Is buying property a good investment?

Is buying property a good investment? Which is better: buying a car for an Uber business or purchasing land?

According to Trading Economics, the inflation rate in Kenya as of July 2022 was 8.3% the highest recorded increase since 2017.

Investing in both land and or a car for Uber business is both profitable since both a car and land are assets. However, which is better? Which will act as a buffer against the rising inflation? Join me as we go through which option is better. Which option will bring a better return in 5 years?

A Car for Uber business

The cost of purchasing one, getting an insurance cover, registering it, and other charges involved is Kes 1,000,000.

Let’s now look at the net annual income and assume you place it on a taxi-hailing company like Uber.

INCOMEDEPRECIATION
Year 1Year 1
Net Monthly Income = 40,000Original Value = 1,000,000
Net annual income40,000*12= 480,00030%*1,000,000= (300,000)
 Value                = 700,000
  
Year 2Year 2
Net Monthly Income = 35,000Value            = 700,000
Net annual income35,000*12= 420,00030%*700,000= (210,000)
 Value            = 490,000
  
Year 3Year 3
Net Monthly Income = 30,000Value            = 490,000
Net annual income30,000*12= 360,00030%*490,000= (147,000)
 Value             = 343,000
  
Year 4Year 4
Net Monthly Income = 25,000Value            = 343,000
Net annual income25,000*12= 300,00030%*343,000= (102,900)
 Value             = 240,100
  
Year 5Year 5
Net Monthly Income = 20,000Value            = 240,100
Net annual income20,000*12= 240,00030%*240,100= 72,030
 Value             = 168,070
  
Total Net Income = 1,560,000Salvage Value = 168,070

So, the total Net income after 5 years                =Kes 1,560,000

Less original cost of the car.                       =Kes 1,000,000

                                                                                       560,000

Add car scrap value.                                             =Kes    168,070

Profit from the use of the car for 5 years =Kes.   728,070

Assumptions:

  • The car will lose value every year of 30% pa as a result of wear and tear and the care being obsolescence.
  • That the value of the monthly income reduces each year by Kes. 5,000
  • That the car was on hire for the duration of 5 years.
  • That the vehicle brought in income therefore, all cash was profit to the investor.
Land

Scenario 1

The original price is Kes 1,000,000

Appreciation rate: 10%pa

After 5 years, the value of land will be 1,000,000 * (1+10/100) ^5 = 1,610,510

Profit =1,610,510 – 1,000,000 = 610,510

Scenario 2

The original price is Kes 1,000,000

Appreciation rate: 20%pa

After 5 years, the value of land will be 1,000,000 * (1+20/100) ^5 = 2,448,320

Profit = 2,448,320 – 1,000,000 = 1,448,320

Assumptions:

The appreciation is higher than the inflation rate as real estate investment is known to form a hedge against inflation.

Land as an asset can never depreciate as it’s considered to have an infinite useful life.

Scenario 1: Appreciation rate is 10% pa in places that have moderate demand for land.

Scenario 2: Appreciation rate is 20% pa in places that have a high demand for land.

The land is assumed to be vacant with no economic activity taking place.

Comparison

For the purposes of constant income and cash flow, buying a car is a suitable idea. However, the income earned should be re-invested in either the purchase of another car or in a more stable investment.

Additionally, for those who are risk averse, you can consider purchasing a piece of land and selling it in the future at will.

Land is a unique asset whose value cannot depreciate.

With land, you can construct a property on it, which as a form of real estate its value of depreciation is low, and you can generate income from rent.

In conclusion

Buying property is a good investment as investing in land is more profitable in the long term. However, if you’re looking for a short-term investment, consider buying a car for the Uber business.

Just be sure to use your profits wisely because, unlike land, the value of a car depreciates within time hence you can use the profit to re-invest on a lasting investment like property or land or in buying another car to keep your business going.

Owing to the rising in inflation levels, there will be an increase in rental units as individuals will prefer renting a house rather than being a landlord. You can take advantage of the gap now and invest in land and residential real estate. 

Check out the best real estate for sale in Kenya. Happy investing!

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