Savings And Investments John on 04 Jun 2008 07:45 am
Sell To Rent
If you read any of the property investment forums or the ‘house price crash’ forums that have sprung up in recent years you’ll be familiar with the idea of Sell To Rent (STR). The basic idea is that at the end of a rapid rise or (more likely) at the beginning of a fall in house prices you sell your home and rent a property.
The theory being that you can then invest the equity from your home in a different asset class until house prices pick up again. The argument being that when house prices drop, stock markets (and other asset classes) tend to rise, so you’ll receive a better return by investing in them.
Which is all reasonable enough, but I still don’t believe it’s a good idea for everyone. For a start your home (especially if you have a family) is more than just an financial asset to be maximised, it’s a place full of memories, it’s a haven from the stresses of day to day life and your family may well have ties to the area: the school the kids go to, local friends and family and your jobs. Is the emotional upset worth the possible financial gain?
It might actually be more expensive to rent an equivalent home in the area and the increase in your cost of living may well consume any returns you receive from the alternative investments. Alternatively you may have to rent a smaller home and compromise your families standard of living.
Most proponents of Sell To Rent also neglect to consider the tax implications, whist there is no capital gains tax on your primary residence you will pay capital gains tax on any gains made on the stock market as well as income tax on dividends received. All of which erodes any gains made. In contrast if you keep your home you can rent a room out and under the Rent A Room scheme up to £4,250 a year tax-free.
Perhaps most important of all - there is no guarantee that the assets that you invest in will out perform the housing market, in fact they could do worse. Add to that the costs of selling a house and you might even end up considerably worse off.
Conversely of course if you do time both the housing market and the market for your alternative asset class right you could beat both the markets and do well out if it, the trouble is that in reality, few people - even the professional traders - beat the market.
Sell To Rent can work for some, but make sure you go into it for the right reasons with a good understanding of the choice you are making.
on 04 Jun 2008 at 3:40 pm 1.Pinyo said …
I think the idea of timing the market with your primary residence is a terrible idea. Even if it make sense financially, I doubt it will overcome the emotional and hassle factors.
on 04 Jun 2008 at 3:45 pm 2.John said …
Absolutely, yet there are a number of people that regularly advise others to do so (and claim to have done so themselves).
Unless you’re young, single, unattached and mobile it’s likely to be very emotionally draining too.
on 04 Jun 2008 at 4:20 pm 3.Tristan said …
I would argue that lots of people see there home as an investment. The amount of times I’ve been down the pub and heard a friend say “my house has gone up £25,000 in the last year, so we’re taking some of the equity out for a new car” or something similar, it amounts to the same as selling your house and cashing in on the equity.
There are lots of companies that advertise to buy your house off you and rent it back to you, so if there was any emotional attachment to your home, you’d still have it because you could still be living in it.
The house I live in I have no emotional attachment to, so for me it really is an investment. However, I can’t sell any time soon thanks to redemption penalties, so I guess I won’t be able to try it out
on 04 Jun 2008 at 5:07 pm 4.John said …
They really shouldn’t see it as an investment - but that’s the topic of one of my next posts
on 21 Jun 2008 at 5:06 am 5.Bret said …
There are a lot more convenient and reliable investment ideas than selling your house to rent and then buying again at some future price.
This sounds like a great way to donate a lot of money to Real Estate agents, mortgage brokers and the IRS.
I can almost guarantee you that anyone who is wealthy or sucessful won’t be using or recommending this investment strategy. For example, Warren Buffet has lived in the same house for 51 years.
Unless you are completely upside-down or bleeding a lot of cash, you should hold onto real assets. Even though housing is suffering right now, it will cycle back around. People will always need a place to live and prime land is getting scarce.
Besides, the dollar is devaluing rapidly and inflation is way higher than calculated. So, paper-assets are no safe-haven right now.