Purchasing land is frequently seen as one of the best investments. It’s palpable: they’re not producing more of it, and population growth suggests that’s an intelligent decision.
However, as with any investment, there are instances when it’s not a wise choice.
In many cultures, being a landowner is considered a great accomplishment and a sign of prosperity. This is especially true in Kenya, where there is a strong desire to own land.
However, for people just beginning their financial journey, the conventional recommendation to invest in land may not necessarily be the wisest course of action.
Let’s examine why purchasing land might not be the best financial decision for everyone.
Table of Contents
Comprehending Assets and Cash Flow.. 1
The Problem with Investing in Land. 1
3. Appreciation vs. Inflation: 1
Options for Alternative Investments. 1
2. Treasury Bills and Bonds: 2
A Long-Term View on Wealth Creation. 2
2. Consider Alternative Investments: 3
3. Seek out Income Opportunities: 3
Comprehending Assets and Cash Flow
Cash flow and assets are the two main ideas in personal finance.
Cash flow is the money you make that you can easily spend on your needs and desires. For instance, your cash flow is represented when you receive your salary.
Conversely, an asset is anything you hold, such as stocks or land, that has the potential to increase in value over time or produce income.
The Problem with Investing in Land
The conventional suggestion may be to purchase land after receiving your first sizable sum, such as a loan of one million or a salary of five 5,000 Kenyan shillings.
The justification is that having land is a symbol of security and prosperity. However, there are a few drawbacks to this strategy:
1. Dead Capital
Land becomes dead capital if you purchase it but lack the funds to develop it.
Although it doesn’t bring in any money, it is an asset. Especially if you’re paying off a loan you took out to purchase the land, this idle cash prevents you from increasing your wealth.
2. Cash Flow Constraints:
Taking out a loan to purchase land requires devoting a sizeable amount of your monthly income to loan repayments, even for someone making 55,000 shillings.
Your cash flow decreases to 30,000 shillings if your loan repayment is 25,000 monthly. This makes saving money for other investments and covering daily costs more difficult.
3. Appreciation vs. Inflation
Kenya’s average annual land appreciation rate is 7%.
However, given current inflation rates of approximately 7.6%, the actual value of your investment may decline over time.
Even when the nominal worth of your land seems to improve, you ultimately lose purchasing power.
Options for Alternative Investments
Rather than investing in real estate, think about other options that can increase your cash flow and yield higher returns:
1. Money Market Funds
These funds give better returns than the typical land appreciation rate by investing in short-term, low-risk securities.
A money market fund, for instance, might yield roughly 10% after fees and taxes, providing you with a higher return on investment than real estate.
2. Treasury Bills and Bonds
Government securities are another secure investing choice.
They can be an excellent method of building your money without the dangers of investing in land because they yield steady profits.
3. Expanding Your Business:
If you own a company, investing earnings back into growing it might provide greater returns than buying real estate.
Growing your business can give you more financial stability and development possibilities by boosting revenue and improving cash flow.
A Long-Term View on Wealth Creation
Growing wealth rather than storing it should be your main priority when you’re young.
Investments that increase cash flow and yield higher returns are preferable to ones that lock up your money and don’t produce revenue.
When retirement draws near, switching to safer investments, like real estate, may make more sense because the goal at that point is to preserve wealth rather than increase it.
Considering that land is scarce, investing in it is frequently regarded as a wise long-term move. Land in emerging suburbs is to be purchased, held onto for over a decade, and then sold to a builder or after being turned into a residential area.
Is this a wise investment, though? Based on the knowledge and experiences that others have offered, let’s examine the possible advantages and disadvantages.
Why Invest in Real Estate?
The land is scarce, making it an attractive investment.
In Mark Twain’s immortal words, “Buy land; they’re not making it anymore.” Urbanization and scarcity frequently raise land values, particularly in the periphery of expanding suburbs.
Possible Advantages
1. Appreciation
Land prices have the potential to rise dramatically, especially in developed areas.
Purchasing land close to an expanding suburb may help you capitalize on the increased demand as the area grows.
2. Long-Term Growth
If land is held for more than ten years, it will likely increase significantly, particularly if the area experiences significant development.
During the conversation, a man showed how an unanticipated boom in the area caused surrounding parcels of land to appreciate dramatically.
3. Flexibility:
While you wait for the land’s value to rise, you may use it for various interim purposes, such as farming, renting it out for farming, or even setting up a campsite that will bring in some cash.
Hazards and Difficulties
1. Speculative Nature
Purchasing land is risky, particularly if you hope a developer will buy it.
There’s no assurance that development will take place or will do so in your chosen time frame. One commentator pointed out that the procedure might not occur at all or take decades.
2. Lack of Liquidity
An asset such as land is not liquid.
It can be challenging to sell it quickly, especially at a reasonable price. You may need to hold onto it longer than planned, which would tie up your cash and require you to pay taxes and maintenance fees in the interim.
3. fees
Land ownership entails carrying expenses such as insurance, property taxes, and, occasionally, upkeep fees.
These may reduce your possible earnings significantly if the land doesn’t increase as quickly as you had anticipated.
4. Market Volatility
The real estate market might change suddenly. Population growth trends, development plan modifications, and economic downturns may impact the value of your investment.
One user mentioned land bought to be developed, and in some instances, it appreciates far more slowly than constructed properties.
Investors’ Advice
1. Do Extensive Research
Before purchasing, look at local zoning regulations, proposed developments, and the area’s general growth trajectory.
If you intend to rezone the site for residential use, ensure it has that potential. Comprehending local laws, water rights, and other issues is essential.
2. Consider Alternative Investments:
Some believe that other investments, such as stocks or real estate investment trusts (REITs), offer superior returns with less risk and more liquidity.
One user suggested that long-term returns on investments in the S&P 500 would be superior to those in real estate.
3. Seek out Income Opportunities:
If you choose to invest in land, consider ways to earn money while waiting for appreciation.
Possible uses include renting it out for farming or establishing a campground.
conclusion
Investing in land close to expanding suburbs can yield long-term profits, but many dangers and difficulties are involved.
It takes patience, in-depth study, and a firm grasp of the market’s mechanics. While it can yield high profits, it’s essential to balance the dangers and advantages of investing and consider diversifying your holdings to reduce losses.
conclusion
Land ownership should not be the default option for everyone, especially for those just starting in the financial world, even though it can be a part of a diverse investment portfolio.
Achieving financial stability and success requires analyzing the actual returns on land, thinking about alternative investments, and concentrating on wealth accumulation.
By making wise investment decisions, You may make sure your money works for you instead of investing in things that don’t advance your financial situation.
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