Many millennials are faced with a dilemma when it comes to taking their first step on the property ladder. Is it better to buy a property for the rental income, or own your home? Well, it depends on your circumstances as well as your appetite for risk and reward. In this blog article, we’ll also cover some of the more obvious pros and cons for homeownership versus investment as a strategy to get onto the property ladder.
Buying Property To Rent
When you buy property, you have a choice to live there or to rent it out. Owning rental properties can be lucrative, and when starting, if you invest in an entry-level flat or house in an affordable neighbourhood, you could get onto the property ladder earlier than you would if you were buying a PPOR (principal place of residence).
An investment property that rents well will provide an income that covers all outgoings and provides a profit, in much the same way a successful business operates. One of the significant outgoings is mortgage repayments. Each month the interest and more than likely, some principal is paid to the lender. Paying the principal reduces the loan amount.
With a tenanted property, the weekly rent should pay the mortgage repayments and over-time pay down the loan on the property.
Cash Flow Positive
When all other outgoings are also paid for by the rent, and there is a surplus this is called a cash flow positive position which is useful for the investor, and an incentive to create a property portfolio. For example, if the surplus is just £50 or $50 per week and over-time you’ve accumulated ten rental properties, you’ve got £26,000 or $26,000 annually to either invest or spend so you can see the attraction of investing in property.
Another pro for investment is when you’re searching for a place to rent, location becomes an important factor for the tenant, rather than for you, and this may open up more options. It might also be easier to find a suitable property, as you’re buying with your head, rather than your heart. Cash is king when you own rental properties.
Once you’re on the property ladder, you can leverage the assets to accumulate more rental properties as well as capitalise on movements in the market, i.e. time the sale for maximum capital gain.
The only real downside to investment is your property is under a tenancy agreement with legislation governing what can and can not occur. For example, access to the property can only happen after the tenants have received adequate notice.
In some countries, the tenancy laws also rule on when rental increases can occur, and the condition of the property. See this article on property law changes for more information.
Owning Your home
The other option when you buy property is to live in your new home. If you choose to do this, you won’t be charged rent anymore, and you’ll be paying into your asset. You’ll be paying off a mortgage, and when you come to put your home up for sale, there’s a good chance that the value of your asset will have appreciated. It’s also possible to add value while you’re covering mortgage costs.
There are several ways of increasing the value of a property, from freshening up the kitchen to adding an extension. Plus there’s the security that you can not be moved on like you can when you’re renting.
Lenders need property owners to contribute a percentage of the property value on the purchase. The purchaser may provide 20% of the property price while the lender agrees to loan 80%.
Loans agreements require repayments paid regularly, and lenders forward a loan amount based on the mortgagee’s ability to service it. With no rental income contribution this limits the loan amount and to secure a home in a better location or a higher spec property, more deposit and more income is required.
When property prices rise due to market conditions, i.e. more demand than supply, first home buyers which are typically millennials find it harder to get on the property ladder.
Australia, USA, Canada, UK, and many more have incentives to get first home buyers into their own home.
There are many more pros and cons for both strategies to own a property, and there is no right or wrong way. Your position will determine which method is best for you. Do your research and set your goals. You may work out a rental property can grow your deposit for your own home later on. Or the risks of owning a rental property far outweigh the positives for you and you’re willing to compromise on location or type of property to get on the ladder quick smart.
Always get professional advice before committing either way and read our blog for more insights.