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Jack bailey

Do you own the home you live in?

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I thought it would be interesting to ask this question.  As we are all property investors at different levels i was wondering do you own the home you live in with a mortgage you are paying off? or do you Rent while building up your portfolio?

 

I'am currently letting just now with the girlfriend, we haven't thought about getting our own place here in Glasgow as she is planning on moving back home (Brighton) at the end of the year so will have to see what happens after that.

 

Jack

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I have quite an odd view on this considering what I do!

I believe in renting the home you live in, and I'll explain why:-

Property value £50,000

Rental value £500pcm (12%)

Property value £100,000

Rental value £750pcm (9%)

Property value £150,000

Rental value £1,000pcm (8%).

The ratio of value:rent is skewed the higher the property value. In simple terms, for every 100% that the value goes up, the rental cost only goes up by 50%.

We once rented a £1.8m property for £3,000! The mortgage alone was £4,000 per month interest-only!

The property I live in is worth £250,000 but I only pay £850pcm in rent (that's competitive - I didn't get a super deal).

If I'd have bought it, I would have had to tie up £25,000 as a deposit, and then pay an INTEREST-ONLY monthly repayment of £850pcm*

Yes, I'm foregoing the chance of an interest-free capital gain.

However, it has given me £25,000 to play with which, considering I just bought a property outright for £25,000, means I can DEFINITELY make a capital or equity gain NOW, not in the future.

I'm also free to move quickly on a house purchase should I wish to buy one, as well as living maintenance-free (I cannot tell you how nice it is not to have DIY on the weekend...).

I believe in cash now, not the hope of equity in the future.

Not a standard view I'm sure, so would be keen to hear people's opinions on that!

* 25-year term at 4.5%

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Rent where I live in Cambridge.

Portfolio of properties where I'm from in the North West. 

 

It's a tiny version of Geo-arbitrage in action. The yields on property in Cambridge are awful, so I pay around 4% yield on the property I am current renting, but receive circa 10% yield on the properties I rent out. 

 

I have no interest in tying up my money in a property that is not an asset for me. Think the Robs have mentioned Robert Kiyosaki before and the whole 'your home is not an asset'.  Couldn't agree more! 

 

Having said all that, long term I will want to buy my own property.  More for the security that ownership provides when I've got a family and it's not just me I have to think about. 

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I have a mortgaged home, interest only with offset, normally the idea is that the offset side is where I keep contingency/deposit for another BTL.

 

Happily my current rate is 1% so the offset is empty and the contingency is earning its keep elsewhere.

 

I go for balance, I have ISAs, pensions and BTLs. But I can understand the own nothing idea, if I had any ME BTLs I would be tempted to be taking cash abroad, a PPR is a big juicy target.

 

To make the extreme leverage guys pull even more hair out, I even pay cash for cars :)

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This is a matter close to my heart:-)  Although my wife would like me to buy somewhere for us to live, it's just not a sound financial decision in most scenarios.  Nick, I couldn't agree more with your summary.  I live in Melbourne (where prices are whacky, but rent relative cheap - bad market for investing) and I buy in Glasgow, where rent is relatively high.

 

I definitely rent a much nicer place that I could afford to buy.  But I think, unless you happen to want to live in an area where the market is perfect for investing and you just happen to want to by in the range where the yield's are optimised, it's rarely the right financial decision to buy.  Of course there are other reasons...just ask my wife:-)

 

I've actually started a blog (although it's very early days and I'm re-designing it) where the first post series was on this subject.

 

If you're interested, it's simplemoneylifestyle.com - be great to get a bit of feedback from the hub members.

 

Cheers,

M

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Cheers Martin.

I've checked out your blog (the link is actually www.simplemoneylifestyle.com - typo! - for other readers) and it's got great content. Very thorough yet concise and focused. Good effort!

People should read that rather than my explanation in order to understand what I was trying to explain!

I've signed up to your newsletter - look forward to it.

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Guest Sarah D

I currently own the home where I live, but not because I think that's the way to go...

 

I have 3 x BTLS and the residential mortgage I'm talking about.

 

But 2 of the now BTLs were initially brought on residential mortgages and to live in. So I've done them up because I've lived there, and then turned them into BTLs and they've hopefully got a good level of rent because they are completely kitted out inside, well decorated (I think!) and are fully furnished to a reasonable level (I rent out fully furnished).

 

I do this for a few reasons - firstly there tends to be less fully furnished places on the market where I am so this gives me an advantage straight away (if this is what someone wants, there are not many of these around); secondly, the 10% wear and tear allowance you get for fully furnished properties comes in very handy; and lastly, (and this is probably something very very silly to tie my mind up with!) the possibility of rent control.

 

My family have been 'into' property for years and we have quite a few properties which are still tied up under rent control (the result of this is achieving rents that are a fraction of what you could get on the open market). I have heard whispers that if a labour government got in they would consider imposing rent control again (in response to everyone saying how unfair property and rental prices are etc), but only on properties which are considered long term lets. If your property is fully furnished it is deemed to encourage short term lets and therefore would not be subject to rent control. A *ridiculous* worry which I should not be concerned about, but since it's happened (and is still happening!) in our family, I'm especially aware of it :-/

 

The house I live in with a residential mortgage I have brought in an area which is ripe for renting out. I wouldn't want to live here long term, but it's very near the university and I know I could rent it out very easily. I rent out a couple of rooms whilst I live here which covers the mortgage and bills which means my salary goes straight into a pot for new deposits. I could not rent these rooms for such a good price if I wasn't living in the city. I'm also doing it up slowly whilst I live here and when the time is right I'll move out into a nicer area (and rent!)

 

I believe in renting the house you live in for a few reasons: not having to do DIY (as above!), being able to live in a much nicer house than you would perhaps be able to afford if you had to get a mortgage for it, having the flexibility to move when you fancy a change or have to move for a job or other reasons. The thought also crossed my mind that for those with children you could get your child into a brilliant school by renting the house next door :-) lol. 

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Guest Sarah D

@Chrisaaaa - do you mean that I get PPR relief? Yes - I only realised this yesterday when catching up with the tax episode podcast.

 

What do you mean re extra ground on repossession? Do you mean the fact that I once lived there means I have an extra ground to evict the tenant/s if need be? If so - what is it I need to have put in the AST?

 

Excuse my ignorance! Thanks! 

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Yep PPR relief.

 

Ground 1 covers repossession where you used to live there, you should have notice that it is a ground you might rely on in your AST to use it, but you need a pro, with insurance, to say exactly how to do that.

 

It is not a big deal, just a bonus.

 

Chris

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Very interesting post this. I own my own house, I justify it by thinking I have 2 very young children and don't want the insecurity of having to move them away from the area/school if the landlord decided they want to sell up.

 

Also my repayment mortgage payments are cheaper (£650) than renting would be (£750 - £800 pcm)

 

This has got me thinking about going onto a interest only mortgage. 

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Also my repayment mortgage payments are cheaper (£650) than renting would be (£750 - £800 pcm)

 

This has got me thinking about going onto a interest only mortgage. 

 

You are not comparing apples with apples, rent money is all gone, with a repayment mortgage at least £5 :) is buying your house.

 

IO with offset seems the best way to go, the 'benefits' of repayment with the flexibility to invest elsewhere.

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IO with offset seems the best way to go, the 'benefits' of repayment with the flexibility to invest elsewhere.

 

I read your post earlier Chris and that is what I am thinking about doing IO with Offset (i forgot to include the offset part). Although I don't really know anything about this type of mortgage. Could you enlighten me a bit Chris?

 

What type of LTV would you need? where is the offset kept? would i have access to it? is there a minimum repayment I would need to make each year? 

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If you have a PPR they have just dropped the time period in which you can resell without hitting any CGT. I think it's down to 18 months now....

 

So, I'd suggest moving out, renting it for the 18 months. Then get a set of agents around to value the property from that point onwards. Of course you would not let the agent know what your doing as you want a true value... Then, when you do sell, it is from the value of the property AFTER those 18 months as opposed to what you bought it for + what you spent on it whilst you lived in it.

 

Well, I think you can do this.... Also, ensure you change where your primary residence is AND update the electoral role - you don't want to get caught out - I did and it cost me a few pounds....

 

Also... One other (non related thing)... If you've got a good family/friends. Why not buy your property (if you are turning it around) in joint or multiple names, so that when you sell, you can use each persons £10k CGT allowance on any gain...

 

Not sure if you can do that, but I cannot see why not... So, get mum and dad to be on the deeds... So, when you sell, you get £30k (at current rates) free of CGT...

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Not sure if you can do that, but I cannot see why not... So, get mum and dad to be on the deeds... So, when you sell, you get £30k (at current rates) free of CGT...

 

Well that's interesting... I'm sure my accountant mentioned this.

 

I'll ask him and comeback to you.

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...What type of LTV would you need? where is the offset kept? would i have access to it? is there a minimum repayment I would need to make each year? 

 

There is nothing particularly special about the mortgage, other than it is IO, so a bit rare nowadays. I suppose it need not even be an IO mortgage so they may still be about.

 

They are sold as offset which means a few things, but the ones I have had have been.

 

Current account - Virgin when it was good, just like a huge overdraught.

Simple offset - they just cancel the amount you have in the linked account from the interest you pay each month.

Hybrid offset - You pay the same each month, but the interest on the linked account over the year is applied as a repayment of the capital at the end of the year.

 

They are really for high rate taxpayers who get sick of moving money/ISAs around to get a good rate. Also great if you are holding tax/deposits

 

I would worry that they could one day say if you had cash in the linked account for some time that they say, "we do not think you would need it and have applied it to your mortgage" along with some blurb about doing you a favour.

 

I am sure there would be something written on a micro-dot on the contract that lets them, maybe some of the mutuals you can trust, but it is a small unknown number. That is not just a offset thing, I worry about having money in any institution linked to any where I have a mortgage.

 

Right now I am not using mine, I have BR+0.5% tracker IO mortgage so I took the offset money out and put it in an ISA :)

 

Chris

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This is a matter close to my heart:-)  Although my wife would like me to buy somewhere for us to live, it's just not a sound financial decision in most scenarios.  Nick, I couldn't agree more with your summary.  I live in Melbourne (where prices are whacky, but rent relative cheap - bad market for investing) and I buy in Glasgow, where rent is relatively high.

 

I definitely rent a much nicer place that I could afford to buy.  But I think, unless you happen to want to live in an area where the market is perfect for investing and you just happen to want to by in the range where the yield's are optimised, it's rarely the right financial decision to buy.  Of course there are other reasons...just ask my wife:-)

 

I've actually started a blog (although it's very early days and I'm re-designing it) where the first post series was on this subject.

 

If you're interested, it's simplemoneylifestyle.com - be great to get a bit of feedback from the hub members.

 

Cheers,

M

 

Hi Martin,

 

Thank yo uvery much for sharing your view on this, it's a really nice blog you have there, well explained and although I really didn't know what to think about the whole "renting when you could buy" topic it is not a LOT clearer to me, thanks a million!

 

I'll be following your blog from now on :-)

 

Jon

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