I have been talking a lot of the investment in Yopougon “working out”, but never clarified what I mean by it. A meaningful definition of working out is that the return on the investment over time including repairs and rent collection costs is at or above the interest I would get on a mortgage from a bank in Abidjan, which last time I checked was in the 11% – 14% range.
Since the plot of land was obtained for free through an inheritance, I have a bit of a margin of safety. Still, the following needs to work out to get the required return:
- The construction costs need not to exceed budget by too much.
Costs were on budget.
- The demand must be sufficient to fill the apartments.
They are not yet filled, but the demand seems to be high, so it’s looking promising.
- The rent must be high enough.
While lower than I had hoped, 15,000 CFA per month per unit generates a return well above the required level.
- There shouldn’t occur too much damage to the apartments requiring repairs
It’s too early to tell, but I hope this won’t be a problem.
- Not too many unpaid rents
The last point is the key point. So, what would cause the tenants not to pay their rents? Straight away, I would guess temporary or permanent loss of income due to reasons such as bad health, job loss or business related issues (such as a taxi breaking down). Other causes could be that tenants prioritise spending on emergencies, weddings, funerals and religious festivals. Well, I guess I will find out in due course.
What do the academics say?
Research such as Portfolios of the Poor, and an essay called The Economic Lives of the Poor stress that emergencies and large expected and unexpected expenses have a big impact on the lives and finances of the poor.
From Portfolios of the Poor:
The diarists are, as a group, less healthy, live in neighborhoods with weaker security, and face income volatility tied to the swings of local supply and demand, no matter whether they are employed or self-employed or are small-scale entrepreneurs. Those sources of uncertainty pile on top of others: in urban Bangladesh, slums can be cleared without warning; in India, crops fail when the rainy season is late or short; in South Africa, the spread of AIDS makes mortality a concern even for the young and able-bodied. While some seem able to shrug it off, most adults in poor households, we found, experience occasional or chronic anxiety about these risks, and seek to mitigate them in every way they can, including managing their money.
Dealing with emergencies is so crucial that even where insurance is available to them, poor households often have to draw down savings and seek loans to make up the losses in full. Similarly, both saving and borrowing need to be deployed, often simultaneously for the same purpose, to manage cash flow on a day-to-day basis and to create usefully large lump sums.
Part of the answer is probably that saving at home is hard. The money may be stolen (especially if you live in a house that cannot be locked) or grabbed by your spouse or your son. Also, if you have money at hand, you are constantly resisting temptation to spend: to buy something, to help someone to whom you find it difficult to say “no,” to give your child a treat. Such temptations may be especially hard for the poor, because many of the temptations they are resisting are things that everyone else might take for granted.
Few poor households have savings accounts. Except in Cote d’Ivoire, where 79 percent of the extremely poor households under $1 a day have a savings account, the fraction is below 14 percent in the other countries in our data
The data used for the Ivory Coast seems to be from 1988, but the use of savings accounts might well still be high, and I would suspect it’s due to the prevalence credit unions. It could well be that poor Ivorians are well served in terms of microfinance and that would kill my idea of providing it to tenants. Well, that’s another thing to find out!
About spending from The Economic lives of the Poor:
Perhaps more surprisingly, spending on festivals is an important part of the budget for many extremely poor households. In Udaipur, over the course of the previous year, more than 99 percent of the extremely poor households spent money on a wedding, a funeral, or a religious festival. The median household spent 10 percent of its annual budget on festivals. In South Africa, 90 percent of the households living under $1 per day spent money on festivals. In Pakistan, Indonesia, and Cote d’Ivoire, more than 50 percent did likewise.
[…] the poor also spend surprisingly large amounts on entertainment: televisions, weddings, or festivals. All of these involve spending a large amount at one time, which implies some saving unless they happen to be especially credit-worthy.
The need to spend more on entertainment rather than on food appears to be a strongly felt need, not a result of inadequate planning. One reason this might be the case is that the poor want to keep up with their neighbors. Fafchamps and Shilpi (2006) offer evidence from Nepal in which people were asked to assess whether their level of income as well as their levels of consumption of housing, food, clothing, health care, and schooling were adequate. The answers to these questions were strongly negatively related to the average consumption of the other people living in the same village.
So, the urge to keep up with the Joneses is a universal phenomenon – that’s maybe not so surprising. The question is if the urge is strong enough to not pay the rent, and risk being evicted? I don’t quite think so, but it’s probably strong enough to delay the rent a couple of days or weeks.