A pretty controversial title for today’s blog, admittedly, but I read an argument for this recently that really rang true and I wanted to share with you.
I am part of a property investors network and mentorship program that meets every month. My mentor, Rob, regularly writes topical property articles and his most recent I found fascinating. He is a very successful property investor, earning over £300k per year from multiple property businesses, and yet instead of buying his most recent family home, he decided to rent it! Have a read and see what you think about his reasons why….
“The house I have just moved to is a rental property!
Now – if you’re like me you’ll have been brought up and conditioned by society that we should try and own the house we live in. Personally – I’ve owned my own house (well, a few different ones thanks to the RAF lifestyle!) since 2005 and never thought I would ever be “wasting” money on rent again.
But over the last couple of years my mindset has changed considerably – and I want to propose an alternative for debate here. (Please note – there will be no right or wrong answer and everyone will have different points of view on this. I am not suggesting any course of action but am very interested in your views..!)
The main paradigm shift came after reading Rich Dad Poor Dad and understanding the importance of owning assets rather than liabilities. I’m sure that you will have read the book but if not – please do – it will change your life!
So – many of us consider our homes to be our prize asset – but it could be considered that your home actually falls into the liability category. You may have a lot of equity tied up in it not working for you & it also costs money to maintain.
I didn’t really take this notion seriously until I decided it was time we needed a larger house to accommodate the (rapidly) growing family. You know the story – buy a young professionals shoebox in a trendy area when life is free and uncomplicated and all of a sudden you have 2 toddlers tearing the place to pieces…!
So – onto the house hunt. When we sat down and did the figures some things suddenly jumped out at me.
The type of property we wanted to move to (which will be the place our kids grow up in), was hugely expensive.
As a self employed investor – it was going to be difficult to get a residential mortgage to buy said house.
So lets put some numbers to this:
We would have had to put together a deposit and stamp duty of around £250,000 to make the move worthwhile. As a professional property investor there was no way I wanted to tie up that sort of money in my own house at this stage of life, even if it was just lying around in the bank account!
So – plan B. Start saving money from the cashflow produced through our existing assets. Hypothetically – if saving at £2000 per month (which would certainly impact quality of life), it would take over 10 years to save the deposit…
Again, if you’re like me I would assume that you wouldn’t want to sacrifice all of that cashflow now to save for a house you may be able to buy in 10 years time. Lets not even take into consideration that property market growth may well exceed your savings rate so actually the deposit you’ve accumulated will not buy half the house you need now…
You would also have to factor in the opportunity cost of not having all of this money working for you. If you invest £2000 a month over that same 10 year period wisely, it will compound and multiply many times. Just with a very basic Buy-to-Let investing strategy you would be able to buy 1-2 investment properties in your goldmine area every year….!
No – I want to enjoy life with the kids now. You only get one chance at that.
So – plan C. I sat down and did the figures and the answer literally jumped off the page…
I think as professional investors and financially literate people we can find the opportunity in any market. You will probably know that the rental market does not follow the same trend as house prices – so as properties get more expensive, their rental values start to shallow off. Therefore, we can rent truly fantastic houses for not much more than much cheaper ones…
After working all of this out on my trusty spreadsheet it became obvious that I could rent our dream house – and then by releasing equity by selling my current house, we could generate cashflow from buying BTL properties straight away that would cover 75% of the new rent.
Of course, if you are a bit more savvy and can buy well and recycle the deposits – within one refinance cycle the cashflow generated from the new assets will be in excess of the personal rent.
Lets put this in layman terms.
If you have equity in your own house and using these figures, within 1 year you could be living in your dream house for free. In fact, better than that, you will be in a positive net cashflow position.
This is an exciting concept.
Now, I do want to be impartial and discuss both sides of the story. Before making this decision, I brainstormed the downsides. This is what I came up with:
You would no longer have a residential mortgage. On consultation with my brokers this may affect lending criteria with some BTL lenders but shouldn’t be an issue with most.
You are not paying off your own residential mortgage. This was a big consideration – but what is important to remember is that you will be re-investing the equity in multiple investment properties which will carry on compounding in value over the years.
If market conditions change (i.e. interest rates shoot up) then the cashflow from your assets will be eroded and may not be able to support your personal rent. This is why it is important to stress test all of your numbers. In all honesty – any market change produces more opportunity which you – the savvy investor – will be able to capitalise on anyway to increase your wealth! (We will discuss that in a future blog).
So – what are the options for the future?
Option 1 is to live in rented accommodation for your whole life, funding it from the cashflow produced by your ever compounding portfolio. You have huge flexibility in life, especially as we are moving to an ever more transitory and mobile lifestyle.
Option 2 is to get to the stage where you have excess cashflow and you can hedge your investments to something which maybe more liquid and then build up a pot to buy your dream house. (Or you could sell some of your assets in the future to fund your own house).
Regardless, why wait for 10-15 years, scrimping and saving to live in the space you need to flourish and grow when you can have it right now, and be financially better off at the same time?
I’m sure, by now, you will have an opinion on this discussion – but there is a 3rd possibility for the future. If you are savvy there will be the opportunity to take an option to purchase your rental property at todays market price and benefit from any market rises. After all, many high quality properties on the rental market are there because the owner hasn’t been able to sell and is now an accidental landlord – you are actually helping them out as well.”
So…what do you think?! Seems to make sense to me! If you want to discuss any of this or how you can start to invest in property then please do get in touch – I have some exciting stuff going on at the moment I’ll gladly tell you about!