Financial literacy is now in vogue, and voices are being raised against giving real estate top priority, when compared to other investment avenues
Real estate is held in such high esteem when it comes to investment, that it may seem sacrilegious to rank it anything but top priority. Indeed, when it comes to matters such as ownership, inheritance, marriage, and divorce, real estate draws the highest attention.
Increasingly, however, a crop of upcoming financial literacy experts is urging a cautious approach. True, it is pointed out, most rich personalities have real estate in their investment portfolios; but the issue that is getting attention is when should an investor, especially young investors, bring in real estate.
Financial literacy is now in vogue, and voices are being raised against giving real estate top priority, when compared to other investment avenues.
Let us look at some ideas being flouted. This young American investor in his late 20s, who says he moved from $80,000 in debt three or so years ago, and is now a self-claimed dollar millionaire, says, and I quote: “Don’t buy a home, rent and invest the difference to generate cash flow. Homes are liabilities that drain your cash flow”.
This article in a South African newspaper is titled: “Is property a good investment? Experts tackle old beliefs and new realities”.
This other advisor makes a statement that many of us would disagree with. When differentiating between assets and liabilities he/she says: “a home is not always an asset. Focus on cash-flowing assets. Buy what pays you back”.
A Kenyan You tuber has this posting titled; “Avoid land and become rich”. Another one urges us to do something else: “Instead of Building a Ksh8 million home, do this instead and thank me later. Buying shares is (more) profitable than buying land”.
Then there is this young investor who is most likely based in the UK. He is discussing what he calls: “16 controversial truths that’ll make you rich in your 20s”. The first one among these is: “Do not invest in property until you hit a £250k liquid net worth”.
The following advice was given to a young Tanzanian investor who had accumulated Tsh100,000,000 and wanted to invest it all in building a good family house. A Tanzanian licensed financial educator advised him otherwise.
The educator has it that, if you are young and have accumulated some cash, if you use that money to put up a building, it is like you are burying that amount. Before building a house, make sure you have investments that bring you cash. You own home gives you peace of mind and pride, but does not bring in cash.
In the end, the young investor was advised to put Tsh50,000,000 in M-Wekeza where he could get an average of Tsh500,000 per month, out of which he could live in a rented house for Tsh350,000 per month. The rest, Tsh50,000,000 could be put into mutual funds outlets, for retirement (it may have accumulated to Tsh1.1 billion when he retires).
The mathematics, and reality are not that simple, but the principle is clear. “Invest Yee first in cash generating assets, before you sink your money in real estate”.
It is true that land keep on growing in value with time; after all, as one prominent American once said: “They ain’t making it any more”. Indeed, acquiring land as one of your investment portfolios is recommended.
Land which is going for cheap today, may have turned into a goldmine a decade or two later. Many of us have regretted not acquiring land, which now is highly valuable, when it was presented before us in the not too distant a past, and when it was going for a song.
My take is: Fist, invest your money in cash-generating assets up to a certain level, say having shares worthy Tsh100,000,000.
Acquire land in locations that are promising to be economically active in the future (population, infrastructure, planning). There are risks in keeping land bare since it can be invaded.
Policing, regular presence, legal registration and some minimum investment may be necessary. These are costs that must be factored in. At an opportune time, that land could be sold entirely or after it is subdivided, and get you enough to invest in your house.
Starting investment early in life means that you can put aside little amounts of cash consistently, that can turn into huge sums with the passage of time.
Nobody is disputing the importance of real estate. But it is expensive. It gulps huge sums of money which could be invested elsewhere to yield cash.
Build your liquid net worth first. Buy land for diversification. And even when you eventually go for real estate, start with building a rental income-generating portfolio, before eventually, investing in your home.
Lusugga Kironde is Professor of Land and Urban Economics and lead consultant at TKA Company Ltd
