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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: 13,517 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
HF 90,000 ABP 3.83; KQ 414,100 ABP 7.92; MTN 23,800 ABP 6.45
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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: 1,634
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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: 7,455
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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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Rank: Elder Joined: 12/7/2012 Posts: 11,908
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By the time you go into a 27-30m plus projects, do you have experience in executing 'smaller' projects .... 3-5m, 5-10m? In the business world, everyone is paid in two coins - cash and experience. Take the experience first; the cash will come later - H Geneen
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Rank: Elder Joined: 7/23/2008 Posts: 3,017
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Take option 1, basically gives you 400K free cashflows after repaying your your mortgage. You can accelerate repayments thereafter or get into a second loan and construction with 400K/month freecash, you can even service a loan a much higher rate. Option 2 is risky but you won't lose muach as nothing stops you from renting as you sell the houses. The price sounds a tad high though. Don't listen to those people telling you to build in phases, there are very many houses and you will not get quality tenants willing to inhale cement. "The purpose of bureaucracy is to compensate for incompetence and lack of discipline." James Collins
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Rank: Elder Joined: 7/22/2009 Posts: 7,455
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This is what I would do @Thirst_4_Knowledge. Take the loan and build the rentals. If I qualify for additional loans at the 6% rate, I fast track repayments, take another loan, do another flat and the cycle continues for as long as I qualify for additional loans. And every cycle I pay even faster because I have more rental income (including from the fully paid up flats). If the loan is one off - even if I fully pay I don't qualify for another loan - I would not fast track the payments - unless of course there is no way I can invest the surplus and get a return higher than 6%. If I can for example be able to invest elsewhere and get say 20% returns, I would be throwing away 14% every year by using that money to fast track payments for the loan yet I will not qualify for another one after clearing!!! 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: 8/17/2011 Posts: 207 Location: humu humu
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washiku 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. 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... Washiku,big loan are very risky. 18 yrs is a loong time and lot of things could change. What am saying is if he has the capacity to pay 200k a month,then such a project is easily achievable without having to take a 27m loan.
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Rank: Member Joined: 8/17/2011 Posts: 207 Location: humu humu
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sanity wrote: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' There is 'bad' and 'good' debt. Taking a loan to finance your entire project without any monetary input on your side is bad idea. I embarked on a rental project in 2013 building in phases.I have completed ground and first floor and rented all 18 self contained units. i took a small bank loan to aid in finishing during ground floor construction. Those saying you get low quality tenants are wrong. i need two more yrs to save enough cash to complete the last floor comprising 10 more units. Patience patience patience! I learnt alot from a 'master' real estate developer who specializes in low cost housing. This is my second project.( but my first 'anchor' project)
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Rank: New-farer Joined: 8/16/2017 Posts: 20
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washiku wrote: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. I wonder why this is? Is it because the elections made people pause in their plans? Is it because there is an over supply of units in the market? Is this across all segments (middle, high end)? Ama ni kusota in general? If you could share some rinks....
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Rank: Elder Joined: 12/7/2012 Posts: 11,908
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Jon_Gray wrote:washiku wrote: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. I wonder why this is? Is it because the elections made people pause in their plans? Is it because there is an over supply of units in the market? Is this across all segments (middle, high end)? Ama ni kusota in general? If you could share some rinks.... Mostly because of Jubilee gava policy  In the business world, everyone is paid in two coins - cash and experience. Take the experience first; the cash will come later - H Geneen
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Rank: Member Joined: 3/26/2012 Posts: 830
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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! Dennis should go with option 1. It leaves him in a positive cashflow position of 436k per month. It is less risky because one bedroom units are forever occupied. Option two appears more profitable ON PAPER. It is harder to sell the units and banks will still need the payments to be made promptly. Since you will have constructed 2 bedroom units, there is a higher chance that they may not be 100% occupied if you change your mind and rent them out to keep up with the bank payments. Basically, option 2 is more risky and considering competition with developers who can sell the same units cheaper because of their economies of scale, you have no fighting chance. A successful man is not he who gets the best, it is he who makes the best from what he gets.
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Rank: Member Joined: 3/15/2009 Posts: 359
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For 32 1 bedroom units to cost 32m, it means one unit costs 1m and therefore its size is aproximately 35sqm. I doubt you can get 20k rent for such a house in Ruaka.
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Rank: New-farer Joined: 8/16/2017 Posts: 20
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Angelica _ann wrote:Jon_Gray wrote:washiku wrote: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. I wonder why this is? Is it because the elections made people pause in their plans? Is it because there is an over supply of units in the market? Is this across all segments (middle, high end)? Ama ni kusota in general? If you could share some rinks.... Mostly because of Jubilee gava policy  Can we expect this to change once the Supreme Court settles
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