To buy or to rent?
Caution: Very long thread.
The war btwn buyers & renters has been long and exhausting. Frankly, I don’t expect it to be won today.
The topic is controversial but let’s just do some housekeeping before we get into the meat of it.

First, let’s agree a home means very different things to different people. There is financial value and there’s sentimental value to home ownership. The mistake I see people make when debating is to completely ignore the sentimental value and focus purely on the financial value.

I’ll give you an example: Buying a car is one of the most financially unsound things you can do with your money if you are not in the transport business. But does it make it dumb to buy a car? Not in a chaotic city whose public transport barely struts along by the grace of God.

Most people buy cars to just enable their families to travel in dignity. You can’t really put a price on that.
For home ownership too, there is value to waking up and stretching out in your own place.

Not having your neighbours’ rowdy kids scratch your car, not having to put up with “plot” gossip, not having to bear with noises caused by neighbours’ carnal activities and so on. Such things have different value to different people and it’s very hard to quantify it. Agreed?

Second, don’t compare your current renting situation to your imagined ‘comparable’ ownership situation. E.g, if you live in a 25K 2BR in Ruaka, don’t necessarily compare that with a 2BR owner occupied house in Ruaka.

A young family living in a 25K 2BR rented apartment in Ruaka while considering home ownership will likely be looking at a 3/4 BR townhouse perhaps in a different location whose effective rent would be maybe 60K. This is because ownership has a long term stance.

You can easily move from a 2BR rental to a 3/4 BR one if your family expands, but how easy would that be if you owned the house? This flexibility is actually one of the underrated benefits of renting.

Hopefully you can already see just how difficult it is to have an apples to apples comparison between renting and owning. But we’ll try. We’re going to disregard the sentimental value of ownership and compare purely on a financial basis.

Also, we’ll assume pretty standard housing in one of the satellite towns of Nairobi. Rent of 60K for the renter and 60K effective rent for the owner (income assuming the owner decided to rent their house out)

To filter out qualitative influences as much as possible, we’ll assume both of them live in almost similar apartments spaces.
The above assumptions are probably academic, but let’s just imagine we are robots who don’t care for emotions or standard of living.

Again, this thread is not meant as a basis for buy/own decisions but simply as a guide for the quantitative aspects of that decision.

A cursory look at several house buying /renting sites, tells me that a decent 3BR apartment which rents for 60K in one of the satellite towns would sell for about 12M. Nothing scientific, just a glance so please don’t @ me.
Let’s now indulge in some number crunching.

The renter’s math is straight forward. For the buyer, let’s imagine they put up a 20% down payment and take out a 15yr fixed rate mortgage of 9.6Mio at 13% p.a. We’ll assume incidental costs are factored in the total 12M. The monthly mortgage payment will be 121, 463.

Now, we all know that rent generally goes up. But by how much? Let’s use a rate from the Hassconsult composite rental. In the report, between December 2007 and Q1 2019 (that’s about 10 yrs), residential rental prices around Nrb went multiplied 1.89fold.

That’s to say something that was renting for 10K 10 yrs ago now rents for 18.9K, which translates into average compounded rent growth of 6.57% p.a.
Time for another assumption. Remember that both the buyer and the renter are living in similar apartments.

The value of the owner occupied apartment probably won’t go up. Even if the value of the land where the block sits goes up, the apartment owner cannot practically extract that benefit. The value of the apartment itself is actually more likely to go down as other projects come up.

For simplicity, let’s assume there will be no movement in the price over time. In any case, let’s say depreciation and inflation will balance each other out such that the price of the apartment remains constant at 12M over time.

To even out the equation, the renter puts the 2.8M he would otherwise have paid as a down payment for a mortgage in an investment that pays 9% p.a.

Remember the mortgage payment is constant over 15yrs but as rents go up each year by 6.57% the owner is progressively enjoying more and more benefit associated with ownership cos the increments in rent is money he does not have to fork out.

Also because our cash flows are monthly, let’s convert that rent growth rate of 6.57% into a monthly rate. It comes to a 0.53% monthly rent increase. Where will the buyer and the renter be financially at the end of 15 yrs (180 months)?

For the renter, his 2.8M investment growing at 9%p.a (0.72% monthly) will have turned into 10.1M after 15 yrs. Over the 15 yrs, he would have paid rent amounting to 18M.
The borrower would have made mortgage payments over the years amounting to 21.8M.

The difference between them is 3.8M meaning that while the owner does not pay rent, there is still implied rent particularly in the first 11 yrs or so where the mortgage payment exceeds the corresponding rent paid by a renter enjoying exactly the same housing.

His effective rent situation turns positive after 11.25 years where the corresponding rent now surpasses his mortgage payment. So even if at the end of 15yrs he has a 12M apartment, we have to take out the 3.8M he “lost” over the months leaving him with 8.1M

The renter will hence come out almost sh. 2M ahead.
You can also flip it the other way around: the owner will have a 12M house, the renter will have 10 125 969 in cash and a further 3 868 532 he “saved” along the way. That’s a total of 13 994 501. Again almost 2M ahead.

Now, the last but very important thing to do is to factor the effect of inflation. A difference of 2M might sound like much but remember it will mean much less 15 yrs down the road. Let’s assume constant annual inflation of 5% p.a which comes to 0.407% per month.

Discount 2M 180 months back and you have approx 962K. Therefore the argument between buying and renting today given a 15 yrs horizon falls in favor of renting by about sh.962K.

What about given a horizon of 30years instead of 15 yrs? It gets interesting. We are going to keep all our assumptions including that the mortgage was fully paid off after 15 yrs.

The renter’s 2.8M investment will have grown to 36.9M. The owner will still have his apartment of 12M but will have made “savings” in rent of 42.7M. So the owner will have a total of 54.7M, which is 17.9M more than the renter.

Again, deflating that back to today’s money, it’s a difference of 4.1M in favor of ownership. We can see that the shorter the time frame, the better it is to rent but as you increase the time frame, it owning becomes more attractive.

Therefore next time you are having an argument on which is better between buying and renting, at least agree on the horizon beforehand.

Disclaimers: I tried to keep the rates and numbers as reasonable as possible. Doesn’t mean my assumptions will necessarily hold out over the next 15 yrs. Numbers are rounded off

In addition to ignoring the sentimental value of home ownership/renting, we ignored other hard to quantify risks and externalities of each option. Take those into account based on your personal profile when considering ownership vs renting.

Comparing across different property types will result in completely different results. Eg comparing between a rented apartment and a stand-alone bungalow where land appreciation will now cause a tilt in favor of ownership.
Tomorrow we resume #stockset.