When Joe Kariuki’s fortunes changed after a handsome bonus in a particularly bumpy returns season in 2018, he did what any sound investment-conscious person would do; cement and diversify his income revenue streams even further. Mr Kariuki used the money as a down payment for a second three-bedroom apartment in Nairobi’s Kilimani. For Sh14.35 million in a market where a three-bedroom unit was averaging Sh18.5 million, he thought he had landed a deal. He put down the 10 per cent deposit and secured a mortgage with a local bank for the rest of the financing.
Little did Mr Kariuki know that he was going down a rabbit hole that would prove to be a constant pain on the backside. Mr Kariuki was required to pay roughly Sh200,000 a month to service the mortgage for a period of 15 years at 14 per cent interest rate.
As a homeowner already and with investments spanning farming to shares in various listed companies and still a director in two companies, paying the mortgage was not going to be a challenge.
“I realised the mistake I had made after I had signed the dotted line and was on the third month into making the payments,” said Mr Kariuki. “While in the long run real estate is a great investment, in the short to medium term the investment was proving costlier than I had hoped. Securing a tenant took six months. Meaning that those six months I had to pay the mortgage directly from my pocket.
In addition, when I got a tenant, the net income from the rent payments was not as high as I had initially thought. I had to be competitive to get a tenant because the unit was not going to be empty any longer.”
According to Amish Gupta, managing director of AG Capital, Mr Kariuki had fallen into the negative equity trap. “This is when a homeowner would receive nothing from a willing buyer as all the proceeds have to go to the mortgage financier,” said Mr Gupta. Basically, if Mr Kariuki had decided to sell the unit, he wouldn’t earn anything on it or even still would be required to top up a difference to the bank to off-load the unit. The price the unit would have attracted would have been lower than what it was bought at.
In addition, renting the unit out as Sh130,000 a month, the rental income was not sufficient to service the mortgage of Sh200,000. Mr Kariuki needed to top up Sh70,000 every month.
According to Mr Gupta who is a registered investment and transaction adviser by the umbrella body Institute of Certified Investment and Financial Analysts, approximately Sh28 billion out of Sh245 billion was non-performing as of December 2021 from the CBK fall into the bracket of negative equity loans.
“What can you do if you find yourself in a negative equity scenario? Inject lump sum equity or consistent equity, explore interest-only mortgage where the principal is paid lump sum after a period or sell and lease-back the property until the mortgagor can buy back the home.”
Mr Njenga recommended paying off the mortgage loan as quickly as possible. But first, a buyer needs to ensure that the valuation of the property is right. “A good quantified valuation report means buying the property at the right price,” said Mr Njenga. Mr Gupta on the other hand calls for: “International standards on valuation such as Royal Institution of Chartered Surveyors should increasingly be the minimum requirement in all property segments,” and that “licensed institutions should follow statutory/regulatory requirements as regards impairments policies, subsequent classifications and provisions,”
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