Rental market/Mortgages

Fondu

Im in my early 20's and have come into some assets that i own.I live at home with my family and now have a rental property.

I was considering trying to get a mortgage to get a second house and using the rental income of house 1 combined with the second investment house to pay for the mortgage.

If say i took out a load with a value of say 300,000 can anyone inform me of the total costs involved with the loan at the end of say a 20year loan (note including the more than likely increased interested rates).If say i had a loan and i just won the lotto and wanted to pay back most of the loan now,what fees would be incurred.And finally is it possible to raise or lower the interested paid per month.Eg am i aloud raise a repayment per month from 900 to 1500 if i wanted to or vice versa,and would this thus lower my overall cost if i did so.

Sorry if its in the wrong forum,just i would like to use my assets in the best possible way,and thanks in advance for your ideas.

Fondu

Anyone?

dynamick

It's impossible to answer without some more information..

What is your non-rental income? Is it likely to increase in future?
How much do you have in liquid assets (not your rental property)?
What is your rental property worth & how much do you owe on it?
How much income is your rental property generating?
Have you been to college?

What do you expect to have to spend money on future? (buying a house, getting married, education, car, ...?)

In general, mortgages on variable rates allow you to make additional payments free of charge to reduce the amount owing and thus to reduce your duture monthly payments and/or reduce the term of your mortgage. Fixed interest mortgages do not allow additional payments without paying a large fee (often a equivalent to a few months payments).

Reducing your mortgage payments is harder than increasing them! Some mortgages allow for 'payment holidays' by arrangement or a mortgage that has no payment in December. If you cannot afford your mortgage payments, your lender will usually accept a smaller payment in exchange for a longer term (depending on your age).

Fondu

dynamick wrote: »

It's impossible to answer without some more information..

What is your non-rental income? Is it likely to increase in future?
How much do you have in liquid assets (not your rental property)?
What is your rental property worth & how much do you owe on it?
How much income is your rental property generating?
Have you been to college?

What do you expect to have to spend money on future? (buying a house, getting married, education, car, ...?)

In general, mortgages on variable rates allow you to make additional payments free of charge to reduce the amount owing and thus to reduce your duture monthly payments and/or reduce the term of your mortgage. Fixed interest mortgages do not allow additional payments without paying a large fee (often a equivalent to a few months payments).

Reducing your mortgage payments is harder than increasing them! Some mortgages allow for 'payment holidays' by arrangement or a mortgage that has no payment in December. If you cannot afford your mortgage payments, your lender will usually accept a smaller payment in exchange for a longer term (depending on your age).

I am still a college student,earning only part time work at the moment with plans to earn more down the line.
I hold around 20k in liquid assets
Its worth around 300k and i do not owe anything on it
Property is making 900 pm
I hope this helps,any more questions feel free to ask

dynamick

Fondu wrote: »

I am still a college student,earning only part time work at the moment with plans to earn more down the line.
I hold around 20k in liquid assets
Its worth around 300k and i do not owe anything on it
Property is making 900 pm
I hope this helps,any more questions feel free to ask

The best way you can invest money at your age is in your education. This will greatly affect your future earning potential.

Working part time during college is difficult to balance with studies and if I were you I would give up the job in case it screws up your education.

Should you buy a second investment property?
You need a decent regular income to get a mortgage so I don't think you'll be getting a mortgage for a second property. Even if you could find a way to get a second property, I wouldn't do it if I were you.

What should you do with your rental property?
Your property is making you 10,800 per year in rent. But that's not counting the costs of being a landlord. Once you take into account vacant periods in between rentals, cost of advertising, insurance,, income tax on rents, NPPR tax, time spent dealing with tenants, depreciation of furniture and fittings, redecorating, you will find there is a lot less than 10800 left.

When you find out how much money you are really making from your property after all costs, it will be less than you would get by selling the property and putting the money in the bank and collecting interest.

Property fell by about a fifth last year in Ireland. So you property lost about 75k last year alone. This year everyone from the government to the estate agents association is predicting it will fall at least another 10%. That's thirty grand you will lose by just owning it in 1 year. It's a terrible investment.

You could sell it and use the money to buy a 3 year Irish government bond (available from the post office). This pays 10%, so in 3 years you would have 330K guaranteed. Plus, government bonds don't ring you up in the middle of the night to complain that their washing machine is leaking or the toilet is blocked.

Fondu

My education is doing fine,i live at home and college is within walking distance of me.Living costs are minimal since dinners etc are cooked for me.

Who in their right mind would quit their job right now..the money is handy for a person my age when most cant find any jobs at all.

Id use the house as a guarantee to get a mortgage.The "regualr income" would be the rental income.

The house is in perfect condition.Its newly built so wont need any renovations anytime soon.Property in this region is let fairly well,and if i bought a second one,i would like to buy it in the same region.Cost of advertising is minimal,as iv seen the procedures in the past to advertise.Daft ftw.Costs should also be minimal since i dont earn enough to be taxed or at least borderline so that should be ok.Insurance and registration of tenants are small amounts in the grander scheme of things.

I was actually thinking that housing might actually pick up if the economy picks up at the end of 2010 beginning of 2011.Do you have any links for housing to further decrease this year.I just heard on the news today that for the first time in 2 years letting markets have remained constant/gone up slightly which is also positive for the market.

Finally what is the government bonds you speak of,even if i didnt go with this idea,i wouldnt mind putting my liquid assets into it,because i hate having money ling there not doing anything for me.I thought government bonds arent "guaranteed" to give a return but more a risk,and with countries like greece giving it a bad example,is this also a bad investment

Fondu

Do i also have to pay dirt on these bonds because that really eats into the amount you earn.

dynamick

The basic idea of financial planning is to think about where you want to be financially in the future, consider things you may have to pay for and arrange your investments so that they provide for these events.

Choice of investment depends on how long you want to leave the money (the term) and how much risk you are willing to take. In general, riskier investments make more money but only in the long term.

Starting with the safest investments with the lowest returns and continuing to the riskiest investments with the highest returns, here is a very rough list:
Cash in the bank
Government Bonds (Gilts)
Corporate Bonds
Property
Shares (Equities)
Derivatives, Spread Betting...

Each of these investments has recommended terms. Equities and property, for example are usually considered to be the type of investment you hold for decades.

Fondu wrote: »

My education is doing fine,i live at home and college is within walking distance of me.Living costs are minimal since dinners etc are cooked for me.

That's great. The better you do in college, the more security of income you will have in future. Also, nowadays a primary degree is not really enough, employers expect people to have post graduate qualifications, whether masters degrees or professional & technical qualifications. I've known people of your age who had money and ended up 10 years later with the money spent on investments that didn't work out and with very little ability to earn money.

Who in their right mind would quit their job right now..the money is handy for a person my age when most cant find any jobs at all.

Maybe you have a job that is great experience and helping your career. If, however, you are selling a lot of your time for money to do unskilled labour, then that is a poor investment of your time that could be better used studying or resting so that your are not tired at college. When I was in college, the students who had to work were usually the poorer kids whose studies suffered as a result.

Id use the house as a guarantee to get a mortgage.The "regualr income" would be the rental income.

This used to work but not any more. You use to be able to go to a bank and say 'I have 100K, can I have 400K to buy a house for 500K and the rental will pay the mortgage?'. Now the bank will look for a larger deposit, proof of other income and assets, so that you can meet the rental payments even if you can't find tenants or rents fall, or interest rates rise... A tiny number of investment property mortgages were issued last year, 90% less than were issued in 2007. Numbers here. The banks have become very selective about property lending. They have been badly burnt on property. Your youth, lack of experience in property investment, lack of significant other income, and the very small amount of money you have available for a deposit will all count against you. You have a 1 in a million chance of getting a mortgage for an investment property right now.

The house is in perfect condition.Its newly built so wont need any renovations anytime soon.

It happens gradually. Every year the fitments and furniture wear a little and bit by bit they need to be replaced.

Even after 1 year, it will look grubbier. After 2 years, you may need to repaint the interior. After 4 years you may need to replace carpets. Kitchen appliances break, sinks get cracked, slates fall off etc. I looked at an investment property my sister owns making 1k/month. When we added up the true costs of owning the property, the after tax profit was 500/month.

I was actually thinking that housing might actually pick up if the economy picks up at the end of 2010 beginning of 2011.Do you have any links for housing to further decrease this year.

myhome.ie predicts a 10% drop in the first 6 months of 2010 alone:http://old.myhome.ie/pdf/barometer_q4/Outlook2010Q409.pdf
daft.ie predicts 10-15% drop in 2010 http://www.daft.ie/report/alan-mcquaid

Bear in mind that...

• interest rates can only go up as they are the lowest they ever have been
• unemployment is rising
• there are 300 thousand empty dwellings in Ireland
• bank are very unwilling to lend for property investment
• central bank guidelines are likely to force banks to keep mortgages hard to get to avoid another bubble
• A domestic property tax is coming in to replace stamp duty
• Young people are emigrating and immigrants are returning home, reducing demand for housing
• A lot of the demand for housing in the past was based on the hope of selling on at a profit. Most people have given up on this dream.
• Property prices are still at historically high prices compared to incomes and rental yields

We are in the most severe depression seen since the second world war. Other markets have seen decade long falls in property prices. In Ireland, real prices for property fell between 1980 and 1990. So even if you wait until 2020, your property may not retain its value, let alone gain in value.

I just heard on the news today that for the first time in 2 years letting markets have remained constant/gone up slightly which is also positive for the market.

Well when you want to believe something is true, there is a tendency for people to look out for any flimsy signs that might be evidence to say they are right. This is called confirmation bias. This is the first month in 2 years that rents have risen.

Right now is a great time to rent. If you buy a house for 300K with a 10yr fixed 5% mortgage, you will be paying 15K a year in interest alone, plus the costs to maintain the house. But you can rent a 300K house for 10.8K/year and not pay for any house maintenance.

Finally what is the government bonds you speak of,even if i didnt go with this idea,i wouldnt mind putting my liquid assets into it,because i hate having money ling there not doing anything for me.I thought government bonds arent "guaranteed" to give a return but more a risk,and with countries like greece giving it a bad example,is this also a bad investment. Do i also have to pay dirt on these bonds because that really eats into the amount you earn.

Government bonds are a way of lending money to the government for a fixed amount of interest for a fixed period of time. The returns are tax free (unlike bank interest which is subject to DIRT).

Govt. Bonds are guaranteed by the country that issues them. You buy a piece of paper with an amount on it and a maturity date and an interest rate. So, for example, you buy a 100K bond and call back to them in 2013 and they give you 110K. The risk is that the country that issues them goes bankrupt. Countries go bankrupt less often then banks and companies.

The amount of interest that bonds pay reflects the risk of the issuer going bust. All investments carry risk and you need to compare those risks. The Irish government sells bonds through the post office.

One way to invest in property with minimum effort is to buy shares in a REIT. This is a tax-efficient company that borrows money, invests in property, rents its out, maintains it and distributes profits to shareholders. In this way you can invest say 100K in German commerical property without actually buying a property. You just buy the shares online, sit back and receive dividends and sell in the future online again. Here is a list of REITs around the world:
http://reits-in-deutschland.de/fileadmin/img/PDFs/Worldwide_REITs_Summaries_-_Final_-_20_May_2008.pdf

To invest in shares you can do something similar by buying shares in a index tracking ETF. You just buy shares in a company that buys shares in the top companies on an exchange for you.

You can do this by setting up an online share trading account at someone like www.tdwaterhouse.ie.

So here's my suggestion for what to do with your money:
Sell house
50k in index tracking ETFs (Euro Stoxx 50, FTSE 100)
150K in REITs (say a German and a Japanese)
100K in Irish govt bonds.
20K on deposit for your emergency cash.

Up till 3 years ago, a lot of Irish people though the art of investing was to borrow as much money as possible to purchase as much property as possible, rent it out and wait for house prices to shoot up. This works when the market is rising rapidly but in a stagnant market it loses money and in a falling market it leads to bankruptcy. Borrowing to invest is a high risk strategy.

Fondu

Well i dont want my assets to be at risk of being lost since im still only starting out in the world.

Im thinking of long term assets,not short term.If i bought a house i was not thinking of resale value but rather letting potential as i have no intention to sell it.

Shares are for me, dodgy at best,and since i dont know enough about the market,it wouldnt be a place id put my money personally.

Iv been looking through the An post website and i cant find anything on government bonds.Do i have to call into them to see the t&c or is it on their website as well.

Im careful with money,always have been and always will be,so i dont intend on burning all my money in wasteful stuff.

The house has been let for 2 and half years and is in perfect condition,although that maybe down to good tenants.Again i doubt ill be charged tax since i dont earn enough.

If i did get a load for a house i meant i would let both houses to pay for it.
eg
house 1: 900
house 2: 900
1800

I never knew interest alone would be as high as 15k a year,are you sure its that high.Are you saying that i would in the end pay the bank back 450k if i got a 300k loan.

i know you cant answer this as were in uncertain period of time but when the government is in serious debt which is only getting larger every day,would bonds be a unhealthy investment.

Thanks for your time and effort as well,your giving a lot of input:)

dynamick

Fondu wrote: »

Well i dont want my assets to be at risk of being lost since im still only starting out in the world.

When you are younger you can afford more risk than when you are older as you are taking a longer term view. I suggest you spread your assets across different risk categories such as equities, property, bonds and cash. You are currently in property which is higher risk than bonds or cash as you will discover in 12 months time when 30K has disappeared off your asset value. You are considering borrowing to purchase more property which multiplies your risk. This is called geared investing. When it works it really works but when it fails you can lose more money than you put in in the first place.

Im thinking of long term assets,not short term.If i bought a house i was not thinking of resale value but rather letting potential as i have no intention to sell it.

The rental income is not guaranteed. Rents may fall in future for all the reasons I listed above for lack of demand for housing in Ireland. And I'm sure that deep down you do care about the resale value. If you woke up tomorrow and found that your house was only worth 30K and not 300K, would you care? In my view property has another 30% to fall before stabilising in 2011-2012. Would it bother you if your house lost 100K in value and never really recovered much beyond inflation for a decade after?

Property makes money in two ways: rental income and capital gain. You are not going to make a capital gain because we on a slide from the top of one of the world's greatest property bubbles. Your rental income is meagre. After costs, I would be amazed if you are making 8K/year. On a 300K house that's a return of 2.7%. There are safer ways to make 2.7% without risking your capital.

Shares are for me, dodgy at best,and since i dont know enough about the market,it wouldnt be a place id put my money personally.

Yes, I agree and I don't own any individual shares directly. But the risk gets less the longer you own the shares and the wider the variety of shares you own. Long term (>10 years), buying a basket shares in this way and holding them leads to returns that go way past property or bonds.
Have a look at http://www.finfacts.ie/stockperf.htm

Buying multiple shares is a pain in the ass so the easiest thing to do is to pay someone to buy the top 100 shares in the market and hold them for you. This is called an index tracking fund and in this way you only have to buy 1 share.

Understanding money is part of your life's education. Have a look at a book called 'A random walk down wall street' or even a dummies guide to investing!

Iv been looking through the An post website and i cant find anything on government bonds.Do i have to call into them to see the t&c or is it on their website as well.

This is the page in the An Post web site for government bonds: http://www.anpost.ie/AnPost/MainContent/Personal+Customers/Money+Matters/Savings+and+Investments/savings_invest.htm?P

Click on the 'Interest Rates for Savings Products' to read the amounts they pay.

Im careful with money,always have been and always will be,so i dont intend on burning all my money in wasteful stuff.

The guy I know who was the most careful with money, very carefully worked and saved from the age of 16 until he was 24 when he managed to buy a 1-bedroom flat for himself. This was 4 years ago. He paid 350K. The new phase of apartments in his block is being sold at less than half the price he paid. He owes 200K more than his flat is worth and to me it looks like he will spend the rest of his life working to pay it off. Tragedy is that his education is not enough to get a good job so he has little prospect of ever getting free.

The house has been let for 2 and half years and is in perfect condition,although that maybe down to good tenants.

This is like saying you will never have to change your car because it's been running for 2.5 years and it's as good as new. For example, the kitchen in a rental house will probably have to be replaced every 20 years. If the kitchen costs 5K, then that's 250quid/year for kitchen depreciation. Now do that for everything in your house from the bathrooms to the carpets, to the paint on the walls, the furniture etc. It all adds up.

Again i doubt ill be charged tax since i dont earn enough.

You still need to declare your income, even if you are under the limits. You will be due to pay PRSI (5% I think). You have to register with the council to pay the NPPR tax. And you have to register with the PRTB.

If i did get a load for a house i meant i would let both houses to pay for it.
eg
house 1: 900
house 2: 900
1800

OK, I missed this, you do have a regular income from your existing house. Remember that these are gross and not net incomes. If you make 700/month net from each house that's 1400/month or 16800/year. It's not a lot of money. Your deposit is 20K and the bank won't want to give you much more than 60-80K extra. I don't think this is enough for you to get a second property.

I never knew interest alone would be as high as 15k a year,are you sure its that high.Are you saying that i would in the end pay the bank back 450k if i got a 300k loan.

Interest rates for investors are higher than rates for residential buyers. 3 year fixed is 5% from KBC. 5% of 300K is 15K per year. If you want to look at the amount of interest you would pay over time have a look at this calculator that I use a lot: http://www.drcalculator.com/mortgage/ (It looks like you would pay back 280K in interest plus your capital of 300K over 30 years)

i know you cant answer this as were in uncertain period of time but when the government is in serious debt which is only getting larger every day,would bonds be a unhealthy investment.

You're right to worry. Every investment carries risk. The trick is to figure out the relative risks. It wouldn't make sense to be scared of Irish bonds and then invest in something more risky instead. If you prefer you can buy bonds from any other eurozone country free of tax. You could for example buy bunds (German bonds) which pay less interest than Irish gilts.

If Ireland decided not to pay out on its bonds (to default) this would be the nuclear scenario. This would be the last stop before absolute meltdown. Everyone expects that the other richer eurozone countries would do everything to prevent this from happening. I would guess that Irish bonds are safer than for example than money in an Irish bank.

Fondu

Ok i now see getting a loan to buy another house is a bad idea..If i had the money up front id still consider it,but when the interest costs are so high,its a no go for me.

Id still like to invest my liquid assets right now though as its been laying idle for years.I also noticed there is a thing known as saving certificate in th an post saving schemes.Is that the exact same thing as saving bonds as i think i might actually go for this..

Just to clarify,i do care about resale value,it just never enter into the equation when i was considering this.Ie i was only interested in letting the house and have something down the line,that maybe useful

Just out of interest may i ask what your situation is like.no need to answer,just intrigued as to what stuff you invested in

rugbyman

Dynamic,
I have not read any of your posts before, but you write well ,clearly and make a lot of sense.
Rugbyman

alejandro1977

rugbyman wrote: »

Dynamic,
I have not read any of your posts before, but you write well ,clearly and make a lot of sense.
Rugbyman

+1 Dynamick has a clear grasp of the long term Risk and Tax implications of investing; (unlike many of the punters on this site I'm afraid).

Have a look at a book called 'A random walk down wall street'

Best investment book ever IMHO. Too many people think there is easy money to be made and picking the best investment/investment manager will give above average returns in the long term.

This book show how easy it is to be suckered in by a fund/company that outperforms the market; after all someone has to be above average for a while but it doesn't mean that they will continue to be above average.
The same author (Burton G. Malkiel) recently featured in this article.
http://www.nytimes.com/2010/02/06/your-money/stocks-and-bonds/06wealth.html

dynamick

Fondu wrote: »

Ok i now see getting a loan to buy another house is a bad idea..

great

Id still like to invest my liquid assets right now though as its been laying idle for years.I also noticed there is a thing known as saving certificate in th an post saving schemes.Is that the exact same thing as saving bonds as i think i might actually go for this..

My understanding is that savings certificates and savings bonds are similar but savings bonds are currently for 3 years whereas certificates are for 5.5 years. You can cash out early if you really need to but then you get a rubbish interest rate.

Just out of interest may i ask what your situation is like.no need to answer,just intrigued as to what stuff you invested in

I have spent a lot of money on my education and my wife's education. I have half shares in three businesses (none of any great value yet). I have some cash on deposit. I rent out a mews that I built behind my house. The yield is poor but I am not willing to sell as I want to keep the option of letting my parents or children or even me live in it at a future date. A large part of my and my wife's income is going to pay off the mortgage as soon as possible. My aim is to have the mortgage paid within 10 years when the oldest child will be going to college.