When it's best to build, rent or buy
Published:Sunday | February 19, 2012 | 12:00 AM
Avia Collinder, Business Writer
Mortgage rates have been trending down and some lenders are quoting single-digit rates to special clientele.
But while almost everyone of working age is faced with the choice of how best to go about obtaining shelter, a home, the experts do not all agree that debt-financed purchase is always the best route.
While renting might be unavoidable in the early years of pursuing a career, the time will come when a decision is required on whether to maintain that status or make the leap as on investor and buy or build your dream home.
A few experts weigh in.
President of the Jamaica Institute of Quantity Surveyors, Sherdon Haye, believes that savvy homeowners should opt to build.
"It is always possible to build below the average (cost of construction) if the homeowner undertakes the project himself. Rather than hire a general contractor, he or she can hire tradesmen and execute the construction work themselves," Haye told Sunday Business.
"They will save what the contractor would get as his margin, which could be anywhere from 15 to 20 per cent. If the homeowner is savvy enough to get discounts from hardware suppliers, he could save a further 10 to 15 per cent in material costs."
COSTINGS
To build a 1,000-1,200 square feet lower-middle income two-bedroom cottage such as are available in Portmore costs around J$6,000-$7,200 per square feet or just over J$7 million with typical building finishes, such as post-formed countertops and alu-steel roofing, the quantity surveyor said.
"However, you will need to ensure quality tradesmen are employed. Attention to quality of work is very important andit is advisable to get professionals to monitor the contractor's work and expenditure. It is possible, but risky for the homeowner as all these factors should be taken into consideration."
Haye notes trending now is the purchase of older properties in the middle to high income brackets. The properties are acquired below their below their market value and retrofitted.
"Dependent on what the market is offering, you can get houses in suitable areas at less than market value," he said.
"If the structure is sound, the cost of renovating or upgrading could work out overall at less than building the same house from scratch."
It could cost J$1,800 to J$2,500 per square feet to achieve the desired result, depending on the house's condition, said the quantity surveyor.
"There are risks here also as, in the worst case scenario, a dilapidated building can cost more" if significant or total demolition is required, Haye said.
"Consider buying an older house in Kingston for say J$15 million to 16 million. Remove land value of J$4 million and you can still come out with a deal using low-cost NHT funds to upgrade it," the quantity surveyor suggests.
He said people and developers scour the classifieds for properties in foreclosure that developers tend to demolish the existing structures and build higher density accommodation for sale.
"I personally recommend this route as opposed to obtaining a loan from say the NHT and seeking to build the 'dream house' in phases where the homeowner builds a section which can be occupied and then completes the remainder of the house when they can afford to do so," said Haye.
"This longer route may take years to accomplish the same thing; whilst buying a 'fixer-upper' means earlier occupation of a 'complete' house," he said.
DECISION TIME
Pierre Shirley, real estate sales manager at Sagicor Property Services Limited, notes that the decision about home ownership is really dependent on a person's readiness.
"Rental may continue because of existing debts and other financial obligations and short-term goals such as plans for car ownership," he said.
"Application for mortgage loans requires that no more than 30 per cent of income is spent on servicing debt."
Shirley says that if a couple is considering purchasing a home and getting their maximum loan amount of J$9 million - J$4.5m each - from the National Housing Trust (NHT), most financial institutions will require that the loan payment does not exceed 30 per cent of their combined gross income before taxes.
A J$9 million NHT loan at 7.0 per cent for 30 years would equate to a monthly payment of approximately J$60,000. The borrowers would need a combined gross income of J$200,000 per month or J$2.4 million per year, he said.
Expenses of a homeowner would also differ from a tenant.
"Some of these include but are not limited to insurance, property taxes and maintenance which include repair and upkeep," said Shirley.
"As a benchmark, your combined household expenses as listed as above should not exceed 50 per cent of combined income. One can afford more in rentals because of these additional expenses," he said.
There is also the matter of raising that 10-15 per cent deposit often required for property purchase.
The sum often eludes those who wish to buy and must continue renting until it is accumulated.
Although the most affordable option in the short term, rental may soon represent a loss of resources that could be better spent on building or buying your own home.
Further, when the age of retirement arrives, the rent, experts say, will be money taken from your reduced income, while colleagues of the same age will be earning rental income from acquisitions made while employed, or living rent and mortgage-free, although insurance, property tax and maintenance charges will continue as expenses.
OPEN-MARKET PURCHASE
Calculating by square footage, local experts within the real estate fraternity say that that savings of up 20 per cent can accrue by going the route of home construction instead of buying on the open market; especially if finishes for the first phase are kept within an economical range.
But, they add, taking on a home construction project is for the brave of heart.
"The landscape is littered with projects which have been started and are now overgrown with vegetation and abandoned, especially in Plantation Heights and Chancery Hall in St Andrew," said Gladstone Whitelocke, vice-president and general manager of the Scotia Jamaica Building Society (SJBS).
Jamaicans tend to shy away from the use of professionals such as quantity surveyors, and architects, said Whitelocke, even though having such expertise at hand would have ensured swifter approval of construction permits, awareness of building covenants and caveats, completion of construction within a budget and a structure with better building integrity and market value.
Such professionals can be costly, but their expertise tends to cut back on delays that add to the cost of the homebuilding project.
Managing tradesmen during the construction process is also a challenge - ensuring that they build to quality standards and without waste.
"You need a strong stomach for building. It is not for everyone," said Whitelocke.
Additionally, he notes, potential homeowners "need to manage their expectations and that of their partner. The chief driver of construction costs are quality finishes. While it is easy to raise the building, it is the finishes - over which partners may quarrel - which leave many a project incomplete or unfinished over a long period."
If you have purchased land in an area just being developed, you might also find yourself living for years in a community under construction - something of an eyesore.
Buying, he notes, is the route to home ownership when mortgage rates are low.
"Interests rates are today where they have not been in the last 25 years. A mortgage in the 10 per cent range can now be combined with NHT funds of seven per cent or under to buy a home," said Whitelocke.
"With the high price of some US dollar rentals, you could easily be paying a mortgage."
While property vendors require all their money upfront - unlike the construction process in which money can be drawn down or secured as needed - getting a mortgage is the easier route, Whitelocke said.
FINANCING OPTIONS
But quantity surveyor Haye notes that there has been no great escalation in material prices and with interest rates trending down, both construction and home purchase are affordable options in the current market.
Shirley of Sagicor warns, however, that getting a loan to build is not as easy as obtaining a mortgage.
"Construction loans are for much shorter periods and much higher interest rate than a mortgage. To service the debt for a construction loan will require a lot more money than will be needed for a mortgage of the same amount," the property expert said.
A J$2.4-million loan for land acquisition would require payments of J$104,516 per month for three years at 23 per cent, compared to a payment of about J$30,000 monthly for the same sum issued as a 30-year mortgage at current rates, Shirley told Sunday Business.
Beyond the higher costs, he adds, there are upfront costs for construction to be paid out of pocket by the homebuilder as they will not be covered by the loan. These may include soil testing of the land, architectural drawings and approval, and engineering and quantity surveyor's report.
Whitelocke of SJBS notes that loans for construction might be as short as one year, but that interest and principal payments are dependent on the money drawn down to fund the project. He said that as soon as construction is complete, the money owed will be converted to a mortgage repayable in periods of up to 30 years.