Getting on the housing ladder is easier than you think
One of the biggest obstacles to middle-class growth is the high cost of getting a loan to buy a house. We expect to walk into a bank and sign our way into middle-class life, but when the reality hits it is much harsher, 22% per annum is a killer. Firstly we must disabuse ourselves of the notion that you can become middle-class overnight, it requires sacrifice of a minimum of ten years even if your parents are middle-class.
There is no reward without sacrifice, that 50k a week you spend on going out weekly is more than enough to get you comfortably on the housing ladder. Firstly, start saving now, immediately, if you save $300 a month for 5 years, you will have $3,600 a year and $18,000 in 5 years. The dollar will have gone up 20% in that time with 4% inflation so equivalent of $21,000. The most important thing is you show the bank financial discipline, that cuts down the risk and the interest rate. Then build a basic house with that $21,000 then ask the bank for a loan to complete it. That weekly craze of going out and spending up to 400k a month going out is deadly, I easily spend that some months and so do my friends but we all complain about how hard the housing ladder is. Wealth is deferred spending, in order to be wealthy, someone had to sacrifice and not spend so the money could accrue. Stop spending now, sacrifice now because houses get more expensive by the minute.
Before we get more people on the housing ladder, we need to protect those already on the ladder. Mortgage insurance should be a legal requirement, to cover payers up to 6 months if they are hit by sudden illness or misfortune. We should charge a property tax on sales to protect homeowners, a 5% tax to the social security board. This would cover people who are unemployed for short periods and risk falling off the ladder. The government declares a moratorium on mortgage payments and pays the interest due, but the principle remains the same. This saves middle-class families from going bankrupt, it is not in the Govt interest for people they spent so much money educating to fall off the ladder. We need safety net provisions as many families fall through the cracks because of three bad months. Just getting RSSB to ask the banks to lay off repossessing their house would have saved them. The government has to use its influence against banks that sometimes make short term decisions with long term consequences. Government can order banks to hold off repossessing, pay interest and recoup it on taxes. Social security for the poor means monetary assistance, social security for the middle-class means protective legislation.
Money gives you options, the more money, the more options you have and you can start now. Think outside the box, stop trying to replicate the mistakes of others and do things the right way. Expand your timeframe to 10-20 years, break it up into sections, first save, then build a basic frame and then borrow to complete it. The market has high rates because of an inefficient system with a blanket rate, but you can get a lower rate if show you have financial discipline and a good record of money management. You develop a good relationship with your bank manager and they offer lower rates.
As an individual you stand little chance, but as a collective you stand a better chance. One serious person is a risk, but four serious people reduces the risk significantly. If you have 5 friends you have known all your life, then get together, save together, design a project with 6 houses, owned jointly until the loan is paid. You can make savings by banding together, buy bigger quantities and save, save on transport, save on taxes, use the same crew, architect, engineer, and reduce costs by up to 30%. The most important thing is you keep a check on each other, when one of you goes out and blows 200k on a boozy night, the others quickly intervene. So it acts as a check of human behavior, the one thing a bank can’t control. Each is responsible for 16.6% of the loan but if one has a bad month, the others can chip in an extra 3.4% but not for long. Shared ownership builds stronger communities, friends can have the bonus of having their kids grow up together and have a safety net to back you up. After the loan is paid you can separate from the joint holding to single-ownership, or expand the estate and pay off the loans quicker.
Rent to own
I pay around $400 rent, I have given my landlord some $30,000 in the 6 years I have lived here, I deserve a slap and a finger in the face to lecture me. You can agree with your landlord to rent to buy, if the house is 300k, pay 500k and own it in 10 years, the landlord builds a bigger house and leverages a 50m house into a 120m house. That way the property is properly cared for and payments are guaranteed, people have a sense of ownership and even add value. Put up an extension, install solar and biogas, make home improvements like adding tiles, landscaping, knowing after 10 years you own it. You can even sell it for 80m and play the property market. Most landlord use rents as income, that is the worst thing you can do, you should use rents to expand your property portfolio. After 10 years a landlord is exactly where she or he was before, if not worse because they cannot charge the higher rents of before. If you could agree a 10 year plan, they build another house, and you pay off that house of more value. The basic frame of even the most expensive houses is just a fraction of the cost, the finishing is the biggest cost but least value.
If you have worked at the same place for 5 or more years, and you have a long term contract, get together with other workers and ask for a mortgage. It works for the company because it helps retain staff but also works for the employee in helping them climb the ladder. Sometimes the company bears no cost, the bank comes in to manage. When you are seeking a job, don’t always look at the salary, look at benefits like mortgages and affordable loans to start a side business. If your company does not offer mortgages then get together with other long-term workers to advocate for a mortgage, or a company estate for cheaper rents. If you are self-employed, then band with other people in your predicament, form a savings union and get a larger amount to leverage cheaper prices.
Assuming a mortgage
In Rwanda, some banks have a default rate of 11%, the bank loses, the home-owner loses the house but is still burdened with debt they can’t pay. The house is sold on auction for less than cost, there is another way – assume a mortgage. When you see a person about to default, ask them if you can assume their mortgage, you take over the debt and deed, the owner walks away debt-free. This requires having inside information but news like this is openly available in Rwanda, they even print the names on walls and newspapers. A White Knight rides in on a horse, offers to assume the debt and saves both sides a loss, this allows a negative outcome to be avoided, and allows others to climb the property ladder. You’d be amazed the deals you can get, what is beyond one person’s means can be easy for you. Some guys can’t pay 200k for their mortgage, I would gladly take it over for free rent
You are like a little ant to a bank, they are used to dealing with billion-dollar corporations, so you are very small by comparison. Form a Housing Cooperative, each of you has equal share, pay the same subscription fee and get the same dividend. If you save 15m, get together with 50 other people, and you have 750m and can buy a big piece of land somewhere. You can make your own neighborhood, go out of the way but start your own little town. With 750m you can buy trucks, excavators, bulldozers, equipment, a quarry, sand pits, you can buy cement at 30% less on discounted wholesale prices. If your cooperative is 100 people it becomes cheaper for members, 1,000 is cheaper still. Waiting for some bank to lend you money will take forever, the cooperative borrows, it is not your credit history on trial but the cooperatives’. This is perfect for people with bad credit records or little collateral, you get collective bargaining and multiply your resources and make savings on economies of scale and save 30%.
A credit union is a member-owned financial cooperative, democratically controlled by its members, and operated for the purpose of promoting thrift, providing credit at competitive rates, and providing other financial services to its members
Simply, you must look at your assets collectively, a house is just one asset, you need fixed property, liquid capital, some in equity, bonds, and whatever can diversify your risk. Joining a Credit Union gives you credit at a lower rate, you get a share of any profits, you can invest in a diverse portfolio of projects without really losing out. If you rely on your company you can sink or swim, but if you are part of a portfolio of 100 companies in a credit union the risk is spread around. The credit union is a perfect meeting place for SME’s and savers who want to invest. A credit union has all the benefits of a bank but is more flexible and is run for its members who are also customers not shareholders. A successful Credit Union can pay off your loans with profits and never actually cost you anything.
A mutual, mutual organization, or mutual society is an organization (which is often, but not always, a company or business) based on the principle of mutuality. Unlike a true cooperative, members usually do not contribute to the capital of the company by direct investment, but derive their right to profits and votes through their customer relationship. A mutual organization or society is often simply referred to as a mutual.
A mutual exists with the purpose of raising funds from its membership or customers (collectively called its members), which can then be used to provide common services to all members of the organization or society. A mutual is therefore owned by, and run for the benefit of, its members – it has no external shareholders to pay in the form of dividends, and as such does not usually seek to maximize and make large profits or capital gains. Mutuals exist for the members to benefit from the services they provide and often do not pay income tax.
If you want to build on your own, there are also ways to achieve this, but you have to make some adjustments.
Revenue stream – you can get a revenue stream to build your house. Save up for a Coaster, or other Public Transport vehicle, they can earn 1.2m a month, 14.2m a year, can build a house in 3 years. A Fuso can cost 13m, and earn 1.2m a month as well, with transport 30% of the cost, it reduces the cost to almost zero and other customers subsidize it. Opening a little shop in the neighborhood like these “Amata meza, Fanta Bikonje, or Mama Fils” can bring in 30k a day. 1m a month, can build a house in 3 years selling blue band and bread, milk, soap, etc. A bar in a good spot can build you a house in Nyarutarama if you run it well and with purpose.
Go basic – the idea of walking into a Gaculiro house at 20% interest is madness, make a sacrifice, take the shame but secure your future. Your house will be basic, a building site for years, but it is yours. Just construct a foundation, it can cost 4m to put up, then one big room divided in 4, the rest of the foundation is a veranda. Just four walls, a roof, cement floor, and a secure door. A total cost of 10m but in a good area, then over the next 5 years you add slowly, get 30 bags and add another room, another, and another. It would be embarrassing when visitors come, but you are building while they rent. Be a real middle-class person, own your property, be proud of it and defend it with your life.
Next week deal with the second of the 4 M’s
The Green Frog