Why I may never own my own home

The standard investment recommendation for any young couple is to buy their own home. I respect the reasons, and I understand the comfort factor, but I don’t think financial intelligence will ever allow me to own my own home.

I thought I’d make this more of a “practical” blog post on property investment and hope to show a different view on home ownership, so lets jump into some numbers.

The kind of home I would want to live in would cost me about £350k minimum, call me a snob, I wouldn’t want to live in anything cheaper. Mostly this is because I want to live in the country, in a nice area, with land for the horses and close to a “nicer” city. We’ve had a look at a few properties around the £650k mark – nice barn conversions with a few acres – one of these would be ideal.

To rent either of the above kinds of properties would cost anywhere from £900/month, to about £1,500/month. Likewise, if I were to own those properties and rent them out, I’d have a rental return of between 2.8% and 3.1%

Lets just say for a minute I had two options on the table, one was the £650k property above, and the other was to rent that property for £1500/month, and instead buy £650k worth of investment properties.

The UK being what it is, there are plenty of properties on the market for less than £80k which have a rental potential of around £500-£550pcm. You have to look carefully, but they are out there. These are houses I would never want to live in, but buy to lets are not “homes”. The rental return on these dives is hovering at about 7%-8%.

Spending £640k on BTL properties would leave me with 8 such properties, with a combined rental potential of £4,000/month. So to draw a direct comparison, that’s £1,500 as opposed to £4,000.

The numbers above assume you are buying these properties outright, which doesn’t make sense when I get a higher ROI sticking those amounts in a cash account, than on the capital appreciation of a property.

The real excitement comes when you look at your lump of money, get a bunch of self funding BTL mortgages, and your tenants pay off your mortgage for you.

The minimum deposit on a BTL property is currently 25% (just a few years ago you could get 110% mortgages, those were the days!). So with those numbers in mind, taking into account increases in rental potential (3%/year) and house prices (3%/year conservatively on average) you ROI figures are as follows:

Year 1: 5.05%

Year 2: 22.73%

Year 3: 41.41%

Year 4: 61.13%

Year 5: 81.93%

Year 6: 103.83%

This compares with a compound interest rate of 13% – which is a pretty nice interest rate to aspire to.

Choosing the investment properties option I’ll only spend about £830/month to rent the £650k property (because the BTL’s are earning money from day 1) instead of paying £2,740/month in mortgage repayments, making me £1,910 better off every month, or £690,000 better off over 30 years. (wow!)

This is the plan anyway… In the meantime I invest in other things while I wait out “the system” (UK Residency, UK Credit History, 3 Years Company Accounts, etc etc etc) – Being a non EEU foreigner can be a massive PITA.

I’ve dumped the full spreadsheets below for an investment property worth £80,000 with a rental potential of £500/month (7.5% rental return) over a 30 year period. It calculates costs including tax on income, lettings agents fees, landlords insurance, etc. It doesn’t calculate time left empty, which is about 6% on average in the UK.

Property Details Value Rent Agents Fees Monthly Principle Monthly Repayments
Y1 £80,000.00 £500.00 -£50.00 £7 -£337
Y2 £82,400.00 £515.00 -£51.50 £7.68 -£337
Y3 £84,872.00 £530.45 -£53.05 £8.23 -£337
Y4 £87,418.16 £546.36 -£54.64 £8.83 -£337
Y5 £90,040.70 £562.75 -£56.28 £9.49 -£337
Y6 £92,741.93 £579.64 -£57.96 £10.20 -£337
Y7 £95,524.18 £597.03 -£59.70 £10.99 -£337
Y8 £98,389.91 £614.94 -£61.49 £11.86 -£337
Y9 £101,341.61 £633.39 -£63.34 £12.81 -£337
Y10 £104,381.85 £652.39 -£65.24 £13.87 -£337
Y11 £107,513.31 £671.96 -£67.20 £15.05 -£337
Y12 £110,738.71 £692.12 -£69.21 £16.37 -£337
Y13 £114,060.87 £712.88 -£71.29 £17.85 -£337
Y14 £117,482.70 £734.27 -£73.43 £19.53 -£337
Y15 £121,007.18 £756.29 -£75.63 £21.43 -£337
Y16 £124,637.39 £778.98 -£77.90 £23.62 -£337
Y17 £128,376.52 £802.35 -£80.24 £26.14 -£337
Y18 £132,227.81 £826.42 -£82.64 £29.09 -£337
Y19 £136,194.64 £851.22 -£85.12 £32.57 -£337
Y20 £140,280.48 £876.75 -£87.68 £36.73 -£337
Y21 £144,488.90 £903.06 -£90.31 £41.79 -£337
Y22 £148,823.57 £930.15 -£93.01 £48.06 -£337
Y23 £153,288.27 £958.05 -£95.81 £56.03 -£337
Y24 £157,886.92 £986.79 -£98.68 £66.47 -£337
Y25 £162,623.53 £1,016.40 -£101.64 £80.73 -£337
Y26 £167,502.23 £1,046.89 -£104.69 £101.33 -£337
Y27 £172,527.30 £1,078.30 -£107.83 £133.64 -£337
Y28 £177,703.12 £1,110.64 -£111.06 £191.49 -£337
Y29 £183,034.21 £1,143.96 -£114.40 £324.65 -£337
Y30 £188,525.24 £1,178.28 -£117.83 £952.04 -£337
Landlord Insurance Monthly Cash Net Years Cash Return Years Value Increase Years Total Return
-£15 £84.21 £1,010.49 £0 £1,010.49
-£16 £94.61 £1,135.35 £2,400.00 £3,535.35
-£17 £105.38 £1,264.52 £2,472.00 £3,736.52
-£18 £116.51 £1,398.17 £2,546.16 £3,944.33
-£19 £128.04 £1,536.47 £2,622.54 £4,159.01
-£20 £139.97 £1,679.61 £2,701.22 £4,380.83
-£21 £152.32 £1,827.79 £2,782.26 £4,610.05
-£22 £165.10 £1,981.25 £2,865.73 £4,846.97
-£23 £178.35 £2,140.21 £2,951.70 £5,091.91
-£24 £192.08 £2,304.96 £3,040.25 £5,345.21
-£25 £206.32 £2,475.78 £3,131.46 £5,607.24
-£26 £221.08 £2,653.01 £3,225.40 £5,878.41
-£27 £236.42 £2,837.04 £3,322.16 £6,159.20
-£28 £252.36 £3,028.30 £3,421.83 £6,450.13
-£29 £268.94 £3,227.32 £3,524.48 £6,751.80
-£30 £286.23 £3,434.72 £3,630.22 £7,064.94
-£31 £304.27 £3,651.27 £3,739.12 £7,390.39
-£32 £323.16 £3,877.93 £3,851.30 £7,729.22
-£33 £342.99 £4,115.92 £3,966.83 £8,082.76
-£34 £363.91 £4,366.90 £4,085.84 £8,452.74
-£35 £386.09 £4,633.12 £4,208.41 £8,841.53
-£36 £409.82 £4,917.81 £4,334.67 £9,252.48
-£37 £435.48 £5,225.81 £4,464.71 £9,690.52
-£38 £463.73 £5,564.79 £4,598.65 £10,163.44
-£39 £495.66 £5,947.87 £4,736.61 £10,684.48
-£40 £533.29 £6,399.45 £4,878.71 £11,278.15
-£41 £580.95 £6,971.36 £5,025.07 £11,996.43
-£42 £649.72 £7,796.62 £5,175.82 £12,972.44
-£43 £779.44 £9,353.29 £5,331.09 £14,684.39
-£44 £1,305.26 £15,663.12 £5,491.03 £21,154.15
Total Cash Net Value Increase Total Return Total %ROI
£1,010.49 £0.00 £1,010.49 5.05%
£2,145.85 £2,400.00 £4,545.85 22.73%
£3,410.37 £4,872.00 £8,282.37 41.41%
£4,808.53 £7,418.16 £12,226.69 61.13%
£6,345.00 £10,040.70 £16,385.70 81.93%
£8,024.60 £12,741.93 £20,766.53 103.83%
£9,852.40 £15,524.18 £25,376.58 126.88%
£11,833.65 £18,389.91 £30,223.55 151.12%
£13,973.86 £21,341.61 £35,315.47 176.58%
£16,278.82 £24,381.85 £40,660.68 203.30%
£18,754.60 £27,513.31 £46,267.91 231.34%
£21,407.61 £30,738.71 £52,146.32 260.73%
£24,244.65 £34,060.87 £58,305.52 291.53%
£27,272.95 £37,482.70 £64,755.65 323.78%
£30,500.28 £41,007.18 £71,507.46 357.54%
£33,935.00 £44,637.39 £78,572.39 392.86%
£37,586.27 £48,376.52 £85,962.79 429.81%
£41,464.20 £52,227.81 £93,692.01 468.46%
£45,580.12 £56,194.64 £101,774.77 508.87%
£49,947.03 £60,280.48 £110,227.51 551.14%
£54,580.15 £64,488.90 £119,069.05 595.35%
£59,497.95 £68,823.57 £128,321.52 641.61%
£64,723.76 £73,288.27 £138,012.04 690.06%
£70,288.56 £77,886.92 £148,175.48 740.88%
£76,236.43 £82,623.53 £158,859.96 794.30%
£82,635.87 £87,502.23 £170,138.11 850.69%
£89,607.23 £92,527.30 £182,134.54 910.67%
£97,403.86 £97,703.12 £195,106.98 975.53%
£106,757.15 £103,034.21 £209,791.36 1048.96%
£122,420.27 £108,525.24 £230,945.51 1154.73%

If that makes any sense whatsoever, I’m extremely pleased to have been able to communicate a complex strategy. If not… well… story of my life I guess :-)

One thought on “Why I may never own my own home

  1. Makes quite a lot of sense actually (maybe I’m just wired in the same way as you for financial stuff). Depending on your overall strategy the capital gains on the properties could play a major factor if you were looking to accelerate plan after a couple years. Like, for example, using the capital gains to finance further property purchases. That’s what we’re planning to do for house 3 as our current ones should have appreciated enough for us to be able to swing it.

    I’ve never really agreed with the notion that buying your own home is an investment either. The only thing that it’s got going for it is that you might be able to leverage it later to get something better, but even then you’d get better returns on your money with other investment vehicles. Then again most people are balls at saving and investing, so it’s probably the only decision they’ll make that could ever be called an “investment”.

    One thing Australia has going for it in this regard (although I know this probably doesn’t help you ;) is that any losses incurred can be offset against your income. That makes it a lot easier to do investment strategies like this in Australia, although finding rentable properties at that price range is a lot harder.

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