Transcript
Transcript
Transcript
Is rental income really passive? Now, for many Kenyans, the idea of owning rental income is seen as the ultimate sign of financial freedom. If you have built rentals, you can relax and wait to collect the rental income at the end of every month. Traditionally, that is how many Kenyan families have built generational wealth. However, among young people there is a growing debate and the question is rental income really passive or does it become passive after many years of being active? So the idea is by the time the rental income. Is coming in, there’s a lot of activity that has been put in. Building a rental property is one of the most financially stressful situations you can find yourself in. If you are building it directly then it means you have to deal with phone deals, conjures and licensing. There are new cost and the finishing can be quite expensive even though you have the perfect budget. Of course, there is the option of either buying a rental property or getting a contractor to deal with all these stressful situations. That means you’re increasing the cost of acquisition. And that’s also extends the amount of time it will take for you to get a profit. Sometimes, especially for properties that have been bought in cash, it can take 20 years or more to break even. So the reality is, rental income is often active before it starts becoming passive. Once the rental property is complete, you have to make another decision. Do you manage it yourself or get an agent? Managing it yourself could mean handling calls in the middle of the night. Not exactly the idea of a quiet. Retirement or quiet life as you wait for passive income to come in. The other option is where you get an agent to handle the management of the property. But this also means you are giving them a percentage of your profits. And of course, something else to consider is the rental yield. In many parts of Nairobi, the rental yield averages between 5% to 8% in a year. Now that is before you account for vacancies, you account for management fees if you are using an agent. The other costs like taxes and repairs that keep coming up. Once you have accounted for all these costs, the net return or the money that comes to your account could be quite different from what many Kenyans dream of when they think of owning rental property. On top of the regular minor repairs that will happen month over month, there are certain major repair costs that could affect your annual rental income. For example, there is a huge crack on the wall or maybe the entire plumbing system needs to be redone. That could take years of profit, especially for older buildings. But this is not to say that rental property is. Bad investment? It simply means rental income will often become predictable in the long run. Yet, many Kenyans still prefer investing in rental property. Why? There are a number of factors. Number one is that it can be a great source of passive income, especially once everything settles. So, if you are thinking about the next generation, rental income could be ideal for protecting their wealth #2 is the appreciation, especially with the land where the rental property seats. As time goes by, there’s going to be a capital appreciation, and if we are to resell or get a valuation later on, the value will be much higher than what you put in #3 and related to that is also that it protects you from inflation. With most passive income vehicles, inflation depletes the future value of that money. But as inflation goes up, the value of your property also goes up. It means the rent you are charging will go up and the cost of the land where the property seat is also going up. #4 and like some classes of passive income investments, rental property will often act as collateral when you’re getting a loan and you can use that to pursue other asset classes. And of course the last point is with rental properties are physical asset that you can hold and see, unlike many other forms of passive income like shares where you don’t have anything tangible to see. Whether you consider rental income to be active or passive, the most important thing is to understand the full cycle. Behind it, before you put your money in an investment, we’re expecting rental income. It is important to understand what will be required of you when it comes to either construction, management of the property, handling repairs, as well as the cost associated with it. Understand these dynamics and consider what are the long term financial priorities for you. For example, if you are thinking about the future of your kids, you might make a different decision from someone who is thinking about maximizing the earnings of the investment. Within a five year period, Money to 5 four dot C dot K has written more about this topic and other news that affect your money. 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