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Good problem, please help!
Rank: Veteran Joined: 7/3/2007 Posts: 1,635
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Dear Wazuans, I have what some would call a good problem, but it is still a problem and I hope you can help. In a few months I expect to come into some Ksh 2M. I am debating whether to use the money to start constructing a rental project or to pay down an existing mortgage. Here are the facts: 1. The commercial project will cost Ksh 5M and will take about a year to finish, based on my cash flow projection. I’ll put up the balance from earnings, but I must pay off the mortgage first in order to do so. 2. If I go the route of paying down the mortgage it will be fully repaid in 8 months, freeing cash for the construction project. But this will delay the construction by more than one year. 3. I can’t do both activities at the same time as my cash flow doesn’t allow it. 4. The mortgage is overseas based, so the interest rate is not a big factor. 5. No, I do not wish to borrow or invest in another business. What would you do if you were in my shoes? "The opposite of a correct statement is a false statement. But the opposite of a profound truth may well be another profound truth." (Niels Bohr)
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Rank: Elder Joined: 3/29/2011 Posts: 2,242
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@Wakanyuki, Since both activities ( Construction and Mortgage pay-off) cannot go on at the same time as per your point 3 above, and since it will take 8 months to pay off the mortgage, you only lose 8 months before you start the project which is not too bad. If i were you i would just wait for the 8 months and then start the project. If the 2 M comes, i would put it in any bank that has a construction product just in case u need to borrow when constructing. During the 8 months waiting period, you can do research on constructions costs ( buy @a4a some good cappuccino and get some free advice), get good fundis ( don't forget Kamau the plumber), re-read Mwalimu Marto's posts ( Financial Education esp the real estate bits) etc. Sharpen the axe for 8 months and it will be sharp enough and may reduce the construction period drastically My 1 cent "Things that matter most must never be at the mercy of things that matter least." Goethe
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Rank: Elder Joined: 9/15/2006 Posts: 3,907
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I'd think this is a case of good debt. Hence it makes sense to do the construction right away.
The issue is to realise that construction is not an end in itself so you need a definite timeframe (just as in the case of the mortgage) for concluding constructing and obtaining rental income.
If time to conclude construction and obtain rent is stretched more than 1.5 years for example, time value of money is lost, so it may be better to pay off the mortgage instead. Likewise, if your true motivation is land appreciation rather than enterprise.
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Rank: Veteran Joined: 7/3/2007 Posts: 1,635
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Gathige wrote:@Wakanyuki, Since both activities ( Construction and Mortgage pay-off) cannot go on at the same time as per your point 3 above, and since it will take 8 months to pay off the mortgage, you only lose 8 months before you start the project which is not too bad. If i were you i would just wait for the 8 months and then start the project. If the 2 M comes, i would put it in any bank that has a construction product just in case u need to borrow when constructing. During the 8 months waiting period, you can do research on constructions costs ( buy @a4a some good cappuccino and get some free advice), get good fundis ( don't forget Kamau the plumber), re-read Mwalimu Marto's posts ( Financial Education esp the real estate bits) etc. Sharpen the axe for 8 months and it will be sharp enough and may reduce the construction period drastically
My 1 cent Thank you very much. I had not thought about parking the money in the bank and just wait. About construction I recently completed a simba for my own use. Quite a learning experience that. But I intend to seek professional help all the same. "The opposite of a correct statement is a false statement. But the opposite of a profound truth may well be another profound truth." (Niels Bohr)
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Rank: Veteran Joined: 7/3/2007 Posts: 1,635
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muganda wrote:I'd think this is a case of good debt. Hence it makes sense to do the construction right away.
The issue is to realise that construction is not an end in itself so you need a definite timeframe (just as in the case of the mortgage) for concluding constructing and obtaining rental income.
If time to conclude construction and obtain rent is stretched more than 1.5 years for example, time value of money is lost, so it may be better to pay off the mortgage instead. Likewise, if your true motivation is land appreciation rather than enterprise.
Good advice, thanks a lot Muganda. I didn't quite get this: "If time to conclude construction and obtain rent is stretched more than 1.5 years for example, time value of money is lost, so it may be better to pay off the mortgage instead."Secondly, is there an easy to use formula for estimating time value of money in a situation like this? (I am estimating a rental income of 30K pm after 12 months. The cost of not paying off the mortgage for 12 months is aprox 120K ). "The opposite of a correct statement is a false statement. But the opposite of a profound truth may well be another profound truth." (Niels Bohr)
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Rank: Member Joined: 3/26/2012 Posts: 830
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This is classic case of Advanced Operations Research...a problem called job sequencing under an incomplete budget. From fundamentals of Operations Research, you always start with the jobs that take the longest time. However, yous case has many variables...please you-tube 'Prof.G.Srinivasan'...his tutorials will prove instrumental on such matters as 'job sequencing','assignment problems', 'transportation problems' etc. A successful man is not he who gets the best, it is he who makes the best from what he gets.
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Rank: Elder Joined: 7/1/2011 Posts: 8,804 Location: Nairobi
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I have been wondering whether one can build a city through sharing, and giving.
How can one gain the whole world but lose his soul?
Is your soul contented? The problem is a symptom.
Otherwise the flow is flawless, doing without decision. To act without acting.
The way that is unatterable.
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Rank: Veteran Joined: 2/21/2012 Posts: 1,739
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tycho wrote:I have been wondering whether one can build a city through sharing, and giving.
How can one gain the whole world but lose his soul?
Is your soul contented? The problem is a symptom.
Otherwise the flow is flawless, doing without decision. To act without acting.
The way that is unatterable.
Have never Understood you an Inch. Do not be anxious about anything, but in everything, by prayer and petition, with thanksgiving, present your requests to God..
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Rank: Veteran Joined: 7/3/2007 Posts: 1,635
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S.Mutaga III wrote:This is classic case of Advanced Operations Research...a problem called job sequencing under an incomplete budget. From fundamentals of Operations Research, you always start with the jobs that take the longest time. However, yous case has many variables...please you-tube 'Prof.G.Srinivasan'...his tutorials will prove instrumental on such matters as 'job sequencing','assignment problems', 'transportation problems' etc. @Mutaga...now you are scaring me. You mean I have to memorize all these long words to solve the problem?  But thanks for the introduction to Prof Srinivasan. I'll listen to some of his lectures, but purely for the cultivation of my mental shamba. "The opposite of a correct statement is a false statement. But the opposite of a profound truth may well be another profound truth." (Niels Bohr)
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Rank: Veteran Joined: 7/3/2007 Posts: 1,635
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Am wrote:tycho wrote:I have been wondering whether one can build a city through sharing, and giving.
How can one gain the whole world but lose his soul?
Is your soul contented? The problem is a symptom.
Otherwise the flow is flawless, doing without decision. To act without acting.
The way that is unatterable.
Have never Understood you an Inch. Me neither. But maybe I could consider amortizing my soul to avoid losing it to earthly depreciation The day I understand Tycho, I will leave Wazua nation and set up an ashram. "The opposite of a correct statement is a false statement. But the opposite of a profound truth may well be another profound truth." (Niels Bohr)
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