Investing in buy-to-let property

Creating income streams especially in terms of property and stocks is a handy style of long term investment. FILE PHOTOS. 

By Kenneth Atugonza

The basic reason why we seek employment is to earn a living. We now live in a global village and the cost of living is on the upward trend due to increasing demand for commodities.

Even in good times, your salary will in most cases not be sufficient to enable you to realise all your goals.

For this reason, it is important to consider the prospect of investing your savings to create income streams.

There are different investment vehicles available. With shares, you buy part ownership in a company, with bonds you lend to government/companies and with property investment you acquire a physical asset.

Focusing on private property, this like shares will provide both capital growth (increase in value) and income (rent).

The difference is that with shares you own a very small part of the company of which you (collectively as shareholders) appoint a team of managers to run the company on your behalf who report to you every year at the annual general meeting (AGM).

Property on the other hand is an asset you will own either exclusively or with another person which you manage yourself.

Investment in property can be used to realise both short and long term objectives. In the short term, it provides an income stream and in the long term it can act as part of your retirement plan especially given the unreliability of pension funds.

Governments across the world are struggling to honour state pensions and some pension funds have collapsed. Last week, public sector workers in England held a one day strike because of proposed changes to their pensions.

Our pension sector is in the process of being liberalised but even with good regulation, good pensions are becoming unaffordable to governments and individuals alike.

Given our setting, I am of the view that properties will realise increased rents and an appreciation in valuation because at the moment Uganda has a housing deficit of about 550,000 units with Kampala accounting for 100,000 units.

This will only increase especially given that Uganda has the highest population growth rate in Africa. Banks have realised this and more are entering the mortgage market.

With the availability of mortgage financing, house prices will rise because the number of buyers will increase.
However, many still cannot afford to buy and are opting to rent which is resulting in rent inflation.

Inward migration especially as a result of free movement of labour in East Africa has also contributed to rent inflation. The development of the oil industry will only hasten the trend.

On the caution side, however, like any investment there are risks in property investment. For example, if you bought your house with a mortgage and it has a variable interest rate, this would mean that the interest payments are not fixed but vary.

You will pay more when interest rates increase. The present economic conditions of high inflation and a weak shilling will necessitate a rate hike.

Despite the central bank using foreign currency reserves to buy the Shilling, it has continued to struggle against the dollar.

Inflation is at 15.8 per cent way above the government’s target of 5 per cent. This leaves the central bank with few options but to pursue a monetary tightening policy.

Another risk is that government can intervene and change regulation in the future. Policy change may make prospects of property investment less favourable.

Presently one is eligible to pay tax if he earns above Shs1.5 million (in a year) from rental income. This is of course after deducting all your running costs and the interest on your mortgage (just like business companies).

However, as a result of the tax element, you have to be organised and have a good record keeping system to register all the costs so that you can correctly compute the exact return on your investment as well as pay the right tax.

As an investor, the key measure at the end of the year is the yield (Rent minus running costs/property value) realised.

This tells you the rate of return on your investment. For example, if the property value is Shs200 million and you get annual rent of Shs12 million (Shs1 million per month) with running costs of Shs2 million, the yield would be 5 per cent.

Do not forget that your running costs should include everything from ground rent, insurance premiums, repairs, general maintenance (plumbing, annual checks of appliances etc).

Annual checks may not be mandatory or vigorously enforced in our country but remember this is your investment.

If you have a mortgage, you should aim to have a yield that is higher than the cost of the mortgage (interest rate).

However if it is lower but house price inflation contributing to capital growth of the property, then it makes business sense especially for a long