The Truth About Renting Versus Buying Property
Conventional wisdom is that buying a home beats renting. But conventional wisdom might be wrong. In my latest Real Money Stories podcast episode - “David Blatt Invests His Way To Wealth” - my guest explains how he has built a multi-million dollar property fund over the past 13 years. He also points out that he rents his home in downtown Manhatten in New York because this frees up his capital for wealth creation and gives him the maximum flexibility to move home in the future.
And David isn't alone. Billionaire property investor and training company owner, Grant Cardone, also rents his opulent home in Miami, Florida. Cardone's view is that he can better use the capital doing multiple-occupant property deals and growing his other businesses for immediate cash flow benefit. He also has total flexibility to move around the country as it suits him and his family.
Young adults just starting out are more likely to find renting attractive, as it gives them flexibility, time to establish their credit rating and build a down payment. For wealthy people like David Blatt and Grant Cardone, having several million dollars tied up in the family home is probably a very inefficient use of capital. That's because they have many attractive investment opportunities available to them and can fund the rental payments from their property portfolio cashflow.
But does renting a home and investing the capital released (or not used) make sense for the average person? To find out, I did some research on property in the York YO30 postcode area, as this is popular with families in that area of the UK.
Buying a Home
A decent four bedroom detached house in YO30 would cost around £450,000. Let's assume you've owned that house for five years and have a mortgage outstanding of £250,000 (with 20 years left to go), meaning you have equity of £200,000.
Your monthly cost looks like this:
Mortgage repayment (at 3% interest) £1,400
Energy and broadband £ 150
Maintenance and repairs (say) £ 200
Buildings insurance £ 50
Total monthly cost £1,800
My research suggests you could rent a similar property for £2,170 per month, inclusive of energy and broadband. So on the face of it, renting would be about £370 per month more expensive than owning. But if the outstanding mortgage was £320,000 (meaning your equity was only £130,000), renting and buying would be the same monthly cost.
Renting to Invest
Let's assume that you sold or didn't buy that house for £450,000 and therefore had £200,000 of cash. You instead decide to buy a couple of two-bedroom homes in the same area for £190,000 each (which were on sale for £220,000). You borrow £100,000 on each over 25 years, and after transaction costs and deposit of, say, £95,000 each, you retain the remaining £10,000 as a cash buffer.
Your monthly cost looks like this:
Mortgage repayment (at 4% interest over 25 years) £1,050
Maintenance and repairs (say) £ 200
Buildings insurance (say) £ 50
Total monthly cost £1,300
If each of the properties rent for around £900 PCM, the total gross monthly rental income would amount to £1,800 PCM. On the face of it, you'd have £500 PCM month higher cashflow. But a basic rate taxpayer will have to pay income tax of around £150 per month, which brings the net cashflow surplus down to £350 PCM. And higher/additional rate taxpayers will pay even more. This Which? website explains the taxation of property in more detail.
More beneficial tax rules apply to rental income when a limited company owns a residential rental property. But company mortgage rates tend to be higher than for individuals. Transaction costs can also be higher, and there are additional costs and complexities associated with running the company.
A basic rate taxpayer would struggle to be better off on a cashflow basis each month in the above scenario. Even with £350 net additional cash flow from the rental properties, it would only bring the rent on the home down to around the same monthly cost of buying the home. Higher/additional rate taxpayers would actually experience worse monthly cashflow.
What is difficult to forecast is the level of capital appreciation that might arise on the four-bed home compared to the two smaller rental properties. That could have a significant impact on the eventual overall outcome.
Marginal Gains
The above example suggests that the financial benefits would be marginal for a basic rate taxpayer and worse for a higher/additional rate taxpayer, and then there is all the extra risk and work involved.
To make renting your home more attractive, I think you'd need to find more lucrative investment opportunities for your capital. That might be investing in property, but it could be buying an unloved, yet cashflow positive business that could be improved and then resold.
Grant Cardone suggests when starting out to focus on buying and renting multiple storage units, and multiple affordable (£/€/$ 800-1,000 PCM) apartments. He strongly advises against buying single-family homes due to the risk of rental voids (when there is no tenant or the tenant defaults on the rent). Cardone explains his basic approach to property investing in this 18-minute video.
With possible changes to the taxation of UK property on the cards to help pay for the pandemic, I think you need to be very careful about property investing. That means doing your research, making lots of low-ball offers, and being very patient. It might mean joining forces with other investors to spread the risk, get into bigger deals and find more lucrative deals through a wider network.
I recently did an Instagram Live with UK house buying agent Henry Pryor, and you might find his and my insights useful. Remember we don’t have a crystal ball and we don’t have all the answers, but we do have experience. You can watch the 55-minute video on my YouTube channel here.
Buying Houses 15% Below Market Value
Errol Williamson is a seasoned and successful property investor I know, who is also a brilliant speaker and trainer. Here is his simple method for buying houses at 15% below market value.
1. Use Rightmove to look at SOLD prices (not FOR SALE prices) over the last 15 months.
2. Include in your analysis at least ten properties of the property type you are looking to buy.
3. Work out the average price of that type of property in the target area.
4. Knock 15% off that price.
5. The price in step 4 is your offer price for properties that match your criteria. You'll get rejected loads of times. Don't take it personally - keep making the offers.
Another Reason to Rent
But there is another reason why you might prefer to rent rather than own your home. If your home represents a large amount of your wealth, you might want or need to free up the capital to allow you to enjoy your active later years. Selling your home will be a much better deal than using any form of equity release mortgage.
Or you might want to give money to family members now when they need it most and you can see the impact it will have, rather than wait until they inherit when you die.
Or it might be a combination of those two things.
The Emotional Payoff
Buying your family home might not be the most efficient use of your capital, but it does provide an effective means of building a valuable asset through enforced savings. Plus, owning the roof over your head also meets that primeval desire for security and control. And when you have no mortgage payments to meet, that feeling gets even better.
Do let me know your thoughts on this subject below in the comments.
Warm regards,
Jason
P.S. If you need mortgage advice and your affairs aren't straightforward, then a mortgage broker can be invaluable. I can highly recommend David Houchell. He is a friendly, knowledgeable and experienced mortgage broker who works virtually for clients all over the UK. Tell David you heard about him from my blog and he'll take extra special care of you. Visit www.houchellmortgages.com for more.