Property - is it worth the investment?

laffer

Hi

I currently rent a place (and always believed that rent money is dead money) but the rent at the moment is significantly below what a mortgage would be on the property. Like most people who want to consider property I have been saving up for a deposit. But lately I have been thinking is it all worth it?

In about three years on my current savings projections I should be in a position to earn at least half of my yearly rent in interest (if my calculations are correct and I can achieve a rate of 4%). This is only possible because I have a deposit large enough to earn that interest in three years time. When I hand over the deposit to the Bank I earn nothing (because I do not have it any longer) and I have to pay the mortgage which will mean savings will be difficult.

So I was thinking: Why not keep hold of it, use the interest earned to pay half your rent and then keep saving away along your current path and diversity into other more liquid assets. House ownership would be nice for both security and the sense of having your own place but in terms of making money is it really just a drain on your current assets? Everyone says the benefit of the house as an asset is its tax status and of course the fact you get a large lump sum at the end of the mortgage when it is sold but would i not have more money if i just kept my money in cash and continued to save even accounting for rent?

Gwhiz

Over the long run property is an appreciating asset as well as being your home. Do not underestimate the feeling of security of owning your home, especially once you have paid off your mortgage.

For the foreseeable future property will not be an asset class that will appreciate much (IMHO) but there will come a time when it will just as it always has.

Diversification is a great idea BUT the moment you think of your house as an investment, as opposed to your home, you are heading for trouble. Keep the two separate - buy a home when the time is right but also put together an investment portfolio for your long term security.

mr_fishbulb

You have to take inflation into account.

You may be able to make £300/month (just guessing) income from a lump sum, but inflation is going to nibble away at the purchasing power of that. 10 years down the line, £300 is going to be less than half of your monthly rental payment.

When you buy a house on a mortgage, it locks in the monetary cost of the house. Mortgage payments may seem a lot of money now, but as your salary increases through inflation and promotion, the percentage of your take home pay spent on the mortgage will drop.

Obviously this is a simplified example and doesn't take into account changes in interest rates.

laffer

Thanks for the perspectives. Your point about inflation is obviously correct and I had not taken that into account. The question which then arises is how much is an appropriate deposit these days? How long is a piece of string I suppose?

Pee

Statistically, I don't think there is any period in history when the money in the bank would have been worth more if allowed to compound interest than a house would over the same period provided the period we are talking about is over 10 years. Of course, that doesn't proved what will happen over the next ten years.

Arthurian

Fully agree with Mr Fishbulb. Also, in owning a house you are forced to keep adding value by putting in time and effort on maintenance, when you can afford it. It's an added drip-fed cost which pays dividends in the end.

laffer

So have you all put all of your savings into a deposit or kept some of it aside?

mr_fishbulb

laffer wrote: »

Thanks for the perspectives. Your point about inflation is obviously correct and I had not taken that into account. The question which then arises is how much is an appropriate deposit these days? How long is a piece of string I suppose?

I'm in a similar situation - I'm renting, currently saving for deposit for my first house. I'd like to have 20-25% available (I'm saving with my girlfriend so that makes this a little easier). But that's just my own goal, not a general wisdom.

Also need to save for up-front costs like surveys, solicitor, mortgage arrangement fees, etc.

Plus you need savings left over for when you move in and the boiler breaks.

pizzagirl

laffer wrote: »

Hi

I currently rent a place (and always believed that rent money is dead money) but the rent at the moment is significantly below what a mortgage would be on the property. Like most people who want to consider property I have been saving up for a deposit. But lately I have been thinking is it all worth it?

It's amazing how many people believe this falllacy. If your rent is less than the mortgage interest then rent isn't dead money, it's money saved.

dopester

Inflation is dead. Long live deflation.

jon3001

Arthurian wrote: »

Fully agree with Mr Fishbulb. Also, in owning a house you are forced to keep adding value by putting in time and effort on maintenance, when you can afford it.

Surely maintenance just maintains the value of a home (in real terms) rather than adds values?

Arthurian wrote: »

It's an added drip-fed cost which pays dividends in the end.

It's just a cost.