By Kilundo Mbithi
Research shows that more than 90% of wealth being passed along generations is done through real estate. Now, to pass real estate to future generations, it has to be acquired. A mortgage is one of the primary methods of financing acquisitions. In the real estate industry, there are at least four ventures you can undertake with mortgage financing:
Home purchase
You don’t have to wait until your sunset years to enjoy that dream home. By taking up a mortgage on your dream home, you can immediately start enjoying the dream at a fraction of the cost.
For instance if you would love to live in one of Nairobi’s leafy suburbs where a regular house/apartment ranges from KES15m-30m you don’t have to wait until you have all the cash to start living your dream.
With only so much cash flow and too many priorities, the approach of accumulating such colossal sums may be untenable. Using, a mortgage you can be 90% financed and pay the rest on the go. Furthermore, a mortgage raises the commitment level.
If an apartment that costs KES. 15m, this means you raise KES. 1.5m now and pay the rest in instalments of KES. 162,507 for 25 years. Sounds great? You decide.
Land purchase
Land has been characterized as one of the most solid investments one can make. As a factor of production, land is a finite commodity. Therefore, its value tends to increase as a result of increased demand. However, land is expensive so many people shy away from buying land.
But you don’t have to wait until you accumulate a huge sum of money to acquire this important factor of production. One solution is to get a mortgage. In most cases, by the time you will be completing your mortgage repayments, the value of your land will have appreciated tremendously.
Construction funding
Real estate development projects are capital-intensive. Such large sums of money may be hard to put together at any given time.
Projects such as construction of rental blocks, offices, factory premises, and storage go downs require heavy capital outlays. Financing them through a mortgage is a great way to start benefitting from such developments sooner than later.
Usually, the benefits derived from the use of the premises outweighs the cost of money paid in instalments.
In the end, the mortgage instrument is a great way of harnessing the power of present value of future cash flows.
Real estate business ventures
Apart from developments, there are several other real estate business ventures that require heavy capital outlay such as development of houses for sale, land banking ventures, fix and flip deals, site service schemes and so forth.
Due to the nature of the business, long-term financing arrangements can be greatly be helpful in making them succeed. Having a mortgage on a piece of property that you own can give you huge leverage on cash flows that arise from the business venture.
In general, real estate and finance are closely knit due to their over reliance on each other. That is why it is a preferred instrument in many real estate acquisitions.
The writer is a registered real estate agent and lead investment consultant at investorclinics.com
