or any other place.
How much would the land have appreciated in the same time as i finish repaying my mortgage?
My jua kali brain tells me by the time i repay the morgage, i would have parted with money worth the piece of land at current (after 20yrs) rate.
and if i sold half the piece of land next to it. I would build a modern house with proceeds from the land sale, not the 20 year museum I have tussled for all that time.
NO?
Okay, i will go back to the 'macho tu' corner...
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Rank: Veteran Joined: 1/4/2010 Posts: 1,668 Location: nairobi
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@poundfooling, using coop bank calculator http://www.co-opbank.co....dex.php/loan-calculator
a 5m loan for 20 years will repay kes 20m WITH KES 84K monthly payments. A 1/4 acre, assuming costs 2m, will appreciate at a minimum of 20% per annum. For 10 years, using simple interest method, will be kes 16m worth. Add compounding interest etc, this comes to nearly kes 20m. In the developed world, interest rates are low so its easy to use bank finance for real estate. In Kenya, only value of land appreciates with same rates as the high bank interest, around 20% per annum. The building and rent income will not appreciate at such crazy rates. There is a corelation between high bank interest rate and rate of land price appreciation that ministry of land/finance need to relook at to enable a smooth economy. Solution is to ensure reduction of land price appreciation then automatically, this will reflect in low bank interest rates. As Iron Sharpens Iron, So one Man Sharpens Another.
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Rank: Elder Joined: 7/23/2008 Posts: 3,017
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knight026 wrote:Big names,not all rosy, and the assumption that one will never make a mistake is a fallacy.
KQ-11.25(1996)
Kengen-11.90(2006) Now we are getting somewhere with regards to this mythical 25% return over 20 years. "The purpose of bureaucracy is to compensate for incompetence and lack of discipline." James Collins
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Rank: New-farer Joined: 5/7/2014 Posts: 40
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poundfoolish wrote:70 posts and i am still lost. with all the figures being thrown around,
Maybe we should break it down like this
If i took a morgage of, say, 5million what would be my monthly payments ?
How much more would i have paid the bank as interest on the 5million?
How much will the land (say an 1/8th) have appreciated in the given time
What are the pros and cons in the repayment period? Fluctuating interest rates, etc
Then lets do this other maths
Say i bought 1/4 acre right besides my mortgaged house or any other place.
How much would the land have appreciated in the same time as i finish repaying my mortgage?
My jua kali brain tells me by the time i repay the morgage, i would have parted with money worth the piece of land at current (after 20yrs) rate.
and if i sold half the piece of land next to it. I would build a modern house with proceeds from the land sale, not the 20 year museum I have tussled for all that time.
NO?
Okay, i will go back to the 'macho tu' corner... A 5 million mortgage means you would pay a total of 15 million over the 20 years. 5 of principal and 10 of interest at 15%. What we must also consider is the utility of living in your home for the 20 years. In your option 2, you will have to live 20 years renting someone else's house. I believe there is a lot of utility gained (that cannot be priced) in living in a place you call home. My view is that if you look at a mortgage vs. investments, the investments will always look more attractive. What the mortgage does is allow for you to live in a HOME that you could not have otherwise afforded (all you need is 10% down). The true comparison should really be the mortgage vs. buying a plot (maybe even with a 15% interest loan) and building years later. Mortgage option, you live in a nice HOME from day one but pay a higher price. Second option, you have to wait 5 years but you save on price.
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Rank: Elder Joined: 7/22/2009 Posts: 7,455
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mv_ufanisi wrote:@Maichblack the assumption of 25% pa over 20 years is too optimistic. I'd move that much lower to say 12%.
Here's why: you can start with 1M and get 25% a year for two years and then on the third year the stock market goes down by 50%. The result would be that you're down to 0.78M on the third year despite two stellar years.
20 years is a long time to enjoy such amazing returns especially in Kenya where something crazy could happen anytime. Also after your portfolio becomes big enough, you start running into liquidity problems and NSE capacity issues. The idea here is that one knows what they are doing. As Amos Kimunya [crudely] put it, the stock market is not a fish market. It is not a place you come, dump you money then come for it after a couple of years. You need to know what you are buying and why. You also need to know when to sell if fundamentals or whatever else changes. Don't fall in love with a stock. Stock markets don't just go up and down for no reason. You need to understand this dynamics or stay out of the stock market. Take the period before the last elections for example. Many wazuans took their money from the stock market and took it elsewhere - money market, dollar accounts, other stock exchanges etc. The same was discussed here at length. The worst didn't materialize but such fellows had covered themselves was it to happen. Never count on making a good sale. Have the purchase price be so attractive that even a mediocre sale gives good returns.
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Rank: Veteran Joined: 1/4/2010 Posts: 1,668 Location: nairobi
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@kenyaneconomist, welcome to wazua. True. the best comparison would be to check the % of downpayment for the kes 5m loan. Say 20%=kes 1m. With the 1m, then the comarison can be made between investing the 1m by buying land worth 700k and kes 300k for a bedsitter or using the kes 1m as downpayment then pay 80k for the next 15 years. The kes 700k land , at 20% per annum appreciation, will be worth around 5 to 6m in 15 years. The kes 5m house, calculating only the land it sits on, assuming the land costs kes 2m, will be worth 16m. The owner will have paid in around kes 20m for a worth of 16m. In the 700k land plus 300k bedsitter,after the 20 year period, the owner will have a kes 6m worth of property plus having saved himself from using /paying kes 19m on top of the kes 1m. In other words, he can now use the kes 80k per month to pay better school fees, live a better life, buy a car etc compared to the kes 80k per month mortgage-paying guy. After the 20 year period, the mortgage payer will have lived a lesser quality life but will have bragging rights for a 20 year old dilapidated house compared to the bedsitter guy. Eventually, its all a matter of personal choice . As Iron Sharpens Iron, So one Man Sharpens Another.
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Rank: Elder Joined: 11/5/2010 Posts: 2,459
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@maichblack, hii ndio inaitangwa kuharibu soko. Some of us survive through selling 'homes'.
I met a juakali guy sometime last year and he has taught me more than I would have learnt from any business school. He pays 120k rent monthly. His net worth is between 250 - 300 million. He loves his rented house in westlands. But if he were to buy it, the cost would be over 40mn.
This is how he put it . "How can I spend 40mn to buy a house whose only use is to land on the wife ? "
And thats the difference in mindset between rich and poor folks.
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Rank: Elder Joined: 7/22/2009 Posts: 7,455
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knight026 wrote:Big names,not all rosy, and the assumption that one will never make a mistake is a fallacy.
KQ-11.25(1996)
Kengen-11.90(2006) See post# 75 above. You need to know what you are doing! Everyone had a chance to exit KQ even at 1,000% gain. You didn't need to be a rocket scientist to know KQ was grossly overvalued at Ksh 100/= levels! If you rode KQ from 10/= to 100/= + and back to 10/= and all along you didn't see an appropriate place to alight, you have no business being in the NSE!!! The NSE is not for everyone and I am not implying it is. Anyone who doesn't understand it should do themselves a favour and keep off. Or learn before gambling with their hard earned cash. Good News: The education is free of charge in wazua. You just need to know who to listen to! Or better yet listen to different view points [like we gladly have in this thread] then make your own decision(s). Never count on making a good sale. Have the purchase price be so attractive that even a mediocre sale gives good returns.
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Rank: Elder Joined: 7/22/2009 Posts: 7,455
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FRM2011 wrote:@maichblack, hii ndio inaitangwa kuharibu soko. Some of us survive through selling 'homes'.
I met a juakali guy sometime last year and he has taught me more than I would have learnt from any business school. He pays 120k rent monthly. His net worth is between 250 - 300 million. He loves his rented house in westlands. But if he were to buy it, the cost would be over 40mn.
This is how he put it . "How can I spend 40mn to buy a house whose only use is to land on the wife ? "
And thats the difference in mindset between rich and poor folks. He he he. Pole bro. Lakini soko haitaharibika sana. There will always be "non-believers". If everyone was to be converted, I would also be in problems!!! I'm heavily invested in financials - Housing finance, Equity Bank, CFC... This institutions depend a great deal on growing their loan books. Wacha watu wanunue nyumba na wachukue loans - then me and you get paid!!! But all the same we still tell people the truth. Wa kusikia asikie!!! Never count on making a good sale. Have the purchase price be so attractive that even a mediocre sale gives good returns.
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Rank: Member Joined: 3/9/2010 Posts: 320 Location: kenya
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This is one of the best threads I have come across in this forum. Wazuans are a group of genius guys. As said earlier, the bottom line is do u want to labour for 20 solid years paying mortgage with a lot of uncertainties in interest rates or live each day enjoying your little hard earned cash with better quality of life. I would chose the second option. Work hard at your job and you can make a living. Work hard on yourself and you can make a fortune.
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