You must read this before buying a plot or house on mortgage

There was a story this week on Daily Nation about how people’s homes are being auctioned. The auctioneer says that some homes are being auctioned after someone has paid mortgage for 15 years. He says that such people die shortly after the ordeal.

This is why we urge people to think carefully before joining the home ownership by whatever means bandwagon. The main reason why the desire to own a home is so intense in Kenya is because of income insecurities and economic uncertainties.

Before making a decision to own a home people should think about the following issues;

1. Risk of fraud – the real estate sector in Kenya is full of fraudsters. Whatever path you choose to own a home, ensure you mitigate fraud risks. Besides, don’t invest your lifetime savings into home ownership. If you are defrauded you wouldn’t recover and even if you do, life will never be the same again.

2. Think objectively – the main reason of owning a home is to have shelter. Therefore, shelter is the objective. Home ownership is just one method of guaranteeing yourself shelter.

3. Think about costs – there are people who think that if they own a home they wouldn’t be experiencing any housing costs. There are a lot of costs involved in home ownership such as security, maintenance etc. In case of gated estates and apartments, you may find that the service charges are even higher than the rent you were running away from.

4. Physical planning risks – in Kenya we have very few well planned places. Most of Nairobi and its environs are turning into a mega slum. You can build or buy your dream home only for the area to turn into an unlivable slum or an insecure hell. Your dream home could turn into a screaming nightmare. There is this story about people who built mansions in Thome Estate but had to abandon them due to insecurity.

5. Think about alternatives – if you have cash money to invest in a home you should think about investing in productive capital. A house can easily turn into dead capital especially given that it is an illiquid asset. Instead of investing say KShs 10 million in a house you could invest in something that will give you over 10% interest annually. You can then spend this money to pay rent. If you are still active economically, you can reinvest these returns and benefit immensely from the power of compounding over time.

6. Think about rigidity vs. flexibility – when you buy a home you tie yourself up in many ways. Of course you can leave the home and go rent out elsewhere but that was not your original plan. So it is good to think about whether you still need flexibility for instance to take up opportunities elsewhere.

7. Because of high interest rates and economic uncertainties, owning a home through a mortgage is one of the riskiest decisions you can make. In the event of foreclosure, you risk losing a lot. Mortgages are good for advanced economies where even if you lose your job you will quickly get another one.

8. It is good to think about liquidity risks – it is possible to have a home but not have cash to spend. In such a situation home ownership wouldn’t give you the peace of mind you were looking for. This is when you hear that a person is asset rich but cash poor. In times of economic strife cash is king. This is because in such times liquidating assets is never easy.

9. Always think about diversification as a way of managing risks – Home ownership can give you peace and security but it offers no guarantees. In addition to owning a home, ensure you have other sources of income as a safety net in the event life deals you a bad one.

To cut this long story short, let us remember that no one is against home ownership. What some of us disagree with is the rigidity and obsession people have about owning a home. The desire to own a home shouldn’t block your mind from thinking about alternatives ways in which to achieve your personal finance objectives.
For instance, it doesn’t make a lot of sense to buy a plot to lie idle as your look for money to build a house. It would make greater sense to invest the plot money in a cash generating asset and only buy the plot when you are ready to build. Better still, you can generate enough cash to a point where you can just buy your dream home without the hassle of building.