Developing property for renting out versus developing property for sale

The end of a year and the beginning of a new one is a transition period looked upon with sentiments of hope by many. It is a chance to reflect on the hits and misses of past seasons and to strategise for times ahead.

Whether it is a personal goal you started the year with but never got to see through, or long-held investment plans that have been collecting dust in a bookshelf or cabinet somewhere, this could be finally the time you get to turn dreams into reality.

Amongst many investment paths one can take in real estate, property development is one of the most lucrative options, but sometimes reaching a conclusion on the finer details of this kind of investment can be quite challenging.

Today we enlist the help of Patrick Ngechu, CEO Patmons Properties Investment Limited, and ask him to break down two investment portfolios common within the Kenyan market: developing property for sale, or developing property for renting out.

Key differences

There are three key differences to consider when choosing between developing property for renting out versus developing property for sale.

Return on investment

One of the primary differences is the potential return on investment. Developing property for sale can be a good option for investors looking to make a larger profit in a shorter amount of time.

When a property is developed for sale, it can often be sold at a higher price than a comparable rental property, due to the added value of ownership.

This means that investors can potentially make a larger profit from developing property for sale. Additionally, developing property for sale allows investors to diversify their investment portfolio and potentially capitalise on market trends and fluctuations.

That said, developing property for rent can be a good option for investors looking for a steady stream of income. Renting out property can provide a reliable source of income each month, as long as the property is well-maintained and located in a desirable area.

Initial investment

Another key difference is the amount of time and effort that goes into each type of development. Developing property for sale often requires a significant upfront investment, as well as a significant amount of time and effort to design, build, and market the property.

Properties developed for sale often need to be more luxurious and have more high-end features to appeal to buyers. Additionally, the process of selling a property can be time-consuming and costly, and there is always the risk that it may not sell as quickly as expected.

In contrast, developing property for rent typically involves a lower upfront investment and may require less time and effort to manage once it is complete. Rentals do not need to be as luxurious or have as many high-end features

Type of property and land size

Another important consideration is the type of property you are developing. Developing single-family homes or luxury estates may be better suited for sale, however, this might only be possible if you have a huge piece of land, while developing multi-family homes or apartment buildings is more suited for rentals, and can be undertaken on smaller pieces of land.

Factors to consider when investing in rental property

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Location: Location of the property is one of the most important factors to consider, as it can greatly impact the demand and income it generates. Areas with strong job growth and good schools tend to be more attractive to potential tenants. Location can also affect security, a major concern for potential clients.

Potential income: Before investing in a rental property, it's important to carefully research the potential income it could generate. Look at comparable properties in the area to get a sense of what you can expect to earn. As this is a long-term investment, understanding this factor will enable you set realistic expectations.

Financing: The cost of financing a rental property can have a major impact on your return on investment. Carefully research different financing options and consider factors such as interest rates and loan terms before making a decision.

Tax implications: Rental properties can have significant tax implications, so it's important to understand how owning a rental property will affect your tax situation. Consider consulting a tax professional to get a better understanding of the tax implications of owning a rental property.

Management: If you don't plan on managing the property yourself, you will need to hire a property management company to handle the day-to-day tasks involved in running a rental property. Consider the costs and services offered by different property management companies before making a decision.

Insurance: While landlord insurance is not mandatory under Kenyan law, insuring your property will give you peace of mind and protect your investment against potential risks such as damage to the building fixtures and fittings, loss of property contents (for furnished apartments) and third-party liability. Make sure to research different insurance options and understand the coverage they provide before purchasing a policy.

Market conditions: The overall market conditions can also have a significant impact on the success of your rental property investment. Look at factors such as the local economy, housing market and demand for rental properties in the area before making a decision.

Legal considerations: There are also legal considerations to keep in mind when investing in rental property, such as zoning laws. Ensure you understand the laws and regulations that apply to rental properties in the area and consider consulting a lawyer if you have any legal questions or concerns.

Your own financial situation: Carefully consider your own financial situation before investing in rental property. Make sure you have the financial resources and stability to handle the costs and responsibilities of owning a rental property and consider seeking the advice of a financial professional if unsure. It is also important to keep in mind that rentals are a long-term investment and might therefore take time to return money invested.

Factors to consider while investing in property for sale

Location: Is critical to any real-estate investment. Location is crucial because it can have a major impact on the value of the property and its potential for appreciation. You should look for properties in areas with strong economic growth, good schools, and other amenities that are attractive to potential buyers.

Market trends: It is important to research the local real estate market to understand current trends and conditions. This can help you make informed decisions about when to buy and sell property and what prices to expect. If the market is good and prices are high, building homes for sale can be a good investment, however, if the market is performing poorly, a safer investment might be rentals.

Financing: When investing in property, you will need to consider your financing options. This could include taking out a mortgage, using savings, or seeking investment from others. It is important to carefully consider the costs and terms of any financing to ensure that it is affordable and manageable.

Size and layout of the property: The size and layout of the property can affect its value and appeal to potential buyers. For example, a large property with multiple bedrooms and bathrooms may be more desirable and command a higher price than a smaller, more compact property.

Style of the property: While building property for sale, it is important to keep in mind that the buyer will own the property on a permanent basis unless they decide to sell it. Where possible therefore, building as per the buyer’s taste might be more prudent. A simpler solution, as people may have very diverse tastes, would be having a general design plan that fits a certain style, so that even as clients approach you, they already have a clear image of what the houses look like, or will look like.

Potential for development or expansion: If you're considering buying a property with the intention of developing it or expanding it in some way, it's important to carefully evaluate the potential for doing so. This could include considering zoning regulations, the availability of building permits, and the potential costs and benefits of the development.

Competition: When investing in property, it's also important to consider the level of competition in the local market. This can help you understand the potential demand for the property and determine whether it is likely to be a profitable investment.

Risks: As with any investment, investing in property carries some level of risk. It's important to carefully evaluate the potential risks and consider how they may impact your investment. For example, risks could include changes in the local economy, natural disasters, or market fluctuations.

Pros and Cons of rental property

Investing in rental property can be a great way to earn passive income and build wealth over time. Some potential benefits of investing in rental property include:

Steady cash flow: If you're able to find a property with good rental demand, you can expect to receive regular rental payments that can supplement your income.

Potential for capital appreciation: Over time, the value of your rental property may increase, which can provide you with a nice return on your investment if you decide to sell.

Leverage: When you invest in rental property, you're able to leverage the money you've invested to borrow additional funds to purchase more properties. This can help you grow your real estate portfolio more quickly. There are, however, some potential drawbacks to investing in rental property that you should be aware of:

Ongoing maintenance costs: As a rental property owner, you will be responsible for maintaining the property and making any necessary repairs. This can be costly especially if you have multiple properties.

Tenant issues: Dealing with tenants can be time-consuming and challenging, especially if they are difficult or unreliable. You will need to be prepared to handle tenant complaints, evictions, and other issues that may arise.

Limited liquidity: Unlike stocks or other investments, it can be difficult and time-consuming to sell a rental property. This lack of liquidity can make it harder to access the money you have invested in your property if you need it for other purposes.

Pros and Cons of property for sale

Some potential pros of investing in property for sale include the potential for capital appreciation, and the potential for a one-time, large profit upon the sale of the property.

Some potential cons of investing in property for sale include the risk of the property not selling, the potential for significant upfront costs such as a down payment and closing costs and the need to continuously search for and acquire new properties to maintain a steady investment income.

Overall, the decision to develop property for rent or for sale is a complex one that will depend on a variety of factors, including the current state of the real estate market, the investor's financial situation, the type and location of the property, and the investor's goals and priorities. It is important for investors to carefully consider all of these factors before making a decision.

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