Savings advice for a 16 year old with £20,000 - convicing my parents that investing this into a property is a bad idea

Question

My younger brother runs a small yet lucrative business in his free time. He has accumulated around £20k in a very short time.

My mother wants him to put this money into buying a property, i.e: a mortgage, under someone else's name since he is most definitely not eligible for a mortgage (16 y/o, no job, still in school etc...). Her idea is to then rent the place out, using part of the rent to cover the mortgage and the rest can go into savings... somewhere.

I have advised her against this for the following reasons:

• there are limitations as to when you can rent a property after buying a mortgage (I think). eg: can't rent it out until 6 months have passed - this will cost us (covering the mortgage fees until the property can be rented)
• there will be gaps when there are no tennants - this will cost us.
• there are lots of costs in maintaining a property - this will cost us.
• if his business stops being lucrative it once again will put strain on the rest of the family's finances
• my brother will learn nothing about financial responsibility from the experience since everything will be done by our mother.
• difficult to track profit over time, due to points listed above.

I say it will cost us because my parents can barely afford the rent on our property as it is. As soon as they have to pay the mortgage fees out of their pocket, it will be my pocket too.

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I have proposed that he invests his money in a low-cost, low-risk index tracker:

• easier to maintain
• yes, this is technically riskier than investing in property, but given our situation I think this is actually safer; way too many moving parts in my mother's proposal
• he is relatively technical/smart - he will enjoy learning about stocks and he will be able to track his savings himself.

Am I correct in my fears about the property idea?

I would not be against it if it was done when he is older, out of school, out of university, when there are less unknowns.

Answer 1

To respond to a couple of points up front:

there are limitations as to when you can rent a property after buying a mortgage (I think). eg: can't rent it out until 6 months have passed

I don't know where you heard that, but that's complete rubbish. Any bank granting you a buy-to-let mortgage (BTL) wants you to be earning rent as soon as possible.

My mother wants him to put this money into buying a property

In many (if not most) parts of the UK, £20k is not nearly enough. The best BTL mortgage rates kick in if the loan-to-value LTV ratio is below 60%, which means that a £20k deposit will get you a property worth £50k, which is practically impossible these days. You can get mortgages with higher LTVs, but they have higher interest rates.

In any case, as you've mentioned, there are up-front costs (e.g. stamp duty, legal fees, mortgage fees, any costs for getting the property in a state suitable to rent); and you need a contingency fund for periods without tenants, and for repairs.

So to summarise: this is a terrible idea, as £20k is not even close to being enough money to invest in your own buy-to-let property.

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Investment of any kind is generally a long-term activity, so what are your brother's long term plans?

If he's planning to go to university, he might do better sticking it in a bond (or even a current account with a decent interest rate) for a couple of years, and then spending it on his education.

If he expects to grow the business, maybe he should keep it available in order to invest in that.

Without knowing his intentions, I'd argue that it would be unwise to suggest any particular course of action for his money.

Answer 2

I'm not sure about the current state of property prices in the UK, so I cannot give you advice on that.

I can give you some advice on alternative ways to spend the 20k.

Like most people, my financial IQ was not very high in and before my twenties. I didn't know how to manage money very well. Everything that came in flew out even faster. It took me another 15 years to understand why financial iq is one of the most important things to have in order to succeed in life, business and investing.

My advice on spending the 20K: keep most of it in your savings account, for now. Re-invest in the business when necessary. Invest the rest in educating yourself and start with your financial IQ. There are numerous ways to do this. I'd start by reading "Rich Dad Poor Dad" by Robert Kyosaki. (and read 'Prophecy' by the same writer to understand why I concluded the first sentence with 'for now').

Do not invest in the stock market, as most stocks, index trackers, funds, etf's are overvalued and there's always a risk of losing your money, even with funds. We're near the top of the economic cycle (see this chart to understand why) and there's a good chance that the stock market will go down somewhere within the coming two years. That doesn't mean that this will happen for sure, but better be prepared for it and don't take the risk of losing your money.

And of course…the majority of users on this site will speak against this advice. If I learned one thing in my life to be important it's to avoid following the majority. If you learn more about life and how this world is run you'll understand why.

All the best and good luck.