In a recent video on my YouTube channel, I spoke about why it is nearly impossible to save for a deposit to buy a house, particularly an investment property. I have seen a lot of books and online influencers saying that the way to get an investment property is to cut back on luxuries like Netflix subscriptions, Starbucks coffee and instead save that money for a deposit.
While that might sound like good advice, I actually think it is terrible advice. It is particularly terrible advice if you are buying an investment property because you will need a 25% deposit. How many cups of coffee will it take to save 25% of the price of a house? Does the maths really add up? In this article, I will take a look at why cutting back isn’t the way forward and what the solution actually is.
Why cutting back doesn’t work
The average price of a house in the UK is £276,000, and you will need to put down 25% when buying a property as an investment in most cases. To buy a property you won’t just need a deposit however. You will also need to pay your legal fees, stamp duty, etc. So, to buy an average house in the UK right now you will need over £60-70k.
If your take home pay is £1,500-1,600 a month, the average rent in the UK is £1,000 a month. So your rent has taken the majority of your wage. Then you have to pay your bills and buy food. There isn’t anything left for buying Starbucks in any case. You can’t cut back and save for a deposit. It isn’t possible.
But let’s say you are making £2,000-3,000 a month. You are not spending on things like Netflix or Starbucks. You have a reasonable rent and your bills are not too high. If you do this well you could maybe save £500 a month. That would mean that after about 10 years you would have enough to buy one below average property.
Property prices are not static
So let’s say you have saved the money and you are now ready to buy a below average property. So you head on to RightMove to see what you can get. You could then find property prices have doubled. On average, property prices double every 10 years. So even after saving up, you still can’t get a property.
To add insult to injury, the prices of everything else will have gone up over that time too. Food prices, your rent, bills, etc. If history is to be believed, what will have gone up much less however are wages. That means saving that £500 a month will have got progressively harder over those ten years.
The solution isn’t cutting back. The solution is making more. You need to find a way to put more money in your pocket each month. Instead of making £2,000 a month, you need to be thinking about ways to be making £20,000 a month.
This could be by becoming a property entrepreneur. For example, I did this by packaging and selling deals on to other property investors. The average deal sourcer makes between £2,000-£5,000 per deal. This doesn’t require buying any property. A deal sourcer just finds good deals and passes that information on to investors. If you can do a deal like that each week, suddenly you can afford deposits!