Why I Rent Where I Live & Buy Cash-Flowing Investment Property Instead?
Renting doesn’t have to be "dead money", in fact this strategy has allowed Lucy and I to live exclusively off passive income helping us to save, compound and reinvest all of our active income in more Rent-to-Rents and property purchases.
Has anyone every told you before that renting is dead money? I completely disagree.
I’m really passionate about this subject but before I go any further I want to make it clear that this is not advice, I’m not advocating this approach, however I want to explain my motivations for renting whilst investing in cash-flowing investment properties instead.
Why is this so important? For me, this one subtle trick has helped me avoid the rat race. A “normal” mentality is to get on the property ladder, take out a repayment mortgage and then chip away for decades. Let’s run through an example, you purchase a property for £200k. Next you put down a 20% deposit (£40,000) and pay off the mortgage every month for the next 25 years. Most people think that your house is an asset, but actually having a house with large remortgage payments is a liability which will stop you from becoming financially independent until that mortgage is paid off.
My mantra is to become financially independent today not in 25 years, this is not possible through purchasing one property and paying it off over a long period of time. Property prices are supposed to double every 10 years, but I’m not sure our generation will see the same growth as our parents or grandparents. That’s why I believe we need to get creative, and why I have decided to not purchase and rent where I live whilst building my portfolio.
Today I want to run through how my approach and Rent-to-Rent compare to the traditional mindset of the property ladder.
In this episode you will learn
Why renting is not dead money.
Why this is a topic I am very passionate about
How to avoid the rat race
Getting creative and not waiting 25 years to become financially free
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Podcast Transcript↓
[00:00:56] Hey, Simon here. And welcome to another episode of the podcast where we cover all things property, Creative Cashflow and how to be financially independent today. Not in twenty five years. And today I'm going to be covering something I always get asked about. Always. And people seem to marvel about it. Hang on a minute. So you're a property investor. You control, you know, twenty-odd properties, yet you rent where you live.
[00:01:30] What?
[00:01:31] Renting is dead money. That's what you're going to hear all the time, and I'm just going to tell you today why I disagree, if you do it right. And I'm going to tell you my reasons behind it, and I'm really excited to go on interview because it's a subject I'm really passionate about. And, yeah, I'm excited. So what I will say before I go any further is this is not advice. I'm not saying this is the right way of doing it. I'm just going to explain my motivations behind doing it. Why me and Lucy choose to rent where we live and invest in terms of Creative Cashflow rent to rent, but also in purchasing properties that cash flow instead. So we rent where we live and we own other properties, we control other properties because we believe that is a better investment. So why is it important? Well, for me, this one subtle trick can be the difference between somebody creating assets and having assets behind them and them never, ever really getting off the financial ground. Never. Because once you enter into the rat race, it's very hard to get out. And that's what I'm going to share today. So I'm gonna start off by explaining what I think the normal sort of mindset and the normal mentality is. And that is that you want to get on the property ladder. And generally speaking, the first the most direct way of doing that is to buy the house that you're going to live in. Okay. And the general sort of mindset is you'll chip away at that mortgage. It'll be on a repayment mortgage. Let's take some figures. You might buy the house for 200 grand.
[00:03:19] You'll put 20 percent down. So you might put 40 K down. Then you lend 160 K. Pay it off every month. And in 25 years, you may have paid off that mortgage under the condition you don't refinance at any point, which most people do. So the general premise is you're going to buy that one house, you're going to put everything you've got behind it. You know, I see a lot of couples that are getting started. They'll both put all their money into one sort of pool and they'll chuck it in this one property. They'll then probably do the property up, fill the property with amazing furniture. And then, of course, you need the two cars, you probably need a couple dogs, then, the white picket fence is the middle class dream. And the issue is, guys, that a lot of people overextend and once you've overextended and you've got that mortgage around your neck, your only hope of financial independence is in 25 years, which is the exact opposite to what? You know, sort of mantra is, our mantra is get financially independent today, not in 25 years. So this is against everything I personally believe. So the general premise is you want to get on the financial ladder. You want to get on the property ladder. You buy this property. OK. You buy it, you put everything in you've got, and then you've got these big two thousand pound, fifteen hundred pound mortgage a month and you've got to then focus on active income to ensure that that's paid off and all the other things are paid off. You've got no passive income. And that's the rat race. That's the danger because if that happens, it can take years for you to ever get any cash flowing assets because you just put all your eggs in one basket.
[00:05:17] I mean, 'Rich Dad, Poor Dad' talks about how. An asset is something that pays you every month. And a liability is something that costs you money every month. So, according to his, many of the super successful wealthy businesses and property sort of people, they would stipulate the property you reside in as a liability. It might be an asset one day because you will chip away, but it's just like a bank account in many ways. It's just like you basically pay in X amount of money into a bank account every moment in 25 years. Yeah, you're going to have a lump sum. So it's almost like a method of saving. Now, look, you are, of course, going to benefit from capital appreciation, but I'm going to explain why that's a constant in a minute between what I choose to do. But I also think, you know, it's different today. If you as my parents' or grandparents' age and you brought a property in London for a few grand, it's probably worth millions now. And I don't know if we're going to see that in my lifetime. So, got to be more creative. And then the other thing as well is, look, property prices on average double every 10 years. But we don't want to wait 10 years. We don't wanna wait 20 years. So the question is, if we're buying a house to live in because we want security and we've got a family and, you know, we...this is gonna be our forever home, then great.
[00:06:49] But if you're buying that house and telling yourself it's an amazing investment and you're going to see huge returns, unless it's part of a bigger investment strategy, I'm afraid to say I just disagree. I don't think it is. And I'm going to explain exactly why in this podcast.
[00:07:10] Now, there is a caveat. And as I've said, if you've got a young family or if you need security or if it's your forever home, you're just going to be there forever. Or if you've already got an asset sort of foundation behind you and you've already built up some cashflow, then buying a house could be great. You know, I would recommend that. But when I started, as you know, I'm still very new to this. I had nothing behind me. I had no assets. And I believe renting where you live to allow more available funds to build an asset foundation is one of the biggest forms of Creative Cashflow.
[00:07:51] So I want to give an example right now of the difference between the two approaches. So let's say you've got a couple, right?
[00:07:59] And, you know, they're taking home 60 grand a year between them.
[00:08:05] And they had one hundred and twenty thousand pounds to invest, and that consisted of 50 grand from partner A, 50 grand from partner B and then maybe the parent given 20 grand to help them on their way. A wedding gift or something like that. So they got a hundred twenty thousand pounds and they decide to buy the best possible house they can do, which was say, worth 400 K. So what happens is they buy the house. They do the house up. They fill the house with furniture and they inherit a mortgage of two thousand pounds per month. Ballpark figures, just examples.
[00:08:39] So you bring five in.
[00:08:41] Instantly, you've got two thousand pounds coming out of the account, which means you've got three thousand pounds left. And we're assuming this couple have no other form of income. No other income, right? So they've got three thousand pounds, let's say, for example, you got a thousand pounds on the cars and leisure, you've got another 500 pounds on additional expenditure, such as the bills, the council tax, all that good stuff. You've got another 500 pounds or meals out and treats, this, that and the other. You're already at 4000 pounds. So you've got a grand left.
[00:09:14] And that's before holidays. That's before trips. That's before any re-education, that's before kids, that's before healthcare. So you can see how hard it's going to be for that couple on that salary with that circumstance, that level of mortgage around their neck to ever re-save. When are they ever going to have one hundred and twenty thousand pounds again to invest? Well, best case scenario would be they do end up being able to save a thousand pounds. Let's say, for example, they...I'm going to do the math. They save a thousand pounds per month. How many years is it going to take? It's going to take 10 years for them to re-save a hundred and twenty thousand pounds. Let's say couple B, they decide to rent a property. Right. And for argument's sake, they're going to rent a property for two thousand pounds, the same amount. Exactly the same amount.
[00:10:14] And what's going to happen, guys, is this is going to blow your mind. It blew my mind. So instead of that one hundred twenty thousand pounds in one property, they rent where they live for two thousand pounds and they buy four investment properties at a hundred K. So instead of them having to put one hundred twenty on one they buy four houses. Okay. And they invest say 30 in each. They put 30 in each and each one of these houses generates five hundred pounds per month income. So what it basically means is they generate 2000 pounds a month in a passive income. And that 2000 pounds pays for their rent. But what this means now, guys, is they now have 5000 pounds per month. They still earn the same active income. They have that now to do what they want. Which means that in the same expenditure bubble that I explained before, they can now save two or three thousand pounds per month. So even on the lower end of that, they're able to save twice as fast as the couple that purchased the property. Meaning they'll be able to re-save one hundred and twenty thousand pounds in just five years instead of 10. But the smart money doesn't want to wait five years either.
[00:11:34] So what you can do is rather than waiting for the pot to build to one hundred and twenty thousand pounds again, you just reinvest every year. 24 K new property, 24 K new property, every year until what happens here is that the passive income goes from two K to five K and then you can say five K a month, which means you can then do two or three new properties a year. Crazy, right. But what's even deeper is, on top of this, they're going to get the benefit of four properties' capital appreciation, because I know some of you are going to be like, yeah, but what about the other property? Like, you know, it's going to go up in value and it will go up in value over 20 years. But the couple that have brought four properties, they are going to benefit from four lots of capital appreciation. So that's what we do. That's the psychology, but where it gets even more profound is when, in that one hundred and twenty thousand pounds, they actually only buy three properties. So they now make fifteen hundred. And with the other 30 K they do..
[00:12:46] Let's say they do another four rent to rents. So they spend seven and a half on each. So they've got four rent to rents. And let's say these rent to rents each make 500 pounds a month too. Now you've got fifteen hundred pounds plus another two thousand. So now they're at three thousand five hundred pounds passive income.
[00:13:06] So not only does the income now, from that same original fund by the way, not only does it pay for their rent, but it's fifteen hundred pounds extra which pays for their cars, their phone, their bills, their council tax and some meals out. So now all of a sudden, they've got 5000 pounds that they're earning actively, that they got nothing to do with.
[00:13:31] For holidays, for trips, for reinvesting. Because now they're saving 60 K a year because their expenditure is pretty much zero. There's other advantages of renting, controlling a property and not owning it. Namely, the first thing is maintenance. Me and Lucy, we don't have no maintenance issues. In fact, we rent the place we're in now for two years and we've not had to spend a penny on maintenance. Why? Because any time there's an issue, we just call up the agent, call up the landlord and say, Hey, Mr. Landlord sink's leaking. Hey, Mr. Landlord, boilers broke. And guess what happens? They send somebody out and deal with it. So Couple A they're going to have to replace the roof. Replace the boiler. Look after this. Look after that. Couple, B, they're renting, they're chilling. Nothing to do. No maintenance. And I think another massive advantage is flexibility. Like, if you don't know exactly where you want to spend the rest of your life, then do you really want to commit to a massive, massive mortgage? You know, what happens if you decide you wanna go Barbados for six months and just, you know, enjoy the climate, try something different, relocate. You know, what happens if you start earning loads more money? You decide, actually, I want a couple extra bedrooms, an en suite,, a steam room, a pool, whatever. You know, you don't have to wait months and months to sell the property. You can just move quickly. And the same goes in uncertain times. If your earning drops, if you lose that job. You've not got the pressure of that huge mortgage. You could just give notice, downsize and wait to get back on your feet. So in summary, it's not as clear cut as some people will have you believe. Renting is not dead money as long as you are being smart with the reserves you've got and you've got a plan.
[00:15:36] If you're just renting with no sort of insight into saving and future, you've got 50 K sat in the bank and you rent any you can see that amount of money depleting. Yes. Suicide. That is financial suicide. Of course. If you're renting and maximizing that initial fund, really, really smart thing to do, guys. Really, really smart. And the two key things, if you are looking to buy, which, by the way, we do want to buy, we will buy. But the two key things to consider is, one, don't buy too soon, because once you buy to live in too soon, you wipe out all your investment funds and your stock. And the second thing is, don't overextend. You know, you don't need the biggest, biggest, baddest house right now. Save some money investing. There'll be plenty of time for that. But don't overextend. And yeah, I will not be renting forever. We will buy a home to live in. And there's some really, really smart things you can do, by the way. Basically, when you buy a house and you live in it for over a year or so, when you come to sell that house, there's no tax on any of the profit. Capital gains allowance. So, you know, you can do some really smart stuff where you buy for two hundred grand, spend fifty on a refurb, or on an extension. And then when you come to sell at three hundred, fifty grand, clear profit. And that's something that I definitely would like to get into. So yeah, really, really interesting. And I hope I've sort of provoked some thought around this because I think some people...
[00:17:17] My main point is some people disregard and they discount and they undermine renting. But if you're renting with a plan, it can be powerful. And if you're Couple A and you've just brought this massive house, then good for you. Even if you're just aware of the potential traps that may be ahead and and find other ways to make income to fast-track your process, then this has been worthwhile.
[00:17:43] So, yeah, that's it for me. Thank you very much for tuning and please subscribe and rate the podcast. And remember, don't wait 25 years. Get creative. Let's listen in for more information, check out Simon Smith online dot com. See you next time.