In this blog post I'm going to talk about renting versus buying a home in 2021. If you're looking to get into property in 2021, or if you've already got a property and you're thinking about moving in 2021, this article is for you. I’m going to discuss the property market, what's happening and whether you should buy your own home before you start investing in property.
Now there are some very well-known people in the property world, like Grant Cardone in America, who's a very successful property investor. He says to people, "Hey, you shouldn't be buying a house. You should be investing in rental property instead to get income coming in." He said you should be renting. In fact, Grant goes as far as saying, sell your own home, and you should take that money and put it into rental property to get income coming in. Now, I agree in principle that might be a good idea. Especially if you think the market's going to come down, sometimes you have to sell the house at a high price then rent for a while. Then when prices all come down, you buy to get back in, or buy a bigger house for the same amount of money you sold your house at.
That can be a good strategy, but it can also be really risky. We don't know how much the market's going to come down in 2021 and we don't know where it's going to stop. So I think that's maybe a little bit excessive. But if you have to move from your own home into another property, and you have to do that because you're relocating, because of work, you're emigrating, you’re increasing or decreasing the size of your family, the question is, do you need to actually buy another property? If values are going to come down in 2021, maybe you should wait. Maybe you should think about renting instead.
“But instead of rushing out and buying a new house, which I do intend to do at some point in the future, I’ve been waiting because I think the market’s going to come down.”
Why you Should Rent Your Residential Property
Now, why is that a good idea? Well if you're going to sell your existing home, rather than going to buy a new one which means you're going to have to put a big deposit in and get a mortgage, maybe instead you can use that deposit money to buy some more investment properties. Those are properties where you're not going to be living in, but the rental income from those helps give you extra cash flow so that you don't even have to work maybe because you've got cash flow coming in from your properties. So instead of tying up a whole load of money in a new property, I can actually see the value of that. I've got a whole load of rental properties and right now, I'm renting. That's because I gave my last house to my last partner, so she's got that. I don't have my own residential property right now. But instead of rushing out and buying a new house, which I do intend to do at some point in the future, I've been waiting because I think the market's going to come down.
Letting Out Your Previous Residential Property
Now here's a much better strategy. If you've got a property you're moving out of, you could sell that property and use the money to buy more properties, or if it's an appropriate property and if it's in the right location, you could maybe rent out your own home. Now there are some interesting things you have to do here. If you've got a residential mortgage on your own home, you need to speak to your lender and get what's called consent to let agreement for you to let the property out, because they've given you a mortgage based on you being there and you living in that property. If you're not going to do that, you need to let them know. You also would need to make sure you have the correct insurance, because you're basically becoming a landlord. You need to have buy-to-let insurance for that property to make sure it's insured properly in case anything happens to it. So that's the first thing, you might move out and turn it into a rental property. Or if you sell the property because it's your own home, you're not going to pay any tax so rather than putting in a deposit to buy a new one, you could use that to invest. So, what are you going to do? Well you've got two choices. People like Grant Cardone would say, "Hey go and rent a property to live in. And then you're just paying rental income. And you're still in the property ladder, because you've got investment properties. Those are going up in value." You can absolutely do that, but there's something better you can do, and this is what I'm looking to do.
Doing a Purchase Lease Option
I'm looking for a property that I can pick up on a purchase lease option. I will move into that property as a tenant, but I have the right to buy that property in a few years' time. Now why would I want to do that? Well, there are a couple of reasons. First of all, it means I'm not tying up a big deposit to buy that property. When you get an option, you need to put down an option fee. Sometimes it's as little as a pound. Secondly, I don't have to get a mortgage right now because I'm not actually buying the property right now. I'm going to have the right to buy that property in three to five years. I'm becoming what's called a tenant buyer. So I'm a tenant in that property, but I've got a right to buy that property. Now, I have to find people for whom that works, and not everyone is going to agree to a purchase lease option. But let me tell you who you might want to look for. Someone who's got a property and they're trying to sell it, but they can't sell it right now. Rather than have it empty, they'd be happy to rent it out. That's exactly what I'm doing. I'm going to rent their property for a number of years and I've got the right to buy. Now I've got the right to buy, but I don't have to buy if you don't want to. I'm going to look for one that I do genuinely intend to buy. I think, to be ethical, you should go into the arrangements with that intention, but plans change and you might not actually buy. Now is this possible, are people doing this? Yes, loads of my students are doing this right now. I've actually done it before.
“I will move into that property as a tenant, but I have the right to buy that property in a few years’ time. Now why would I want to do that? Well, there are a couple of reasons. First of all, it means I’m not tying up a big deposit to buy that property.”
So with a previous partner, I was looking for a nice property in Edgbaston to move into. I was looking for a four or five bed house, up to about half a million pounds. This was about seven years ago. I found a very nice property. It was a Georgian property in a lovely terraced row of houses. It was a big, four bedroom property. It was a listed property, so it had really nice character. The owner had wanted to sell this property. He'd lived there himself with his partner and then they had split up. He'd used it as a rental property for a number of years, and he wanted to get rid of the hassle. He didn't really need the money as such; he just didn't want the hassle anymore. So I saw this on the market. I kept an eye on the area in which I wanted to buy and I saw this property come on and I saw it was sale. There was no real interest for me. But then by keeping an eye on Rightmove and Zoopla, I noticed the same property came back onto the market several months later. Now that's because in the UK, one in three sales fall through. So I saw this property come back on the market, but interestingly, it came on for sale and also for rent. That's a big clue, by the way. If you're looking for purchase options, look at what is listed for sale and also for rent. So I called up the agent, I arranged a viewing at the property, and I said to the agent, "So, just tell me, I thought this property had sold. It looks like it's come back on the market." The agent, "Yes, it had sold. A developer wanted to buy it, move in, live here, and develop it. But he pulled out." I said, "Do you know why he pulled out?" Well on the back of the property there's this lovely kind of orangery and because it's a listed building, they had to get consent to put this up. The previous owner had got consent and done it. So when the current owner bought it, he knew all the consent was in place. But when the current owner came to sell the property, he couldn't find the evidence. He couldn't find the proof. The buyer, this developer, used that as a reason to back out of the sale. So the seller was upset, put it back on the market and said to the agent, "Look, I can't afford to have the property empty. I'm happy to rent it out until I find someone to buy." The agent quite rightly said to the owner, "Look, this kind of value property, no one's going to rent over six months. You probably need to rent it for at least a year." They owner said, "Okay, fine." So when I understood the background, I said to the agent, "So look, I'd like to buy this property, but I guess it's going to take a while for the guy to sort out all the paperwork, do you think he'd be open to me moving into the property, renting it for a year, and then buying the property?" And the agent said, "Well, yeah, I think he might well be interested in that."
Negotiating End Prices and Changing Your Mind
The agent then said to me, very surprisingly, "And I suppose what you pay in rent, you'd want to take off the end price." And I said, "Yes, I would love to do that." Now, I didn't expect the agent to say that. Most agents don't get this so never use the terminology, purchase these options. I just explained I'd like to rent and then if I like it, I'd like to buy the property. So, the agent spoke to the owner and we negotiated a bit on the price. It had previously been sold for £425,000 and it was on the market for £475,000. So it was already at a 10% discount there. I said, well I would be prepared to pay the same price, £425000, in a year's time. The owner thought the market was going up at the time. It wasn't really, but he said, "No, no, I won't sell that. I want to get a bit more money." We agreed on £435,000. So more than he'd sold it to the previous person, but we agreed the rental income that I was going to pay would come off the end price. The rent should normally be about £1600 on this property; I negotiated down to £1200 per month. I was in this really nice, four bedroom Edwardian property in a great location in Edgbaston, Birmingham for just £1200 a month, and renting for a year. All that money would come off the end price. Now that's just under £15,000. So in other words I'd have another £420,000 to buy this property.
We moved in, me and my partner at the time and we did a little bit of decoration. We improved the quality of the property. For various reasons, we decided not to buy this property. We reached out to the owner and we said, "Look, we're really sorry. We've enjoyed living here, but the house is just not for us." Now obviously he was a bit disappointed, but we'd looked after the house and we'd added value by decorating it. We spent a couple of thousand pounds doing that, not a huge amount. And he said, "Look, how would you like to stay there as tenants, until we can actually sell it to someone else?" We agreed. He put it on the market, and had people come around to view it. He actually sold it eight months later for more than we were going to buy, so he still ended up doing really well from it. We lived in a property which we were planning to buy but we had the option, we didn't have to buy it. What that meant was we had the luxury of living there and if we wanted to buy the property we could. Imagine we'd just bought that property. We'd put in a deposit, we’d have gotten a mortgage and a year later realised, you know what, this isn't the right house for us. So, that would have been a bit of a difficult situation.
“The agent then said to me, very surprisingly, “And I suppose what you pay in rent, you’d want to take off the end price.” And I said, “Yes, I would love to do that.” Now, I didn’t expect the agent to say that. Most agents don’t get this so never use the terminology, purchase these options.”
Try Before You Buy
So the benefit of you going in and renting a property first before you buy, is you get the chance to try before you buy, to make sure it really is the right property for you. This whole strategy of, if you're moving from one property into another, rather than thinking you have to sell that property to get a deposit for the next one, maybe you could get a purchase option like this. You can rent your own house out, make an income from that or refinance it, and you could actually change the mortgage into a buy-to-let mortgage if you want to do that as well and rent it out. That's another property in your portfolio, and you don't actually need to be buying a property right now. So that's my thoughts on whether you should rent or buy, ultimately you might want to own your own property. It's always good to have your foot on the ladder but if you've got other investment properties, you are on the ladder. Don't think you have to own your own home and then buy properties. You could build up a portfolio, and then you can buy. In fact, you can use the money from your portfolio. You can refinance to give yourself the equity you need to buy the property in the end. So I think it's an interesting way of doing it. So should you rent or buy? I think I'm in the rent camp. Rent and then buy, and instead invest some of your money in investment properties to give you an income in the meantime.
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