This is the article where I will probably lose a lot of readers who have been conditioned to believe property is for everyone and you can get going easily with little time, money or experience, but that’s ok. I can handle it!
Maslow’s Hiearchy of Needs is a motivational theory of psychology, depicting human needs in order of priority. The theory is that needs lower down in the hierarchy must be satisfied before you can attend to needs higher up. These are represented as the following layers, from the bottom to the top:
- Physiological: E.g. food, water, warmth.
- Safety: E.g. security.
- A Sense of Belonging: E.g. friends, relationships.
- Esteem: E.g. accomplishment.
- Self-actualisation: Achieving one’s full potential.
I believe a similar hierarchy should exist, with property investing somewhere close to the top. My Maslow Hierarchy of Property Investing looks like this (see Figure 1 below):
- Home owner
- Stable income
- Good credit
- Property investing
What does this mean? It means I believe you should meet all the criteria of the lower levels before investing in property. Oops, there goes half of my readers!
Why? Let me take each in turn to explain …
There is a school of thought that you shouldn’t own your own property as it is a liability. That you should rent instead and invest in other property to rent out, as they are assets.
I am not sure where this originated but I have a sneaky suspicion it was in the book Rich Dad, Poor Dad, which is often touted as a great book to read but which I found light on anything actually actionable.
This is perhaps the worst advice I have ever heard uttered by multiple people.
Owning your own home satisfies several human and financial needs, such as:
- You are buying an appreciating asset. For the same reason you are investing in buy-to-lets. Why would you want to rent and not realise the capital growth for yourself?
- You can buy well and force appreciation. All the talk on buying at a discount and realising value applies to your own home, too.
- It is not a liability. I believe this stems from the thinking that you have to pay a mortgage (bad) vs. receiving rents (good). However, the alternative to paying a mortgage is to pay rent, not to pay nothing at all as you still need somewhere to live. So, even as a homeowner, you are getting benefit by NOT paying rent. Your own home has an “implied rent saving” attached to it – i.e. the amount you are not having to pay in rent to live in a similar property.
- It is a forced savings scheme. Assuming you take out a repayment mortgage (you should) and meet the mortgage payments every month, then by the time the mortgage ends (usually 25 years), you will own an unencumbered property, simply by doing nothing else. Given you will plan on retiring at some point and this would be hampered by your largest outgoing of paying a mortgage, this puts you in an ideal financial position with the flexibility of downsizing and releasing equity should that help your retirement plans. The alternative is to rent until, well, you die. And when retired, you will need significant assets just to meet your rent payments.
- Proponents of renting over buying often quote that their capital is better invested elsewhere whilst they rent until the returns are sufficient to purchase their own home outright. This is a super risky approach with what is a basic human need. Also, humans are terribly bad at being prudent and saving. Are you really going to put aside (e.g.) £500k to buy somewhere?
- We have a robust legal framework for tenant management. Outside of the fixed term period, a landlord can give you two months notice to vacate the property, with no reason needing to be given. Do you want that uncertainty? Even more so if your children are in local schools. Not to mention the hassle of moving. Imagine having to move if in your 70’s / 80’s / 90’s?
- Nesting. In a rental property you are constrained by what you can do to it. You cannot change or configure the property to suit your lifestyle. Nor can you upgrade it (e.g. new kitchen). Well, you probably can, but at your expense and the landlords benefit! The alternative is to move, which is huge upheaval.
This is why I believe that if you have capital, then sort out your own house purchase first, before considering property investing.
You can even blend the two, which is how I got started. Buy well, live there, force appreciation then refinance onto an appropriate BTL product (or even better, get a Consent to Let from your existing mortgage provider) and move into a new home for yourselves. Depending on how well you bought, how the market has moved and how well you have added value, you may be able to release enough capital on refinancing to use as a new deposit on your next home. This is exactly what I did. Twice!
Furthermore, BTL mortgage lenders much prefer home owners. The availability of funding will be deeper if you own your home as compared to renting. Since the lifeblood of a property investment business is funding, this is important.
Much like being a homeowner, mortgage lenders much prefer people with stable incomes. There are no minimum income products, but this is not the same as having no income at all.
Not only that, having a reliable income stream outside of property, especially when starting out, will enable you to ride the inevitable unforeseen costs that will happen during your investing career.
If you have a well-paid job, then you should be able to save which assists in generating capital lump sums for the next property investment.
Many people want to give up the day job to become a full-time property investor, but it is much easier to build a property portfolio alongside a day job.
It is virtually impossible to invest in property without considerable savings.
Even if you manage to construct a No Money Left In (NMLI) deal, itself a relatively rare beast, you will still need considerable sums to finance the purchase and redevelopment such deals need in order to create significant uplift in order to refinance your working capital back out.
I say virtually, because it is theoretically possible to find an investment partner willing to bankroll everything whilst you do the sourcing, refurbishment management and tenancy and property management going forward.
However, when starting out, you likely won’t have those skills to bring to the table. So, why should such an investor give you an equity share when they could otherwise pay for all the other tasks on a fee basis, if they are putting all the money into the deal?
You need to be bringing sufficient value to the table in order to convince an investor to bankroll everything, or you need an unsophisticated investor, which is ethically dubious.
Note that Rent-to-Rent or Deal Packaging is not investing in property.
It is generating income from a property business, in a similar way to surveyors, letting agents and estate agents. Be very clear that it is not investing though, which means you are not generating long-term wealth and not benefiting from buying well, forced appreciation or capital growth.
So, get some money behind you first. Depending on where you are buying I would say you need a minimum of £25k and down south closer to £50k.
Getting financing via bridging finance, short term loans and term mortgages is the lifeblood of property investing and enables you to use the power of leverage.
This means you need to be creditworthy. Whilst there are some products out there, a bad credit rating, CCJ or bankruptcy will severely curtail your options.
If this applies to you, focus on repairing your credit rating first. You can get a free credit report from Noddle.
In fact, I would urge anyone to get into contact with a good mortgage broker and explore if their circumstances and means are suitable for raising property finance, in principle. If not, then you need to repair those holes first, otherwise your property investing career will be over before it has begun.
Property investment is capital intensive if you are seeking wealth generation over the longer term. Plus, you are most likely going to need access to mortgage financing.
Generally speaking, to get the best mortgage rates, you need to be a home owner with good employment history and it should be obvious that you need a good credit rating. Indeed, as I have hopefully demonstrated above, you should prioritise being a home owner that in any case, even as a way to get started as a landlord.
Only once you have those baselines in place and have met my Maslow Hierarchy of Property Investment Needs should you consider allocating spare capital to property investing.