Buying a home or an investment?

The following article continues along the themes of a previous article that I wrote entitled: Renting Versus Buying. This article supposes that you have enough for a deposit on a house. Looking at the purely financial side of the transactions: Should you invest it or buy yourself a home?
Picture from jscreationzs 

Buy a home to live in or buy an investment property?

We're going to view this problem purely as a numbers game, so let's take a look at the excel spreadsheet below. The same principals would work for any currency.

Let us say you purchase a home worth £200,000, and you put a 20% deposit down, requiring you to put down £40,000. Let us assume that interest on your Mortgage is at 6%. From here onwards, costs will be considered on a weekly basis.

Regardless of whether this house becomes a home or an investment property, the weekly mortgage repayments are still £185 a week, which in the case of a home is your total costs.

In the case of buying the house as an investment property you will obviously receive a weekly rental income. This is usually worked out at 4% of the total price of the property, in which case you receive £153 a week in rental income.

In the UK up to £4250 of tax free income can be claimed on rental income and so we write that as a tax refund, giving you a weekly refund of £82.

So far we are making £50 a week more than we're paying out on this investment property due to the weekly repayments and tax refund. However, you've got to live somewhere. You can now afford to rent somewhere even more expensive than your investment property, for example, paying £200 a week, so that your total weekly costs on housing are £150, which is £15 a week lower than had you just bought a home. Throw into the mix the obvious fact that other people are paying for your mortgage (ego boost!) and you're onto a winner.


Now I am very aware of the assumptions made here and I think I should outline them to you, just to be upfront and honest:

  • Interest rates may be higher (or lower) than 6% and will fluctuate
  • Rent received may be lower (or higher) depending on the area
  • I have only included the £4250 tax free rental income in the 'Tax Refund' section, of course this could be a much larger number as you could write off landlord insurance and other business expenses
  • It doesn't include the 'cost' of the hassle of having to deal with tenants
  • It doesn't deal with the possibility that you may not have tenants for a period of time in which case you will have to pay the full mortgage interest repayment and your own rental income for those weeks

What do you think? Is is worth buying an investment property or should you just keep your finances simple and just buy a normal home?

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Katie said...

I definitely want to buy a rental property but I live in an area where housing is pretty cheap. With the way houses are priced right now I could buy a rental home with a mortgage for about 1/5 of what I am paying for my own home.

I think a lot depends on the are you live in. But in the scenario you mention I would buy my own home versus buying an investment home.

Alex said...
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Mr. Moneybanks said...

Thanks for the compliment Ahmad but I currently don't allow advertising within comments on my site. Feel free to comment again with your profile name acting as a link to the site you're trying to promote.

Adil Awan said...
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Therence Sim said...

It is best to consult a tax resolution company and find out the Statute of Limitations for your case.

Unknown said...

We have to make something work for our future. Make sure that we have a business that we can depend on when time comes. A business that will help us survive and support our needs for the future.

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Unknown said...

Thanks for taking the time to discuss this, I feel strongly about it and love learning more on this topic.
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