When it comes to making long-term financial decisions in Kenya, buying a home often stands out as a significant milestone. While the emotional and social benefits of homeownership are well-recognized, the financial advantages are equally compelling. In this blog, we delve into five financial reasons why purchasing a home in Kenya is a smart investment, backed by insightful excerpts from a comprehensive study.
1. Leverage Your Investment with Homeownership
One of the most compelling financial reasons to buy a home in Kenya is the unique opportunity for leveraged investment that it offers. Unlike other types of investments, where borrowing money to invest is less common and more difficult to obtain, homeownership allows individuals to leverage their investments in a significant way.
“Few households are interested in borrowing money to buy stocks and bonds and few lenders are willing to lend them the money. As a result, homeownership allows households to amplify any appreciation on the value of their homes by a leverage factor. Even a hefty 20 percent down payment results in a leverage factor of five so that every percentage point rise in the value of the home is a 5 percent return on their equity. With many buyers putting 10 percent or less down, their leverage factor is 10 or more.”
This means that even small increases in home value can lead to substantial returns on investment. For instance, with a 20% down payment, a 1% increase in the home's value translates to a 5% return on equity. With lower down payments, this leverage can be even greater, offering a potentially lucrative investment opportunity.
2. Convert Housing Costs into Equity
A fundamental truth of living expenses is that you will always have to pay for housing. However, the financial dynamics differ significantly between renting and owning.
“Homeowners pay debt service to pay down their own principal while households that rent pay down the principal of a landlord.”
When you own a home, your monthly mortgage payments contribute to building equity in your property. In contrast, rent payments help build the landlord's equity. Over time, homeownership can convert what would have been rental expenses into a valuable asset that can be leveraged for future financial security.
3. Homeownership as a Form of Forced Savings
For many, saving money consistently can be challenging. Homeownership acts as a mechanism for forced savings, ensuring that a portion of your monthly payments goes towards building your own wealth.
“Since many people have trouble saving and have to make a housing payment one way or the other, owning a home can overcome people’s tendency to defer savings to another day.”
By making regular mortgage payments, homeowners are essentially saving by paying down the principal on their loan. This creates equity, which can be a powerful tool for financial stability and growth. It’s a way to accumulate savings indirectly, through the necessity of making housing payments.
4. Enjoy Tax Breaks and Incentives
Tax benefits are a significant financial incentive for homeowners in Kenya. The current tax code offers several advantages that can reduce the overall cost of owning a home.
“Homeowners are able to deduct mortgage interest and property taxes from income...On top of all this, capital gains up to a certain threshold are excluded from income if they sell their homes for a gain.”
These tax deductions can make a considerable difference in a homeowner's annual tax bill. The ability to deduct mortgage interest and property taxes reduces taxable income, leading to potential savings. Additionally, the capital gains exclusion on the sale of a primary residence provides a substantial financial benefit, allowing homeowners to keep more of their profits.
5. Shield Yourself from Inflation
Over time, inflation erodes the purchasing power of money, making the cost of goods and services more expensive. Owning a home can serve as an effective hedge against this economic phenomenon.
“Housing costs and rents have tended over most time periods to go up at or higher than the rate of inflation, making owning an attractive proposition.”
As inflation drives up housing costs, having a fixed-rate mortgage ensures that your principal and interest payments remain stable. This stability can protect homeowners from the rising costs of living and provide a sense of financial security. In contrast, renters are more vulnerable to increasing rents, which can strain their budgets over time.
Bottom Line
Homeownership is more than just a dream for many Kenyans; it’s a financially savvy decision. From the leverage opportunities and the shift from paying rent to building equity, to the forced savings mechanism, substantial tax benefits, and protection against inflation, owning a home offers numerous financial advantages.
Understanding these financial benefits is crucial for prospective homeowners in Kenya. By leveraging tax incentives and the potential for investment returns through home equity, homeowners can enhance their financial stability and build long-term wealth. If you’re considering homeownership in Kenya, these five reasons should solidify your decision to invest in your future through property ownership.
