Twice now, I have made my aversion to home-ownership the direct subject of a post. Here are those two posts:
And although that makes me seem a bit prejudiced (which I am), it doesn’t mean that it is never a good idea to buy property. This post, for example, is being written because of all those people that inherited some money and started rolling properties and today own half a city. Which sounds like a pretty sweet deal, right?
I mean, they had to start somewhere, so maybe owning your first home is the first step on the road to owning the monopoly board…
Where is “somewhere”?
Before I get to that point (and I do have a suggestion), let’s just backtrack a second and talk about rolling properties and how that works.
So assuming that you own a property outright (ie. no outstanding mortgage) to start with, the general idea is as follows:
Step 1: rent out the first property (let’s call it Old Kent Road)
Step 2: go and find a second property (the Angel Islington), and buy it with a mortgage.
Step 3: use rentals from Old Kent Road to pay the mortgage on the Angel Islington.
Step 4: borrow some money to make some improvements to the Angel Islington, and then rent it out.
Step 5: use the first few months of rentals to pay back the money that you spent on improvements.
Step 6: then buy Pall Mall on a mortgage.
Step 7: use rentals from the newly-improved Angel Islington to pay the mortgage on Pall Mall.
Step 8: borrow some money to build a hotel on Pall Mall, and then rent it out.
Step 9: sell Old Kent Road to pay for the hotel on Pall Mall, and use the remainder to settle some of the outstanding on the Angel Islington.
Step 10: use the rentals on both the Angel Islington and Pall Mall to repay the mortgages and save up the residual for the deposits on The Strand, Fleet Street and Trafalgar Square.
Step 11: buy them, and then use your connections to obtain a government grant to build houses as part of the Fleet Street renewal.
Step 12: build an office block instead.
Step 13: they see me rolling.
So it’s all very simple and easy. As you can tell.
The trouble is: where do you start?
- If you live in Old Kent Road, then you’re not going to have the rentals available to help with paying off the Angel Islington.
- In fact, the property mogul lives in none of his properties.
- So the key here seems to be ownership without habitation.
And/or the old adage that you don’t make money off your first house, you only make money off your second.
Which means that the logical starting point is…
The moment when you can afford to both rent and buy a house at the same time.
You can also choose the moment where you can afford to buy two houses at the same time – but because that will be more expensive than my alternative, it just means that the “moment” is a more distant one.
To clarify, under the rent & buy scenario, you could do the following:
- Continue to rent an apartment where you want to live.
- Buy Old Kent Road because it’s going cheap (rather than buying Mayfair because that’s where you want to live).
- Borrow some money to improve it, then rent it out.
- Use the rental money to cover rates, levies, interest, and the cost of improvements.
- Use your own money to repay the capital on the property (let this be your savings vehicle).
An unexpected side-benefit
Did you know that buying a property and renting it out means that you’re carrying on a business? In fact, in most jurisdictions, you should be able to claim all the good stuff (rates, levies, water, electricity, interest and a capital allowance on improvements) as deductible expenses for tax.
What this means:
- Anything that the rental income covers, you won’t have to pay for.
- Anything that the rental income doesn’t cover, you’ll get a discount on equal to whatever your net effective tax rate is*.
*that is, you’ll get a refund when you submit your tax return (there are exceptions – some jurisdictions will ring-fence your salary income from your business income and expenses).
And if your rental cover gets high enough to cover the expenses and start making some contribution to the capital repayments – then score!
Also: it means that you can buy your dream house when your other property investments generate sufficient income to pay it off for you.
It’s like the ultimate bonus.
This is the type of strategy that housing market bubbles are made of. There’s a saying here that gets used by casinos. Oh yes:
“Winners know when to stop”