Buy to rent no magic shortcut
He doesn’t buy craft beers. She sips Nescafé Blend 43 from a tin. They live in a feral sharehouse, all so they can save $623 a week to put towards their house deposit.
And here’s the kicker.
While they scrimp and save … the prices of properties around them are going up $1990 a week.
Do you see what’s happening? Despite all their hard work and sacrifice – they they’re re going backwards.
There’s no celebratory champagne after winning the auction. Just second-rate slurps from a dirty teacup in a sharehouse – and the sinking feeling they’ll NEVER crack the market. And then, in their darkest hour, there is hope.
A few weeks ago there was a spot on the nightly news that talked about a brand new product called OwnHome (backed by
CommBank), which promises to “save for your dream home, while you live in it, meaning you can kiss the renter’s life goodbye”.
Understandably, it caused my inbox to light up like a kid on Coco Pops.
Here’s the guts of how OwnHome works.
OwnHome buys your dream home and then rents it to you for three to seven years.
The rent is expensive. On a $1m home, you’d pay $70,500 a year. A large part of that rent goes to OwnHome, while a smaller part goes to building up equity in the property. You agree to buy the property from OwnHome in, say, five years for
$1.2m. (Because OneHome sets the price, you’ll pay for the home at the start of the contract; currently they increase it by 3.8 per cent a year).
And, if you’d done this deal five years ago, you’d be well ahead.
So is this really a breakthrough product?
Not really.
Despite OwnHome’s fintech vibes, and the fact it was on the news, this is not a new strategy. It’s called “rent to buy” and it’s been around long before Billy Ray had an achy breaky heart.
Straight up: I’m not a fan (of Billy Ray, or rent to buy).
Why?
Let me count the reasons.
there’s a power
First, because imbalance
The sellers (su such as OwnHome) are generally savvy savv investors who can set the terms of the th deal in their favour. Whereas the t renters are making an emotional emotio decision which is often driven by FOMO (Fear Of Missing Out).
Second, because becau there’s a chance the renters could lose everything
Over the years I (like many other financial counsellors) counsell have helped renters who got an a achy breaky heart on these deals. How Ho does that happen, Billy Ray?
Well, if interest interes rates go up you risk not being able to a afford (or being able to qualify for) a home ho loan to buy it. (OwnHome is not no a lender.)
And if house prices p go down, you risk overpaying for fo a home that’s dropped in value since you agreed to buy it.
And here’s the stinger: if you walk away from the house, ho you also walk away from all the dough you’ve put towards it. In the example I used above, that would translate to around $165,000. In other othe words, the
$165,000 you’ve put p towards the home would be goneski, go and you wouldn’t be able to t use it to purchase another, cheaper home.
Third, because becau you’re probably better off renting re and saving
Get this: OwnHome itself admits that “in many situations using
OwnHome is slightly more expensive on a monthly basis than renting and saving”.
Or, in other words, don’t believe everything you see on the nightly news!
Tread Your Own Path!
I’M A GROWN MAN, AND I’M SCARED
Hi Barefoot,
I’m worried about what to do with my superannuation. I want to retire in the next 12 months as I turn 66 in
July. But I’m scared that if Russia or China invade, this would have an impact on the share market, which will directly impact my super fund. What do you think?
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Bill
Hi Bill,
I have absolutely no idea what Putin or Xi will do, or the effect it will or won’t have on the market.
After all, who’d have thought a global pandemic would cause a boom in the share market?!
Yet, I am very sure that by pouting about Putin you’re overlooking your biggest financial risk: inflation.
If you’re retiring on a fixed income, you need to ensure that money won’t be whittled away.
The price of stuff is currently rising at the fastest pace in 11 years. Ronald Reagan once described inflation as “violent as a mugger, as frightening as an armed robber and as deadly as a hit man”.
So, how do you outrun inflation? Generally by investing in businesses that can put their prices up. Of course, doing that buys you a ticket on the stock market rollercoaster – which will work out so long as you don’t jump off mid-ride!
Seriously, Bill, I don’t think it’s good for your wellbeing to worry about things you can’t control.
I’d suggest you sit down with a financial adviser and work through a strategy that will make your money stretch.
AM I A GREEDY LANDLORD?
Scott,
I own an investment property in an area where rent prices have basically doubled during Covid.
Do I keep my good tenant of nearly 10 years, who is now on very, very low rent, or chuck him out to cash in on the double dollars with new tenants?
The tenant could actually be making money as he has two rooms to sublet, and the rent from these could exceed the entire rental.
The rent is actually so low now that it is embarrassing me – I feel stupid!
Helen Hi Helen
You’re embarrassed? Really?! There are plenty of things you could be sheepish about, but this is not one.
Helen, stomp your hoof, you’re a rolled gold daddy ram! Here’s another way to frame your situation.
Your property probably went up 30 per cent over the Covid period, while you were still able to provide a secure roof over the head of your tenants, who were likely going through a really stressful time.
Am I saying you should let them rent it out well below the market rate? No. What I am saying is that you renegotiate while also being considerate of the people who’ve been paying off your investment.
If they’ve been good tenants and have maintained your property well, they’ve earned the right to sit down and make a fair deal with you. Good tenants are hard to find. Giving a little often goes a long way.
Baaa!
I’M ALL EARS
Hi Scott,
My nine-year-old daughter started a business making earrings and hairties last year during lockdown. It’s grown so much she now has a few thousand dollars in her bank account!
We have an agreement that she must split the money into reinvesting in her business, saving for the future, and saving for a short-term goal like an iPad (which she actually bought at the end of last year as a reward for hard work).
Given the rate her business is going, I’d like to help set her up more for the future, but I’m not sure how to go about it, as I’ve never done this myself.
I’m probably not the best role model for money with her.
Can you provide any advice?
Tammy
Hi Tammy
Oh, I LOVE THIS.
Let me tell you a little secret: you don’t need to know all the answers.
As parents we feel like we should, yet it’s usually better to work alongside your kids and help them work it out themselves.
This is exactly what my next book is about. And I’d like your daughter to be a part of it!
So I’ll put my hand up to be both a customer (my wife likes earrings) and her financial coach.
I’ll be in contact next week.
Information and opinions provided in this column are general in nature and have been prepared for educational purposes only. Always seek personal financial advice tailored to your specific needs before making financial and investment decisions