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Stocks vs Buying a house - A tale of two kenyans
Moorings
#16 Posted : Thursday, January 15, 2015 10:45:15 AM
Rank: New-farer

Joined: 1/3/2011
Posts: 67
Location: nairobi
sell the house once it appreciates to 20m, pay off the mortgage [which would have reduced marginaly] say 6m, bank 14m, buy a new apartment cash for 10m, invest 4m in stocks + the entire monthly savings. @ 55yrs he'll come out ahead richer!!!
Swenani
#17 Posted : Thursday, January 15, 2015 10:52:26 AM
Rank: User

Joined: 8/15/2013
Posts: 13,237
Location: Vacuum
Moorings wrote:
sell the house once it appreciates to 20m, pay off the mortgage [which would have reduced marginaly] say 6m, bank 14m, buy a new apartment cash for 10m, invest 4m in stocks + the entire monthly savings. @ 55yrs he'll come out ahead richer!!!



So only your apartment will appreciate in value while the others remain at 10M?
If Obiero did it, Who Am I?
mtumishi
#18 Posted : Thursday, January 15, 2015 10:56:36 AM
Rank: Hello

Joined: 1/14/2015
Posts: 3
Location: nairobi
@shrewdinvestor. Thx although I would hope that this post is taken as not prescribing one right or wrong way to do things but as an illustration of the famous ‘choices have consequences’ saying.

@sparkly. Beware he who will not read anything due to the fact that it is more than one paragraph as he may well be the same person who wont read the fine print on their mortgage documents or insurance policies or simply relies on his broker’s BUY/SELL recommendations as its too much work to read financial statements. Let each person read and reach their own conclusions
@bird_man. Have you managed to derive the rent? Please share your answer with the rest of the class

@kalameni. Arriving at how much the house would be valued is an area where I would like those with more knowledge than me in this area to assist. Sh. 14.3m to 50m is 6.5% annual growth but my view is that there just may be a ceiling valuation that apartments especially will struggle to surpass. But prices for apartments in Manhattan could prove otherwise.

@lollest!. Very true that a high savings rate has been assumed. But if a person was save and deploy to investments even half of what John and Charles did, they would still end up in a good situation at retirement. Remember that one assumption is a non-working spouse. If the spouse brings in income then the savings goal becomes more attainable. My hope is that this post will inspire at least one person to give it a shot

@takeshi. Good question. Click this link to see an analysis of historical returns for the US stock market. I am yet to see a similar one for the NSE and would love to hear from our stocks gurus on what an average return is reasonable projecting into 20yrs. But studies show that stocks have generally outperformed other asset classes over the long term and I believe that 13% is achievable and some would say even on the conservative side. Remember that the ‘real’ return will require that you adjust the figures for inflation so the 110m networth of 2035 is not necessarily the same as 110m of today but is still a good networth for retirement. The main issue may be just how liquid the networth is to support your living costs.

@xsk. Well put. Past performance is not a guarantee of future returns but can be a good guide

Some major assumptions taken in the posts include that both John and Charles don’t lose their jobs or die, that they don’t get better jobs elsewhere, that they don’t get catastrophic medical issues or have to support others with such issues, that their pension does not require contribution from their pay in which case their net pay will need to reflect this, that the mortgage rates remain fixed as variable rates can mean significant changes in the monthly mortgage amount and any other assumptions that wazuans can pick out
jwatesh
#19 Posted : Thursday, January 15, 2015 11:09:09 AM
Rank: Member

Joined: 8/19/2014
Posts: 125
Did we factor in dividends from the stocks held? Dividends are just as high as rent money in some companies invested
Fyatu
#20 Posted : Thursday, January 15, 2015 12:05:55 PM
Rank: Veteran

Joined: 1/20/2011
Posts: 1,820
Location: Nakuru
@Mtumishi Very stimulating analogy.The hybrid scenario is much more wiser but personally at 55 i would prefer to live somewhere far from ilovi.
Dumb money becomes dumb only when it listens to smart money
FRM2011
#21 Posted : Thursday, January 15, 2015 12:16:50 PM
Rank: Elder

Joined: 11/5/2010
Posts: 2,459
@mtumishi, thanks for the post. There is a guy called @maichblack, and I can bet he will be very excited once he reads this.

First, an apartment going for 14m in kileleshwa is likely to attract rent in the range of 60-70k. Which basically means its overpriced. Our in-house architect, A4architect had recommended a price to rent ratio of between 150-200. I.e. a house fetching 100k in rent should cost between 15mn to 20mn, which represents a payback period of 12 to 16 years.

Finally, and I make this appeal on behalf of my immediate and extended family, some of us sell homes for a living. This kind of hypothesis might be interpreted as "kunyang'anya mtoto chakula ikiwa kwa mdomo"
sparkly
#22 Posted : Thursday, January 15, 2015 12:34:22 PM
Rank: Elder

Joined: 9/23/2009
Posts: 8,083
Location: Enk are Nyirobi
mtumishi wrote:
After 20yrs, he has paid the bank the principal figure of Sh. 13m plus interest of Sh. 23,553,164 for a total payment of Sh. 36,553,164.


This interest amount is enough to buy another apartment.
Life is short. Live passionately.
lochaz-index
#23 Posted : Thursday, January 15, 2015 12:40:28 PM
Rank: Veteran

Joined: 9/18/2014
Posts: 1,127
FRM2011 wrote:
@mtumishi, thanks for the post. There is a guy called @maichblack, and I can bet he will be very excited once he reads this.

First, an apartment going for 14m in kileleshwa is likely to attract rent in the range of 60-70k. Which basically means its overpriced. Our in-house architect, A4architect had recommended a price to rent ratio of between 150-200. I.e. a house fetching 100k in rent should cost between 15mn to 20mn, which represents a payback period of 12 to 16 years.

Finally, and I make this appeal on behalf of my immediate and extended family, some of us sell homes for a living. This kind of hypothesis might be interpreted as "kunyang'anya mtoto chakula ikiwa kwa mdomo"


First off a mortgage in kenya doesnt make any economic sense since annual interest rates are way above annual rental yields. The only scenario it would be of any economic benefit is if one took a mortgage for a house an off plan stage and hope it substantially appreciates in price before completion( initially new units outpace old ones in the same locality) sell the house at a profit, repay the mortgage in full and pocket the balance.
Secondly, the current price to rent ratio is 170-230% with the figure going as high as 250%.the only real estate property capable of returning your capital in 12years or below is block of flats or a commercial building. This is because current land prices have outpaced rent rates over the last few years.
The main purpose of the stock market is to make fools of as many people as possible.
Act
#24 Posted : Thursday, January 15, 2015 9:40:26 PM
Rank: Member

Joined: 1/14/2009
Posts: 5
Your hypothesis is good but to derive rent to be paid in 20yrs we need some hint on annual rent increment rate e.g. a long Thika apartment rent is increased by 1k - 2k per year.
On the other hand, with that kind of saraly why do you want to be a slave for 20yrs. I think young people should realise circumstances have changed when our parents had to wait for retirement so that they can build a permanent house. By 55yrs may be your kids will be moving out to university or to start their own life and it is the time you are getting a 4 bedroom massionate. This does not make sense any more. I would rather take some calculated risk to get a house for my family within 5yrs and the same time retain a room to save/invest some surplus. Life must go on.
Gordon Gekko
#25 Posted : Thursday, January 15, 2015 10:15:37 PM
Rank: Elder

Joined: 5/27/2008
Posts: 3,760
sparkly wrote:
mtumishi wrote:
After 20yrs, he has paid the bank the principal figure of Sh. 13m plus interest of Sh. 23,553,164 for a total payment of Sh. 36,553,164.


This interest amount is enough to buy another apartment.

There's a phenomena known as 'time value of money'. The value of ksh 23m in 20 years isn't the same as it is today. What you need to find out is the present value of ksh 23m then see if it can buy you an apartment today.
Mukiri
#26 Posted : Thursday, January 15, 2015 11:05:30 PM
Rank: Elder

Joined: 7/11/2012
Posts: 5,222
I'm surprised no one has mentioned this but one rarely retires in their first house... Grow into your house ie bedsitter to studio to apartment to mansion to farmhouse to beach house.

The scenario as initially mentioned, can be argued from a different perspective.

Capital.

Mortgage should not be necessarily a bad thing if

1. The guy continues courting other investment vehicles (The lesson here being 'Don't put all your eggs in one basket')

2. The guy uses the mortgage as 'Capital' ie buys the apartment, looks for better offers, sells it for a profit, get another (with mortgage+profit) sells it etc etc... Use mortgage money as capital in the real estate business, and make money from it while avoiding paying rent

Doable but tricky.

And all the while, he grows to his dream home. Not retiring to some apartment.

Proverbs 19:21
whiteowl
#27 Posted : Friday, January 16, 2015 7:31:02 AM
Rank: Veteran

Joined: 4/16/2014
Posts: 1,420
Location: Bohemian Grove
Lolest! wrote:
Kihara joni wrote:
Mortgage equals very bad idea unless the house is paying for itself which currently in Kenya is story of giants

Lool!! Story of giants!!
You just made my morning joni

Laughing out loudly Laughing out loudly
Siringi
#28 Posted : Friday, January 16, 2015 10:39:39 AM
Rank: Elder

Joined: 6/8/2013
Posts: 2,517
Ok good exercise Mwalimu Mtumishi...

Now do illustrations for those earning 800K+
500-799
250-500
100-250
50-99

etc etc smile smile
"😖😡KQ makes money for everyone except the shareholder 😏😏 " overheard in Wazua
shrewdinvestor
#29 Posted : Friday, January 16, 2015 11:08:36 AM
Rank: Member

Joined: 9/12/2014
Posts: 120
Location: Nyali
Siringi wrote:
Ok good exercise Mwalimu Mtumishi...

Now do illustrations for those earning 800K+
500-799
250-500
100-250
50-99

etc etc smile smile

sure!that would save us lots of trouble and make us rethink our investment decisions.Haya boli kwako mtumishi!
Swenani
#30 Posted : Friday, January 16, 2015 4:29:50 PM
Rank: User

Joined: 8/15/2013
Posts: 13,237
Location: Vacuum
shrewdinvestor wrote:
Siringi wrote:
Ok good exercise Mwalimu Mtumishi...

Now do illustrations for those earning 800K+
500-799
250-500
100-250
50-99


etc etc smile smile

sure!that would save us lots of trouble and make us rethink our investment decisions.Haya boli kwako mtumishi!

Laughing out loudly Laughing out loudly Laughing out loudly Laughing out loudly Laughing out loudly Laughing out loudly Laughing out loudly

Why haven't you included those earning below 50K? or they are not supposed to invest
If Obiero did it, Who Am I?
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