Buy, Build, or Rent? How do I Know What's Best For My Family

EDITOR'S NOTE: This article is a part of our Money254 Partner Series and is produced in partnership with Absa Bank Kenya. For more on Money254’s editorial policy, read here.

Take a minute and think about your dream home. How would you like to live? You probably already have a good mental picture of the home your family deserves. And it probably is not where you are living today.

So, the million-dollar question has got to be; should you continue renting, or should you buy or build that dream home?

According to the Kenya National Bureau of Statistics (KNBS), only 61% of Kenyans are homeowners. Of this, 93% of them built their homes, 3% bought their houses, and 3% inherited. 

Housing happens to be one of the biggest decisions everybody will have to make in their lifetime. And it is not an easy one. As you get older and your family grows, it becomes inevitable that you will have to make the choice.

And for most of us, this is a decision to live with. So, it is not one to take lightly or make in a hurry. If you are renting today, you either can’t want to say goodbye to the world of landlords or you still find the flexibility of renting very appealing. 

Now, renting and homeownership both offer their distinct benefits and drawbacks. As such, you must approach your decision-making process with all the necessary information. At the kick-off of Absa's Home Ownership Month, we decided to dive into the complexities around this topic. 

This article will explore what you need to know about renting, buying, or building, and how to decide what's suitable for your family.

Let’s dive in. 

Renting a House 

For most urban dwellers, renting is the most common housing option. According to KNBS, Nairobi County, for instance, has over 1.5 million households, 91% of whom are renters. 

Renting provides a fairly easy and affordable way to house your family. With a wide array of options available, with a little patience and some expectation adjustments here and there, you are likely to find a house suitable for your family needs. 

However, for most Kenyans, paying rent is inconvenient and burdensome. A survey published by the Kenya Bankers Association found that most Kenyans would rather own a house for three reasons: lifestyle investment, lower rent burden, and building up wealth for retirement.

So, should you keep renting, or should you consider owning your own home?

Pros of Renting

1. Flexibility - you have the luxury of choosing the location and house you want whenever you feel like changing vicinities. 
2. Low upfront costs - most landlords require less than three months of security deposit
3. Low maintenance costs - the property owner is responsible for major repair costs and damages you didn't cause.
4. No long-term commitment - most leases are less than three years, and you can negotiate for termination if you want to move.
5. Easy to budget - Rent payment is predictable and will stay the same for the tenure of your lease. But depending on your tenancy agreement, it may go up marginally each year. 

Cons of Renting

1. Your rent money goes towards enriching your landlord, and you don't build equity. You have a home, but it is not your asset. 
2. The rent might significantly increase after the expiration of the lease. While you can move, you will still pay high moving fees.
3. Lack of control and personalisation. 
4. There are no tax benefits.
5. There is no permanency. You may be evicted. You must abide by the landlords’ rules. They can put the property up for sale. 

Renting vs. Homeownership: What to Consider 

To decide what's best for you between renting and homeownership, ask yourself these questions:

‍Are you ready to commit to one place? Renting allows you the freedom to change location depending on your emerging needs. If you buy/build a house, you commit yourself to the same area. But if you really needed to move to a different location and already own a home, you could always rent it out. 

‍Are you financially ready? Homeownership has many costs that may come close to or exceed renting. The costs can even be higher than your current rent for certain property types. You must ensure you have enough income and cash flow to cover them.

‍Do you have time? The process of buying or building a house can take months to years. You need to ensure you have the time to follow through these processes. And the more the time you spend, the more expenses you will typically incur. 

‍What are your family's needs? Homeownership might involve changing locations, which can lead to more changes, like your children changing schools and friends. Ensure they are ready for the changes. 

Buying a House 

On the other hand, buying a house involves basically purchasing a ready home from the housing marketplace. Depending on your budget, this can be a new or pre-owned house; an apartment or a standalone unit. 

For many, it can be the easiest route to homeownership since it can take even less than three months to complete the whole process and move to your new home. If you already have the cash, it could be as direct as going to the market and buying one.

You can also buy a house through rent-to-own schemes, which involve leasing a home from a seller for a specified period (months or years) with the intention to buy it before or after the lease expiration. The rent you pay will go toward the down payment.

Funding The Home Purchase 

Mortgage: This is a type of loan from a financial institution such as a bank or Sacco - to purchase a house. The property will act as collateral as you repay the principal borrowed plus interest. 

For a mortgage loan, a lender will typically require that you pay a downpayment of 10-30% of the house’s worth, and they will finance the rest. 

For instance, you can qualify for up to 90% financing using the Absa Bank straight purchase mortgage. If you need to buy a house worth Ksh10m, for example, you only need to raise Ksh1m as a downpayment. You can repay the remaining balance in up to 25 years.

‍Liquidating: If you have other assets, you can use them as collateral or sell them to raise money to buy a house.

Saving: If you don’t have enough money to buy a house, you can open a saving account such as the Absa DigitalSaving Account to start saving for a downpayment to qualify for a mortgage. 

What to Consider When Buying a Home 

For most people, buying a house is the most significant financial commitment they will ever make. So before deciding if it is the right path for you, you should consider the following:

1. The opportunity cost - Putting so much money in one investment that doesn’t generate an income might lead to other missed opportunities of increasing your earning potential. 
2. The debt burden - If you buy a house using a mortgage or rent-to-own scheme, you will be stuck with a loan you must service for as long as 25 years. You need to ensure you are ready for that commitment.
3. Your liquidity - How much liquidity do you want in your portfolio? A house is a big investment that can represent half or more of your net worth. If this happens, you may have limited cash in hand, which might affect how you invest.

Pros of Buying a House 

1. A sense of permanence and stability for you and your family.
2. Capital appreciation as your house may go up in value and increase your net worth.
3. Building equity as you pay off your mortgage. 
4. Your home can be an investment and hedge you against inflation. 
5. You can leverage your house and borrow against it to finance other projects and investments.
6. You can enjoy tax deductions of up to Ksh300,000 per year on the interest you pay on your mortgage. 
7. You can pass it to your children after your demise, giving them a headstart in life and building generational wealth.
8. Freedom to personalise the property to your taste. 

Cons of Buying a House 

1. High upfront costs, including down payment, real estate and broker fees, and property transfer fees.
2. High ongoing costs, including mortgage payments, insurance, maintenance, taxes, security, and utilities.
3. Lack of flexibility to move. 
4. Illiquidity - the process of selling your house can be long and cumbersome. If you have an emergency, you might have to sell way below market value. 
5. Potential for “dead capital” - your rural family home will likely not generate any income.

Building a House

Building a house involves the construction of a new home from scratch. It entails finding land, acquiring necessary permits, designing the house, and constructing it. You could also get a construction loan.

One of the main benefits of building a house is its flexibility. You can construct at your own pace and design everything to your liking. In Kenya, many people use the "jenga pole pole" route to build incrementally. 

Additionally, building a house can be an excellent option for people with an active imagination who want to create a custom living space that meets their needs and preferences. 

But building from scratch, like all other homeownership routes, has its fair share of benefits and drawbacks. Here’s everything you need to know.

Funding your Construction 

Building a house from scratch is cash intensive. Before you break ground, you must run the numbers and ensure you can finance the whole project within your timeframe. The shorter the building period, the more cash you will need. 

With that in mind, here's how you can finance your construction project: 

‍Construction Loans: This loan facility provides funds required to finance the building of a house from start to finish. The loan is typically given in different phases and uses your land and house as collateral. To qualify for a construction loan, you must get your building plan approved, an architect certificate, and a quotation from a qualified surveyor. 

The amount, terms, and type of loan you get will depend on your financer. For instance, Absa's construction loan facility offers up to 100% of the construction cost if you own the plot and up to 80% if you don't have land yet. Absa also offers a 20-year payback period and a 9-month moratorium to start repayment after construction. 

‍Joint Venture: This involves partnering with a real estate developer to construct your house. In return, you will pay monthly rent until the developer recoups their investments plus profit. 

‍Saving to Build a House: This is the longest route and usually involves opening a goal-saving account and slowly saving until you can afford to finance the construction. To ensure you get the most out of your money and reduce the effect of inflation, consider an account that compounds your interest and has low maintenance fees. With Absa Digital Savings Account, you can earn up to 7% interest compounded quarterly.

What to Consider When Building a House 

The location: Your chosen location will determine everything from the construction cost to the financing type. For instance, most lenders will only finance construction in urban areas. 

‍Future Needs: Are you planning to increase the size of your family? Will this be your retirement home? Do you intend to resell the house, or is this your dream house? All these factors will decide your house's size, type, and finishing.

Pros of Building a House

1. Freedom to customise your house as you wish.
2. New homes have fewer maintenance costs. 
3. Extra privacy for you and your family. 
4. You can build anywhere as you decide where to buy land. 

Cons of Building a House

1. Building from scratch is time-consuming. The process can take almost a year or more.
2. Getting a construction loan is harder than a mortgage and has a shorter repayment term.
3. It can be challenging to create a budget as building materials can increase in price leading to cost overruns.
4. You spend a lot of money on taxes and fees, e.g., NEMA and building licences from the county government. 

How to Decide What's Best For Your Family

Determine Your Current Needs

How is renting currently benefiting you? This is the first question you must ask yourself when considering homeownership. A lot of thought went into deciding where you are renting. It could be near your workplace or your kids' school. Any action you take might affect your current lifestyle. Therefore, any decision you make should factor in those needs.

If you choose homeownership, your current budget and financial situation will significantly determine your route. For instance, the cost difference between building from scratch and buying a ready house is significant if you want to live within the city and environs. 

Determine Your Future Needs

What are your long-term needs? If your family's security and permanence are your main concerns, then you may want to consider homeownership. However, you will also need to consider your personal retirement goals. Do you plan to keep staying in the city, or do you plan to relocate to a quiet place?

Additionally, you should think about the growing size of your family. What are your space requirements? Do you need multiple bedrooms, a home office, or a yard?

Answering these questions will help you determine your future needs and preferences for a home. If you need a larger space or require specific amenities, buying or building a home that will meet your future demands may be more advantageous. 

On the other hand, if you require flexibility or plan to relocate to the countryside after retirement, renting may be a better option for now. However, you can invest in a house now, sell it when you retire, and buy/build a new one. 

Evaluate the Housing Market

Before deciding whether to keep renting or buying, you need to look at the housing market. This will help you understand which option is better from a financial point of view. You will be able to make a more informed decision by looking at the following:

1. Home prices - Depending on the type of house you want, this will help you create a ballpark budget which will inform whether you can afford a house.
2. Market trends - Certain market and economic trends can drive house prices up. For example, the cost of a house will go up when inflation is increasing, and it might drop when inflation is low. Be on the lookout for housing markets that are inflated which could leave you servicing a loan for a property that is worth much less. 
3. Alternative investments - Homeownership can offer security but will not help you generate income. Therefore, you can consider other investments offering better returns, including rental real estate. You can buy/build a house and rent it if it generates higher returns to offset your rent.

The Long-Term Cost of Homeownership 

Homeownership comes with many financial responsibilities. Are you ready for them? Here are some costs you must consider:

‍Loan Repayment: If you are using a loan to finance your dream, you must ensure you can comfortably service it for the long term. Defaulting can lead to repossession of your house. Your loan repayments can however end up costing less than your current rent amounts over time.

Check out the Absa Home Loan Calculator to see an estimate of how much your monthly mortgage repayments could be. 

‍Maintenance Costs: To maintain the value of your house, you will need to repair and renovate it constantly. These costs can add up over time. 

‍Resale Value: Whether you plan to sell your house later or not, you need to invest in a home that will maintain its value in the long run. Location is one of the biggest factors. 

Consider the Economic Outlook 

The state of the country’s economy can affect how much you spend on acquiring a house and your ability to pay in two ways:

1. Interest rates: The economy can affect interest rates, impacting your ability to secure a mortgage or construction loan. If interest rates are high, it may be more challenging to afford a mortgage payment. 

2. Job security: If the economy is unstable, finding and keeping a job may be more difficult. This can make it harder to afford mortgage payments and other ongoing homeownership costs. While you only need a solid emergency fund to rent, you need a stable income source to pay off loans and build a house from scratch.

WRAPPING UP 

When deciding whether to rent, build, or buy a house, you must ensure your priorities are right. 

The homeownership journey is a solid financial decision that offers stability to your family. It can be an effective wealth-building investment strategy as you gain equity, and your property value increases. But it has its fair share of disadvantages.

For starters, it is a daunting process that requires a lot of time and financial commitments. You must think about everything from maintenance and renovations to the intangible costs, including lost opportunities and the chance that your house can depreciate.

While housing can be an emotional investment, you shouldn’t let this affect your decision. Assess all the pros and cons and choose an option that aligns with your financial situation.