You Have Ksh7 Million: Buy a Home in Cash or Rent and Invest? [The 10-Year Numbers]

For many Kenyans, buying a home is often treated as a financial decision with an obvious answer: if you can afford to buy, you should buy.

But what if the money you put into that home could have been doing something else?

Let's take the example of someone who wants to live close to Westlands. They have saved Ksh7 million for the purpose of owning a home. 

They have two broad choices - buy an apartment or buy a piece of land and build. If living close to Westlands is a priority, the choice will probably favour buying an apartment in a place like Ruaka. This is because land in the areas around Ruaka is very expensive and Ksh7 million may just be enough to buy an eighth-acre plot. 

We will consider the buy and build option in a separate article. 

So, what happens when they make the Ksh7 million cash purchase to buy an apartment? 

For one, they now own a home. They have secured a place to live without having to worry about a landlord deciding to sell the property or increase the rent.

They can also make changes to the apartment as they please, within the rules of the development, and they have an asset that they can potentially pass on to their children or sell in future.

Also Read: Would You Rather Buy a House or Build Rentals? [A Case of Ksh5M]

There is also the possibility that the property will increase in value over time. If Ruaka continues to develop and demand for housing in the area grows, the apartment could be worth more in the future than the Ksh7 million they paid for it.

There is a less tangible benefit, too: peace of mind. For someone who intends to live in the same area for many years, owning the home can provide a sense of permanence and stability that renting may not.

But buying the apartment also means that Ksh7 million is now tied up in that property. Seems like an easy trade-off, right? 

Not necessarily.

Every financial decision comes with an opportunity cost: what you give up by choosing one option over another. In this case, the opportunity cost of buying the apartment is what that Ksh7 million could have earned if it had been invested elsewhere.

That does not mean the Ksh7 million would necessarily have been better off in an investment portfolio. The apartment could appreciate, provide a place to live and give the owner benefits that cannot easily be measured in shillings. But the investment alternative is worth examining. 

This is what we will do in this article by looking into the numbers. 

What Could Ksh7 million Bring in the Current Market?

We first need to establish what the Ksh7 million could potentially earn if it remained invested elsewhere. 

For this comparison, we use an average net return of 13% a year. This is not a guaranteed return, nor does it mean that a single investment will consistently deliver 13%. It is an assumption based on the range of returns currently available in the market.

At the higher end of the risk spectrum, the NSE All Share Index has recorded a return of 33.19% year to date, while some Special Funds that have been gaining momentum in recent years have offered average returns of about 21%. At the lower-risk end, bonds are currently averaging about 12.4%, while MMFs are offering around 8% net.

The idea, therefore, is not that someone should put all their money into the investments generating the highest returns. A more balanced portfolio would combine assets with different levels of risk, liquidity and return potential.

Against that range, we use 13% as a relatively modest blended return for the purposes of this illustration. It gives us a way to ask a useful question: if the Ksh7 million were invested rather than used to buy the apartment, what could it potentially generate?

At 13%, Ksh7 million would generate about Ksh910,000 in investment income in a year. That translates to about Ksh75,800 per month. 

Now consider what happens if the person uses that investment income to pay for their rent. A Ksh7 million two-bedroom apartment in Ruaka could cost about Ksh35,000 a month to rent. 

On these assumptions, the investment income would be more than enough to cover the annual rent, leaving about Ksh490,000 before considering taxes, fees or changes in either the investment return or rent.

On the face of it, that creates an interesting proposition: instead of converting Ksh7 million into a home, the person could keep the capital invested, use part of the returns to pay for housing and potentially retain the balance.

Also Read: Renting or Homeownership: How Do You Decide?

What the Homeowner Gets

But this is only one side of the calculation. The homeowner still owns the apartment, which could appreciate in value, while the renter-investor remains exposed to investment-market risk and future changes in rent.

So the more useful comparison is not simply which option produces more cash in a single year. It is what happens to the two people's wealth over time.

The first-year calculation gives us a useful starting point. But buying a home is a long-term decision, so it is worth looking at what happens over a longer period, say 10 years. 

For this illustration, let's assume the apartment appreciates by an average of 6% a year, while rent increases by an average of 5% a year.

We are using approximate five-year average rates to illustrate how the two costs could change over time.

If the Ksh7 million apartment appreciates by 6% a year, after 10 years it would be worth about Ksh12.53 million.

That means the owner would have an asset worth about Ksh5.53 million more than the original purchase price, before considering selling costs, maintenance, service charges, taxes or other ownership costs.

For the renter, starting rent is Ksh35,000 a month. If rent increases by an average of 5% every year, the monthly rent would rise to approximately Ksh57,000 by year 10. Over the full 10 years, the renter would have paid approximately Ksh5.28 million in rent.

After 10 years, the buyer would have an apartment worth approximately Ksh12.53 million.

Not to say the buyer has automatically come out ahead.

Also Read:Land Prices in 7 Nairobi Satellite Towns Drop

Assumptions

The renter started with the same Ksh7 million, but kept it invested. Assuming it earns an average 13% net return and the renter uses part of the returns to pay rent, while rent increases by 5% a year, the investment portfolio would grow to approximately Ksh13.95 million after 10 years.

Under these assumptions, after 10 years the buyer has a Ksh12.53 million property, while the renter has Ksh13.95 million in investments and has spent Ksh5.28 million on rent. 

During that period, the renter would have paid approximately Ksh5.28 million in rent.

So, under these assumptions, after 10 years the buyer has a Ksh12.53 million property, while the renter has Ksh13.95 million in investments and has spent Ksh5.28 million on housing.

There is an important assumption behind the renter's Ksh13.95 million investment balance.

In this illustration, we assume that the renter continues to invest the Ksh7 million, earns an average 13% net return, and withdraws only enough to pay the rent as it increases over time. The surplus investment income is left in the portfolio to compound rather than be consumed.

But this is not a prediction of what will happen.

We have assumed that the investment earns 13% every year, property appreciates by 6% every year, and rent rises by 5% every year. In reality, none of these things will move in a straight line. Investment returns can fall, property prices can stagnate or decline, and rent can rise faster or slower than assumed.

We have also left out factors such as inflation, maintenance, service charges, taxes and transaction costs, which can affect both scenarios.

The point, therefore, is not to declare a winner. It is to show what the numbers look like under a particular set of assumptions. 

There is No Right or Wrong Investment

Buying a home is not simply a choice between paying rent and owning property. It is also a decision about what happens to your capital.

Neither option comes without risk or cost.

And, as the 10-year illustration shows, small differences in assumptions can materially change the outcome. The better question may not be "Is it better to buy or rent?”

It may simply be: “What do I want my Ksh7 million to do for me over the next 10 years?”

The answer will depend on the home you want, the returns you can realistically earn, how long you intend to stay and how much value you place on owning the place you live in.

The numbers can only help you think through the trade-off, but the decision is yours.