Tag: mortgage in zambia

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PART 2: Is Buying a House in Zambia worth it? Should you just buy for the sake of it?

Disclaimer: This information is for general knowledge and guidance only. It does not constitute financial or investment advice.

Is Buying a House in Zambia worth it? Should you just buy for the sake of it? In the last article we talked about how to calculate your return on investment (ROI) using Capitalization Rate. If you haven’t read that article yet, please read it here (https://zambiahouseplans.com/?p=811) 

Let’s continue our assessment by using another method called Cash on Cash Return.

The following methods are suited for people who are interested in knowing the cash flow before investing in a property.

Cash-on-cash return measures the annual pre-tax cash flow generated by a property relative to the total cash invested. In simpler terms, it tells you how much cash you’re getting back on your initial cash investment.

Let’s use the same example of a block of flats in Chalala, Lusaka. Grab a pen and paper.

STEP 1. CALCULATE YOUR ANNUAL PRE-TAX CASH FLOW (APCF)

This is the net income you receive from the property after deducting operating expenses and mortgage payments, but before accounting for income taxes.

  1. Determine Gross Annual Rental Income
  • Research comparable rentals in the area to set a competitive market rate. Be realistic.
  • Consider factors like size, amenities (e.g., parking, appliances), and property condition.
  • Rent in Chalala 2 by 2 bedroom house R= 5,500 x 2= 11,000 per month
  • Multiply monthly rent by 12 months account for potential vacancy periods (e.g., between tenants). 
  • Gross Annual Rental Income= K11,000 * 12 months= K132,000
  1. Determine Annual Operating Expenses (AOE)

Add up all the annual operating expenses you expect for example:

  • Mortgage Payments: Include principal and interest.( Let’s assume 4,500/month
  • Insurance: Many people in Zambia don’t take this seriously but please insure your house.
  • Utilities: (If you pay any)
  • Maintenance and Repairs: (Estimate for routine and unexpected costs)
  • Property Management Fees: (If applicable)
  • Vacancy Costs: (Estimate potential lost income during vacant periods)
  • Total Annual Operating Expenses (AOE)= K90,000 (just an example factoring in all the above, )
  1. Annual Pre-tax Cash Flow (APCF)

= Gross Annual Rental Income – Annual Operating Expenses

= GARI – AOE

= 132,000 – 90,000

APCF = K42,000

STEP 2. CALCULATE TOTAL CASH INVESTED

This is the total amount of cash you put into the property upfront. This includes down payment, closing costs and any initial renovation or repair costs.

Let’s assume you purchased the property including closing costs and renovations for K1,000,000.

Then:

  • Cash-on-Cash Return = (Annual Pre-Tax Cash Flow / Total Cash Invested) x 100

= (42,000/1,000,000)*100

Cash-on-Cash Return = 4.2%

This means you’re getting a 4.2% return on your initial cash investment each year. Is this good enough for you?

  • Interpretation:
    • Higher Cash-on-Cash Return: Indicates a higher percentage of your initial investment is being returned annually in cash flow. This can be very attractive to investors.
    • Lower Cash-on-Cash Return: Suggests a lower immediate return on your initial investment.

To increase the percentage, you can either have higher rent or ensure your initial investment is as low as possible by negotiating and making sure you assess the renovation costs accurately before buying by engaging a professional. It can also help you choose which loan/finance to use.

  • Key Considerations:
    • Investment Strategy: If your primary goal is immediate cash flow, a higher cash-on-cash return is more desirable.
    • Pre-Tax: Cash-on-cash return is calculated before taxes, so it doesn’t reflect your actual after-tax profit.  
    • Leverage: Cash-on-cash return is heavily influenced by the amount of leverage used (mortgage financing).  
    • Cash Flow Focus: This metric primarily focuses on cash flow, not property appreciation.
    • Short-Term View: It provides a snapshot of the current year’s return only, not the long-term overall return on investment.  

Cash on cash return is a very useful metric, but should be used in conjunction with other metrics such as cap rates.

So tell me, does the result of this calculation matter to you or are you buying real estate regardless of the returns?

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Seizing the Opportunity: Buying Foreclosed and Repossessed Properties in Zambia

In our inaugural issue of the Builders Blueprint, we talked about buying land from the councils as an affordable option available to everyone. The Zambian real estate market presents a unique opportunity for both local and international investors. Today, let’s talk about the acquisition of foreclosed and repossessed properties by banks and financial institutions. 

This often happens when someone borrows money to buy a property or borrows it for other purposes but puts the house as collateral. When they fail to pay back, the bank takes back the property. This leaves the bank with excess stock of properties. Banks are not in the real estate business, they are in the money business. 

There is a growing number of properties being foreclosed as evidenced in the local newspapers and bank websites. This offers a chance to acquire land and houses at potentially significant discounts. Let’s analyze this opportunity.

The Benefits of Buying Foreclosed Properties

  1. Affordability: Foreclosed and repossessed properties are often sold at a substantial discount compared to market rates. This is because the bank would rather get rid of the property and use the cash for other investments. They set a minimum sale value however, in some cases it might be possible to go lower if the conditions are in your favour.
  2. Investment Potential: As the Zambian economy continues to grow, real estate investments can yield significant returns. 
  3. Diverse Property Options: Foreclosed properties range from residential homes to commercial properties, offering a variety of investment opportunities. Sometimes foreclosed homes are in very good locations which can yield great returns when repurposed.
  4. Legit Business: the process of lending money or offering a mortgage by banks and financial institutions requires them to carry out background checks and check legitimacy of the property. Therefore, foreclosed properties are already vetted by the bank to be legitimate. This is half of our work done for us by others for free.

Potential Challenges

  1. Legal Complexity: Navigating the legal process of acquiring foreclosed property can become complex and time-consuming. It’s always advisable to consult with a local real estate lawyer to ensure a smooth transaction.
  2. Property Condition: Foreclosed properties may require significant repairs and renovations.The properties can range from new to very old. It’s important to exercise due diligence before making the bank an offer.
  3. Market Fluctuations: Real estate markets can be volatile, and economic factors can influence property values. Sometimes properties may be marked up due to market fluctuations or the bank attempting to recover their moneys.

The Diaspora Advantage

Zambians in the diaspora and foreign investors are uniquely positioned to capitalize on this opportunity. With a global perspective and access to international financial markets, they can leverage their knowledge and resources to identify lucrative deals. Additionally, diaspora investors can often secure financing from international institutions, providing them with a competitive edge.

Key Considerations for Potential Buyers

  • Thorough Due Diligence: Conduct a comprehensive property inspection to assess its condition and potential value.
  • Consult Local Experts: Seek advice from local real estate agents, lawyers, and property managers to navigate the intricacies of the Zambian market.
  • Secure Financing: Explore financing options from local and international lenders.
  • Consider Long-Term Plans: Determine your investment goals and whether you plan to rent, sell, or develop the property.

By carefully considering these factors and taking advantage of the opportunities presented by the foreclosed property market, individuals and investors can make sound real estate decisions in Zambia. WOULD YOU FEEL GUILTY BUYING A PROPERTY THAT WAS FORECLOSED?