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Should you build for rent or sale?

By Graham Kajilwa | Dec 30th 2021 | 4 min read
By Graham Kajilwa | December 30th 2021
The disadvantage of the tenant purchase agreement is that one can lose any equity accumulated towards the purchase of the house. [iStockphoto]

To a buyer who does not want the complexities that come with buying a house through a mortgage or does not have a deposit, rent to own is one of the attractive options to consider.

This model of property ownership allows one to pay rent equivalent to the market rate or slightly higher over a period as they accumulate equity towards the purchase of the house when payments are completed.

While this method is desirable for buyers, it may not be favourable to developers and financiers. Yet, if a developer or financier chooses an outright sale, it might take time to sell off all units due to the difficult market conditions that include the real estate bubble.

As a developer, this is one of the factors to consider when putting up a project: Should you build it for sale or rent? If it is for sale, how should you go about it?

During the Kenya Mortgage Refinancing Company (KMRC) Affordable Housing Conference held in Naivasha this month, the major challenge for rent to own model for developers is the slow turnaround of capital.

This is even made worse with the bureaucratic process of getting a title deed in the country.

Washington Agutu, who is in charge of the asset management division at the National Housing Corporation (NHC), said the rent to own model has been profitable.

He said the corporation has been charging 13 per cent which is almost like the market rate if one was to go to the bank. He said a tenant purchase agreement gives time for buyers to organise their finances so that payments can be achieved over time.

“What we have observed is even if you give the purchaser 18 years, it will take them just about 10 years to pay off. Right now, for those who got houses in 2016, almost 75 per cent have paid off,” said Agutu.

He said even though they are given 18 years, people often work hard to pay for their houses within a shorter time knowing that the longer time you pay, the more expensive it is.

He, however, noted that this model ties up the money used in the project. As such, the developer cannot rollover.

“You cannot roll over quickly the capital you used in the project. That is why we try and have a mix of tenant purchases together with outright purchases so that we have a balance,” he said.

Do you do tenant purchase or outright houses for sale?

Agutu said one needs to examine their strategy.

“If you are doing rental houses, how long will it take you to get back your capital? If it is 10 to 13 years, then it makes sense. If it takes up to 20 years, then if you are just an ordinary investor then it does not make sense,” he advised.

At all times, he said, the developer and financier need to check the returns if they are worth doing tenant purchase.

Final payment

Simon Walley, a housing finance specialist with the World Bank, explained that the tenant purchase model is similar to mortgage only that the title of the property stays with the developer or financier and is only transferred when a buyer makes the final payment.

“If you look at the cash flow of rent to own, it will be very similar to a mortgage, just a question on what point the transfer of property will be done,” he said.

Some of the advantages of rent to own he presented in the conference include certainty when challenges arise during foreclosure as the financier or developer already owns the property.

It is also a good option when credit scoring is difficult or down payment is a stretch that favours informal earners.

The disadvantage of the tenant purchase agreement is that one can lose any equity accumulated towards the purchase of the house.

“In theory, if you make all your payments but the last one, you could be evicted and not benefit from the equity that you have built up, so there has to be some protection for the consumer as well,” said Walley.

By doing the tenant purchase, the financier and developer also run the risk of the tenant declining the option of buying if prices fall as a result of market instability.

“Developers are all about quick turnarounds and moving on to the next project and so for them, this isn’t a great option,” he said.

Agutu said there is still a market for rental houses even as the government seeks to increase homeownership. The key is to assess the market and the area of development which should be close to the social amenities.

"A number of people did beautiful mansionettes in Ngong and they have moved away to come back and get rental houses,” said Agutu.

He said when NHC is doing projects, three services have to be near schools, commercial or shopping and hospital facilities.

“That is why someone can stay 30 km away in Athi River knowing that their child is safe. And they can go to school within the estate,” he said.

He said developers can lease part of the land to service providers like a hospital to make the project attractive.

“You talk to a hospital and give them like a 25-year lease and they will build it there, that will be an attraction to any investor either for purchase or rental,” he said.

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