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Build To Rent vs. Build To Sell - Thoughts
Rank: Hello Joined: 5/9/2016 Posts: 9
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Hi people. I would interested to hear your thoughts on this case study,, and which of the two options would leave Denis in a more favorable position.
Background: Dennis has access to a mortgage loan facility, where he can qualify for approximately 27M to repay back at an interest rate of 6%. That's approximately 204K per month for the next 18 years (18 years is the loan term). He already has a piece of land in Ruaka, ready for development.
Option 1: He has worked on a plan that could see him build 32 one-bedroom apartments. This would require ~32M to build (give or take, as I am sure the figure could be debated, but for sake of argument, let us assume the figure is accurate). Once complete, each unit would provide him a rent of approximately 20K per month, which equates to a total collection of ~640K per month (again, give or take to factor vacancies). But he would still need to service the loan.
Let us assume he takes 12-18 months to complete the building, after which all the rent he collects can go towards servicing the loan; ideally, this would mean that he can fast track paying the loan in, say, 3 years after completion.
In summary, he will have cleared the loan in 4 years (starting from when he broke ground) and have an asset generating him a monthly income of 640K. This is an asset he would probably leverage for Project #2.
Option 2: He could tweak his plan and put up 2-Bedroom apartments on the same piece of land. But in this case, he would build fewer units to stay within budget (i.e. 32N) and fit of the land. So he could put up, say, 22 2-Bed apartments using the same money. However, this time, he can sell the apartments for at least 7M each, to bring in 154M. After which he can pay off his loan (let's assume a figure of 40M incl. interest & other costs...) leaving him with ~114M. This yields him two things:
a) Buy another piece of land and build his dream home (say 60M)
b) Leaving him with a balance 54M which he can use to start another project (~ 2.5 - 3 years after breaking ground, since he has to factor the time to market & sell the units)
I would be interested to see which of the two options would have your vote and why.
Asante!
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Rank: Elder Joined: 6/23/2009 Posts: 14,309 Location: nairobi
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Thirst_4_Knowledge wrote:Hi people. I would interested to hear your thoughts on this case study,, and which of the two options would leave Denis in a more favorable position.
Background: Dennis has access to a mortgage loan facility, where he can qualify for approximately 27M to repay back at an interest rate of 6%. That's approximately 204K per month for the next 18 years (18 years is the loan term). He already has a piece of land in Ruaka, ready for development.
Option 1: He has worked on a plan that could see him build 32 one-bedroom apartments. This would require ~32M to build (give or take, as I am sure the figure could be debated, but for sake of argument, let us assume the figure is accurate). Once complete, each unit would provide him a rent of approximately 20K per month, which equates to a total collection of ~640K per month (again, give or take to factor vacancies). But he would still need to service the loan.
Let us assume he takes 12-18 months to complete the building, after which all the rent he collects can go towards servicing the loan; ideally, this would mean that he can fast track paying the loan in, say, 3 years after completion.
In summary, he will have cleared the loan in 4 years (starting from when he broke ground) and have an asset generating him a monthly income of 640K. This is an asset he would probably leverage for Project #2.
Option 2: He could tweak his plan and put up 2-Bedroom apartments on the same piece of land. But in this case, he would build fewer units to stay within budget (i.e. 32N) and fit of the land. So he could put up, say, 22 2-Bed apartments using the same money. However, this time, he can sell the apartments for at least 7M each, to bring in 154M. After which he can pay off his loan (let's assume a figure of 40M incl. interest & other costs...) leaving him with ~114M. This yields him two things:
a) Buy another piece of land and build his dream home (say 60M)
b) Leaving him with a balance 54M which he can use to start another project (~ 2.5 - 3 years after breaking ground, since he has to factor the time to market & sell the units)
I would be interested to see which of the two options would have your vote and why.
Asante! Option 2 on paper would require much more in capital outlay, since the 2 bedroom units would most probably require high quality finishing and parking bays implying larger land space for the project. Option 1 offers better overall liquidity throughout the project lifespan and has minimal chance of default distress due to spread out on the risk over several units COOP, IMH, KEGN, KQ, MTNU
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Rank: Chief Joined: 5/9/2007 Posts: 13,095
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I have been reading the way its hard to sell houses these days. Assuming that is true, he should factor in how long it will take to sell the 22 units and how he will be paying the loan during that period(Basic research would answer this). Rental on the other hand would be easier to fill as long as the houses are relatively of good quality and competitively priced.
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Rank: Member Joined: 8/17/2011 Posts: 207 Location: humu humu
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Thirst_4_Knowledge wrote:Hi people. I would interested to hear your thoughts on this case study,, and which of the two options would leave Denis in a more favorable position.
Background: Dennis has access to a mortgage loan facility, where he can qualify for approximately 27M to repay back at an interest rate of 6%. That's approximately 204K per month for the next 18 years (18 years is the loan term). He already has a piece of land in Ruaka, ready for development.
Option 1: He has worked on a plan that could see him build 32 one-bedroom apartments. This would require ~32M to build (give or take, as I am sure the figure could be debated, but for sake of argument, let us assume the figure is accurate). Once complete, each unit would provide him a rent of approximately 20K per month, which equates to a total collection of ~640K per month (again, give or take to factor vacancies). But he would still need to service the loan.
Let us assume he takes 12-18 months to complete the building, after which all the rent he collects can go towards servicing the loan; ideally, this would mean that he can fast track paying the loan in, say, 3 years after completion.
In summary, he will have cleared the loan in 4 years (starting from when he broke ground) and have an asset generating him a monthly income of 640K. This is an asset he would probably leverage for Project #2.
Option 2: He could tweak his plan and put up 2-Bedroom apartments on the same piece of land. But in this case, he would build fewer units to stay within budget (i.e. 32N) and fit of the land. So he could put up, say, 22 2-Bed apartments using the same money. However, this time, he can sell the apartments for at least 7M each, to bring in 154M. After which he can pay off his loan (let's assume a figure of 40M incl. interest & other costs...) leaving him with ~114M. This yields him two things:
a) Buy another piece of land and build his dream home (say 60M)
b) Leaving him with a balance 54M which he can use to start another project (~ 2.5 - 3 years after breaking ground, since he has to factor the time to market & sell the units)
I would be interested to see which of the two options would have your vote and why.
Asante! I know this is just an example. however if you can qualify for a 27m mortgage and have the power to repay 200k a month Dont take the mortgage. with patience and small loans,you can put up a massive project. Just build in phases.
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Rank: Hello Joined: 5/9/2016 Posts: 9
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kaifastus wrote:Thirst_4_Knowledge wrote:Hi people. I would interested to hear your thoughts on this case study,, and which of the two options would leave Denis in a more favorable position.
Background: Dennis has access to a mortgage loan facility, where he can qualify for approximately 27M to repay back at an interest rate of 6%. That's approximately 204K per month for the next 18 years (18 years is the loan term). He already has a piece of land in Ruaka, ready for development.
Option 1: He has worked on a plan that could see him build 32 one-bedroom apartments. This would require ~32M to build (give or take, as I am sure the figure could be debated, but for sake of argument, let us assume the figure is accurate). Once complete, each unit would provide him a rent of approximately 20K per month, which equates to a total collection of ~640K per month (again, give or take to factor vacancies). But he would still need to service the loan.
Let us assume he takes 12-18 months to complete the building, after which all the rent he collects can go towards servicing the loan; ideally, this would mean that he can fast track paying the loan in, say, 3 years after completion.
In summary, he will have cleared the loan in 4 years (starting from when he broke ground) and have an asset generating him a monthly income of 640K. This is an asset he would probably leverage for Project #2.
Option 2: He could tweak his plan and put up 2-Bedroom apartments on the same piece of land. But in this case, he would build fewer units to stay within budget (i.e. 32N) and fit of the land. So he could put up, say, 22 2-Bed apartments using the same money. However, this time, he can sell the apartments for at least 7M each, to bring in 154M. After which he can pay off his loan (let's assume a figure of 40M incl. interest & other costs...) leaving him with ~114M. This yields him two things:
a) Buy another piece of land and build his dream home (say 60M)
b) Leaving him with a balance 54M which he can use to start another project (~ 2.5 - 3 years after breaking ground, since he has to factor the time to market & sell the units)
I would be interested to see which of the two options would have your vote and why.
Asante! I know this is just an example. however if you can qualify for a 27m mortgage and have the power to repay 200k a month Dont take the mortgage. with patience and small loans,you can put up a massive project. Just build in phases. Interesting view point...
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Rank: Veteran Joined: 7/3/2007 Posts: 1,635
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Thirst_4_Knowledge wrote:Hi people. I would interested to hear your thoughts on this case study,, and which of the two options would leave Denis in a more favorable position.
Background: Dennis has access to a mortgage loan facility, where he can qualify for approximately 27M to repay back at an interest rate of 6%. That's approximately 204K per month for the next 18 years (18 years is the loan term). He already has a piece of land in Ruaka, ready for development.
Option 1: He has worked on a plan that could see him build 32 one-bedroom apartments. This would require ~32M to build (give or take, as I am sure the figure could be debated, but for sake of argument, let us assume the figure is accurate). Once complete, each unit would provide him a rent of approximately 20K per month, which equates to a total collection of ~640K per month (again, give or take to factor vacancies). But he would still need to service the loan.
Let us assume he takes 12-18 months to complete the building, after which all the rent he collects can go towards servicing the loan; ideally, this would mean that he can fast track paying the loan in, say, 3 years after completion.
In summary, he will have cleared the loan in 4 years (starting from when he broke ground) and have an asset generating him a monthly income of 640K. This is an asset he would probably leverage for Project #2.
Option 2: He could tweak his plan and put up 2-Bedroom apartments on the same piece of land. But in this case, he would build fewer units to stay within budget (i.e. 32N) and fit of the land. So he could put up, say, 22 2-Bed apartments using the same money. However, this time, he can sell the apartments for at least 7M each, to bring in 154M. After which he can pay off his loan (let's assume a figure of 40M incl. interest & other costs...) leaving him with ~114M. This yields him two things:
a) Buy another piece of land and build his dream home (say 60M)
b) Leaving him with a balance 54M which he can use to start another project (~ 2.5 - 3 years after breaking ground, since he has to factor the time to market & sell the units)
I would be interested to see which of the two options would have your vote and why.
Asante! It is unlikely that any plans made for the future unroll exactly as imagined. My thinking then would be to take the option that allows Dennis to monetize his investment the quickest - unless he is planning this for an approaching retirement. Option 2. "The opposite of a correct statement is a false statement. But the opposite of a profound truth may well be another profound truth." (Niels Bohr)
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Rank: Elder Joined: 7/11/2012 Posts: 5,222
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Thirst_4_Knowledge wrote:kaifastus wrote:Thirst_4_Knowledge wrote:Hi people. I would interested to hear your thoughts on this case study,, and which of the two options would leave Denis in a more favorable position.
Background: Dennis has access to a mortgage loan facility, where he can qualify for approximately 27M to repay back at an interest rate of 6%. That's approximately 204K per month for the next 18 years (18 years is the loan term). He already has a piece of land in Ruaka, ready for development.
Option 1: He has worked on a plan that could see him build 32 one-bedroom apartments. This would require ~32M to build (give or take, as I am sure the figure could be debated, but for sake of argument, let us assume the figure is accurate). Once complete, each unit would provide him a rent of approximately 20K per month, which equates to a total collection of ~640K per month (again, give or take to factor vacancies). But he would still need to service the loan.
Let us assume he takes 12-18 months to complete the building, after which all the rent he collects can go towards servicing the loan; ideally, this would mean that he can fast track paying the loan in, say, 3 years after completion.
In summary, he will have cleared the loan in 4 years (starting from when he broke ground) and have an asset generating him a monthly income of 640K. This is an asset he would probably leverage for Project #2.
Option 2: He could tweak his plan and put up 2-Bedroom apartments on the same piece of land. But in this case, he would build fewer units to stay within budget (i.e. 32N) and fit of the land. So he could put up, say, 22 2-Bed apartments using the same money. However, this time, he can sell the apartments for at least 7M each, to bring in 154M. After which he can pay off his loan (let's assume a figure of 40M incl. interest & other costs...) leaving him with ~114M. This yields him two things:
a) Buy another piece of land and build his dream home (say 60M)
b) Leaving him with a balance 54M which he can use to start another project (~ 2.5 - 3 years after breaking ground, since he has to factor the time to market & sell the units)
I would be interested to see which of the two options would have your vote and why.
Asante! I know this is just an example. however if you can qualify for a 27m mortgage and have the power to repay 200k a month Dont take the mortgage. with patience and small loans,you can put up a massive project. Just build in phases. Interesting view point... And have tenants occupy, even as he builds in phases
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Rank: Member Joined: 1/24/2011 Posts: 407 Location: Nairobi,Kenya
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Mukiri wrote:Thirst_4_Knowledge wrote:kaifastus wrote:Thirst_4_Knowledge wrote:Hi people. I would interested to hear your thoughts on this case study,, and which of the two options would leave Denis in a more favorable position.
Background: Dennis has access to a mortgage loan facility, where he can qualify for approximately 27M to repay back at an interest rate of 6%. That's approximately 204K per month for the next 18 years (18 years is the loan term). He already has a piece of land in Ruaka, ready for development.
Option 1: He has worked on a plan that could see him build 32 one-bedroom apartments. This would require ~32M to build (give or take, as I am sure the figure could be debated, but for sake of argument, let us assume the figure is accurate). Once complete, each unit would provide him a rent of approximately 20K per month, which equates to a total collection of ~640K per month (again, give or take to factor vacancies). But he would still need to service the loan.
Let us assume he takes 12-18 months to complete the building, after which all the rent he collects can go towards servicing the loan; ideally, this would mean that he can fast track paying the loan in, say, 3 years after completion.
In summary, he will have cleared the loan in 4 years (starting from when he broke ground) and have an asset generating him a monthly income of 640K. This is an asset he would probably leverage for Project #2.
Option 2: He could tweak his plan and put up 2-Bedroom apartments on the same piece of land. But in this case, he would build fewer units to stay within budget (i.e. 32N) and fit of the land. So he could put up, say, 22 2-Bed apartments using the same money. However, this time, he can sell the apartments for at least 7M each, to bring in 154M. After which he can pay off his loan (let's assume a figure of 40M incl. interest & other costs...) leaving him with ~114M. This yields him two things:
a) Buy another piece of land and build his dream home (say 60M)
b) Leaving him with a balance 54M which he can use to start another project (~ 2.5 - 3 years after breaking ground, since he has to factor the time to market & sell the units)
I would be interested to see which of the two options would have your vote and why.
Asante! I know this is just an example. however if you can qualify for a 27m mortgage and have the power to repay 200k a month Dont take the mortgage. with patience and small loans,you can put up a massive project. Just build in phases. Interesting view point... And have tenants occupy, even as he builds in phases This is the best advice you will ever get.Infact you should have given this as your option 1 and always remember the key word 'Patience'Hope is not a strategy
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Rank: Elder Joined: 7/22/2009 Posts: 7,904
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kaifastus wrote:Thirst_4_Knowledge wrote:Hi people. I would interested to hear your thoughts on this case study,, and which of the two options would leave Denis in a more favorable position.
Background: Dennis has access to a mortgage loan facility, where he can qualify for approximately 27M to repay back at an interest rate of 6%. That's approximately 204K per month for the next 18 years (18 years is the loan term). He already has a piece of land in Ruaka, ready for development.
Option 1: He has worked on a plan that could see him build 32 one-bedroom apartments. This would require ~32M to build (give or take, as I am sure the figure could be debated, but for sake of argument, let us assume the figure is accurate). Once complete, each unit would provide him a rent of approximately 20K per month, which equates to a total collection of ~640K per month (again, give or take to factor vacancies). But he would still need to service the loan.
Let us assume he takes 12-18 months to complete the building, after which all the rent he collects can go towards servicing the loan; ideally, this would mean that he can fast track paying the loan in, say, 3 years after completion.
In summary, he will have cleared the loan in 4 years (starting from when he broke ground) and have an asset generating him a monthly income of 640K. This is an asset he would probably leverage for Project #2.
Option 2: He could tweak his plan and put up 2-Bedroom apartments on the same piece of land. But in this case, he would build fewer units to stay within budget (i.e. 32N) and fit of the land. So he could put up, say, 22 2-Bed apartments using the same money. However, this time, he can sell the apartments for at least 7M each, to bring in 154M. After which he can pay off his loan (let's assume a figure of 40M incl. interest & other costs...) leaving him with ~114M. This yields him two things:
a) Buy another piece of land and build his dream home (say 60M)
b) Leaving him with a balance 54M which he can use to start another project (~ 2.5 - 3 years after breaking ground, since he has to factor the time to market & sell the units)
I would be interested to see which of the two options would have your vote and why.
Asante! I know this is just an example. however if you can qualify for a 27m mortgage and have the power to repay 200k a month Dont take the mortgage. with patience and small loans,you can put up a massive project. Just build in phases. This is a 6% loan. Don't pass on a 6% loan especially if you have concrete investment plans. My only problem with loans is the interest rate charged. If you have a plan where rent covers the entire mortgage repayment and leaves you with money in your pocket (a huge percentage in this case), it is a no brainer really! As for renting out or selling, it depends on your goals. Security - Rent out. Growing your money - Sell (In theory). I am saying in theory because as someone has pointed out, selling houses has become a herculean task. Example: Great Wall apartments (Phase II) were going for 7 million for a 3 Bedroom with an SQ. The price has now been reduced to 3.7 million!!!! They are pretending it is a "promotion" but the "promotion" has been running from April and has not stated end date. And the apartments are still in thr market!!!! 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: Chief Joined: 5/9/2007 Posts: 13,095
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kaifastus wrote:Thirst_4_Knowledge wrote:Hi people. I would interested to hear your thoughts on this case study,, and which of the two options would leave Denis in a more favorable position.
Background: Dennis has access to a mortgage loan facility, where he can qualify for approximately 27M to repay back at an interest rate of 6%. That's approximately 204K per month for the next 18 years (18 years is the loan term). He already has a piece of land in Ruaka, ready for development.
Option 1: He has worked on a plan that could see him build 32 one-bedroom apartments. This would require ~32M to build (give or take, as I am sure the figure could be debated, but for sake of argument, let us assume the figure is accurate). Once complete, each unit would provide him a rent of approximately 20K per month, which equates to a total collection of ~640K per month (again, give or take to factor vacancies). But he would still need to service the loan.
Let us assume he takes 12-18 months to complete the building, after which all the rent he collects can go towards servicing the loan; ideally, this would mean that he can fast track paying the loan in, say, 3 years after completion.
In summary, he will have cleared the loan in 4 years (starting from when he broke ground) and have an asset generating him a monthly income of 640K. This is an asset he would probably leverage for Project #2.
Option 2: He could tweak his plan and put up 2-Bedroom apartments on the same piece of land. But in this case, he would build fewer units to stay within budget (i.e. 32N) and fit of the land. So he could put up, say, 22 2-Bed apartments using the same money. However, this time, he can sell the apartments for at least 7M each, to bring in 154M. After which he can pay off his loan (let's assume a figure of 40M incl. interest & other costs...) leaving him with ~114M. This yields him two things:
a) Buy another piece of land and build his dream home (say 60M)
b) Leaving him with a balance 54M which he can use to start another project (~ 2.5 - 3 years after breaking ground, since he has to factor the time to market & sell the units)
I would be interested to see which of the two options would have your vote and why.
Asante! I know this is just an example. however if you can qualify for a 27m mortgage and have the power to repay 200k a month Dont take the mortgage. with patience and small loans,you can put up a massive project. Just build in phases. What is the difference then especially given that he wants to speed the rate of payment? The Principal vs the repayment amounts mentioned sounds like the rate is so good. Why not just build it and malizana mapema mapema...
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