Why building rentals maybe a mistake!

Ugandans love building rentals, apartments and malls. It seems everyone who “gets” a good deal of money rushes to build some kind of rental. Obviously real estate should form part of any mature asset portfolio. Rentals are a good long term investment which can give you a steady stream of cash-flows. You can also mortgage the assets to get more funding from banks.

However rentals are not necessarily the best investment for your money especially when you are starting out. The returns on rentals are typically long term. It can take quite a while to fully get your money back in some areas. I have run some models and simulations and it could take you typically 10 to 15 years to earn your money back from residential units.

Plus you need a large capital layout. A small plot of land in Kyanja will easily cost you UGX 100m. Putting up decent rentals might cost you another UGX 300m. And you might struggle to charge a sensible rent per unit. Not many Ugandans can easily come up with such capital without borrowing. If I invested this UGX 400m in Treasury bills at 12% I would easily earn 4m a month without doing much and with my capital secured.

Buying land and supervising the construction process can be quite a hustle for a novice. If you are not careful you may buy encumbered land or the foreman will cheat you.

Depending on the location, the value of the property will take ages to appreciate. It is also difficult to easily sell of a physical property. In cases of emergency the asset may be sold off at a lower price. I can easily liquidate part of my Treasury bill at a small cost.

And then there is dealing with the tenants and all the headache which comes with it. And sometimes you have vacancies to deal with and defaulting tenants. Many malls and arcades have empty spaces around town.

Buildings continuously deteriorate and you have to keep maintaining them. So one has to factor in the cost of maintenance including re-painting, repairing broken pipes and tiles, and landscaping. 

If you have some little cash to spare I would recommend starting with simple investments like Unit trusts and Treasury bills. The minimum investment required is only 100k. For only a few shillings you become an “Investor.” As you learn more and accumulate more capital you can then start playing around with rentals.