The benefits of Land Options
Leverage
The Land Options enables one to work smart and not necessarily hard to achieve a better investment outcome. Getting a mortgage is equivalent to working hard in the sense that all costs involved including the interest rates, land rates , cost of finance application etc. are met by the mortgagee. These expenses significantly reduce the return on investment. Land options however enable one to create wealth faster. With Land Options, one only needs a very small fraction of the purchase price in order to begin the land acquisition journey.
No Bank interest & Deferred Costs
As soon as one begins the Land Options journey, leverage comes into play. The purchase price to be settled at a future date, say 2 years is locked in for that period. What that means is, if the property appreciates in value for the next 2 years, then the equity created is wholesomely the purchaser’s. Remember, the buyer shall not pay any bank interest because there is no need to get a loan for this acquisition. Whilst the equity created remains the reserve of the purchaser, the vendor continues to incur land rates until the day the purchaser exercises their right to purchase the parcel of land before the agreed expiry date. Mandatory costs of acquisition will only be settled after the purchase price has been settled at the agreed future date.
High Yields
Our clients enjoy very high yields. For instance if the Sale price is Ksh 455,000 for 1/8 acre of land to be settled in 2 years, the client only pays Ksh 11,000 per month for 10 months. The buyer who opts to seek finance or pay for the land upfront will also have to immediately pay for some of the costs of acquisition including initial costs of the finance application. By the end of the term all costs including bank interest may be well over 45% of the Price of Land (Ksh 230,000). The least amount required to meet the initial expenses excluding the 2 year interest may be Ksh 60,000. Assuming this parcel of land appreciates to Ksh 555,000 in 2 years, then it is right to say that the equity created is Ksh 100,000 for the 2 years the client held the position. Remember the purchase price was Ksh 455,000 but the buyer only paid Ksh 110,000 (10 instalments of Ksh 11,000). What this means is, Ksh 110,000 gave a yield of Ksh 100,000, a remarkable return on investment of 45% per year. The customer who purchased upfront pays Ksh 515,000 (455,000 + 60,000). This means the investment of Ksh 515,000 yields only Ksh 40,000 in 2 years equivalent to a low yield of 3.9% per year.
Low Risk
A client who pays the full purchase price now risks a total of Ksh515,000 that is (455,000 and at least initial costs equivalent to Ksh 60,000) if the transaction goes wrong for whatever reason. However, with Land Banking Kenya options, the stress-free payment of Ksh 11,000 per month means that all one risks on the 1st month is only Ksh 11,000 and Ksh 110,000 on the 10th month. Since cost of land acquisition is postponed, a loss for whatever reason on the 1st month or 10th months limits the risk to the payments made.
Article by Dr. Peter Tole
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