Renting vs. Buying: Are You Making the Right Choice or Just Following the Crowd?

The Illusion of Homeownership:

Friends,

Removing the emotional attachment we have to the houses we construct or buy as our primary residences can often lead to clearer evaluations of significant projects that require substantial initial investments. This is particularly true given the current housing prices in Uganda, especially in Kampala.

Yesterday, my friend Pathy suggested that for younger couples, instead of constructing a three-bedroom house far from town, it might be more beneficial to purchase an apartment, especially if a favorable payment plan is available, such as one spanning three to four years.

For instance, there is a three-bedroom apartment condo in Kira listed for UGX 238 million, which requires an upfront payment of UGX 47.6 million (20% of the cost of apartment), followed by monthly payments of UGX 7.9 million for two years.

The three Bedroom Condo Plan going for 238 million

A little search revealed the developer and I called them who indicated the payment terms.

At first glance, this appears to be a good deal. If you pay upfront, the asking price by the Developer is UGX 238 million.

However, if you opt for the payment plan, you would end up paying around UGX 238 million in total. This suggests that if the actual value of the condominium is indeed UGX 238 million, then taking the payment plan could be seen as a low-interest home loan, given the two-year payment period.

(The developer noted its a 24 months payment plan after paying 20% upfront)

The critical question remains: what is the true value of that condominium apartment now, and how will it affect future payments and property value?

Moreover, anyone who can afford UGX 48 million upfront and UGX 8 million monthly for two years likely has a solid cash flow. If they are fully employed (Manager level kind of employment ) or running a successful business, they must consider whether investing all this money into the condominium in Kira is wise.

The first question that arises is how much it would cost to rent a similar three-bedroom apartment in that area. After consulting with my real estate broker friends, I found that rental prices in that location with such good amenities range from UGX 1.5 million to UGX 2 million per month, translating to an annual expense of UGX 18 million to UGX 24 million.

The potential development of the Daisy Portico.

To be generous, let's assume the rental cost is UGX 2 million per month. If someone invests their UGX 48 million in a good unit trust or money market fund with an average interest rate of 12% per year, they could cover the UGX 2 million rent, leaving them with UGX 6 million to invest. Over two years, by July 2027, they could accumulate around UGX 220 million in investments. However, they would also have spent around UGX 48 million on rent during that period, which is a cost that cannot be recovered. Thus, while they may have UGX 220 million in investments, they must consider the trade-off of not owning the property.

If someone chooses to invest in a treasury bond while paying UGX 2 million in rent, they could take the UGX 47 million upfront and the UGX 6 million monthly payments and invest in a treasury bond yielding 15.8% with a 10% withholding tax. By July 2027, they could have close to UGX 260 million in investments, with the treasury bond generating approximately UGX 2.5 million in monthly income. This would allow them to pay rent for as long as necessary while still growing their investment.

This scenario prompts us to evaluate the right financial decisions. Should we invest in condominiums? Yes, but developers must reassess their pricing strategies without compromising quality.

For example, Apartments in Kampala that cost as little as UGX 100 million are rented out at around UGX 500K per month. if I can rent an apartment for UGX 500,000, costing UGX 6 million annually, while investing UGX 100 million in a treasury bond that yields UGX 14 million per year, I could pay the rent upfront and still have a balance of UGX 9 million.

The current market dynamics send a message to developers and banks underwriting these apartments: the prices may be too high and unsustainable. It seems there is little consideration for this perspective, as developers continue to introduce condominiums priced at UGX 200 million, despite concerns about affordability and quality.

When it comes to condominiums, we must also consider capital gains, which differ from land ownership. While condominiums come with full titles, they are not the same as selling land. In a condominium with ten units, all owners share a title, complicating the resale process. Therefore, unless it is a necessary purchase, it may be wiser to invest the money and rent from the developer or owner instead.

Happy Investing

Alex Kakande