Rental Investment Query

Michael D Not Higgins

I have been asked to post anonymously on behalf of another user who doesn't want their financial situation linked with their account. I have asked that they include all information in their post so I'm not the go between for a long thread so please reply with that in mind.

There is a similar question here, but I didn't want to hijack that thread, so here is the situation I find myself in.

I was left an inheritance of €350k from a grandparent. With that money, I bought a new house outright (no mortgage) and I now rent out my old property. The rent on my old home pays for the mortgage and the outstanding balance is about €120k (probably slight negative equity).

After buying my new place, (which ironically cost less than the old one due to buying in a slump rather than in the boom), I now have cash in the bank of €150k and no other debt apart from the original mortgage.

I am 40 years old, have a decent company pension and our household income is approximately €50k net. No kids and not going to be (definite). I live in the West of Ireland, fairly rural but within 25 minutes of the nearest big city .

I have 2 options initially;

1 - Pay off the mortgage on my old house, then I have a €30k nest egg to invest in some way.
2 - Let the old house continue to pay for itself and have €150k to invest.

I'm inclined to lean towards option 2. The interest rate on the old house is low so it's "cheap debt" and I think I can probably make a greater return by investing the €150k than I would by saving the interest by paying the mortgage off early.

My leaning at the minute is to buy 2 more properties. I'm thinking of buying 2 houses around the €120k mark, using €60k deposit and €60k mortgage. I have already spoken to the bank manager and getting the mortgages won't be an issue.

Before anyone asks, I have spoken to a financial advisor and he agreed that my plan made sense, although he also felt that investment in the right stock options could be more lucrative. The issue is that I don't like the risk attached to those. The (slim as it may be) option that a crash could happen and my money would be wiped out is too much of a fear for me. To me, bricks and mortar aren't going anywhere!

Those houses once rented would comfortably cover the mortgage and leave about €200 a month in profit. I would be aiming to pay off the mortgages in 15 years, and would intend to pay off the original house in the same time. This means that when I'm in my mid 50s and looking towards retirement, I will have 3 rental incomes, totaling approximately €1700 per month, to supplement my pension.

As I have one rental property already, I am aware of the potential pitfalls and the tax implications. My first tenant was a nightmare and left me with a rent shortfall/repair bill of nearly a grand. However the house has now been rented out for over a year and has no issues. I used a letting agency in order to find a good, well referenced tenant rather than just letting to a friend of a friend of a neighbour last time! I have also spoken to local estate agents to establish the best rental markets and areas to shop in.

I intend to put the extra €200 profit into a separate account in order to build up a fund which I will use to pay the tax each year and cover any downtimes and/or maintenance issues and also to allow for interest rate raises. I would manage the property myself and as such would be buying fairly locally.

I would also still have about €30k in the bank as an emergency fund.

So, any thoughts or suggestions?

Pros:
*Houses pay for themselves provided they are rented out regularly.
*Fairly small steady income (although initially set aside to cover issues).
*Sizeable supplementary income once retired.
*Potential to sell one or more of the houses when reaching retirement if I want to tour the world etc!
*Market is pretty low at the minute so fairly low chance of negative equity in the future.

Cons
*Potential for empty houses costing me money
*Trouble tenants can be an expensive itch to scratch (evict)
*Effort required to manage the properties.
*The property market can affect both the value of the house and the rental market.


Overall I think that provided I put the effort into getting the right tenants, in the right houses, in the right areas, this is a relatively low risk way to generate a long term income. The main time being for when I retire. I will have a private and state pension but those will represent a noticeable drop in my working wage so my intention is that once the mortgages are paid off, I have 10-15 years of clear profit which I will use to build up a nest egg and hopefully retire early. Even if I can't retire early I will have the extra income to supplement my pension.

Thanks for listening, and thanks to Michael D Not Higgins for posting on my behalf as I would prefer to keep my identity under wraps!

I suspect from the other thread that a lot of people will be anti-property investment but I welcome all comments.

Pkiernan

It is not a good idea to have all of your investments in one area, in this case property.
Diversify by buying 10 high returning mutual funds which will easily return you 7 to 10% per annum before tax.

Mrs OBumble

If you really must go with property, buy places in very different towns / counties - and towns in which the major employer(s) are in different industries, in order to minimise your risk.

Also, make sure you have very good insurance and property management approaches: Contrary to your belief, bricks and mortar can go places eg up in smoke, down the river in a flood, uninhabitable because of tenants drug manufacturing, or just the dump if they go mouldy because a leak etc.

In your situation, I would consider some very safe investment options, eg government bonds. But that's just me, I don't have the property bug.

dustyie

It will all look rosey on paper but in practice you will need to be thick skin and have to have time to manage the many hipcups , i.e. tax, prtb, broken appliance's, and many more issue's

plasmin

What about investment in commercial property in right area?

GGTrek

Pkiernan wrote: »

It is not a good idea to have all of your investments in one area, in this case property.
Diversify by buying 10 high returning mutual funds which will easily return you 7 to 10% per annum before tax.

Agree on not having all your eggs in the same basket (called diversification, improves risk/return profile). Now could you just point me to non-equity mutual funds that make 7-10% p.a.? If you believe Irish property is in a bubble, the current equity bubble is way worse.
To the OP, your plan only makes sense in the following cases:
1) you are not in the high tax rate band
2) you need to have at least 4-5 separate tenancies so that you diversify tenants risk. One of the tenants is almost sure to cause you thousands euros loss in the long term and with broken Irish legal system you have no way to recover the loss. No landlord can always pick the good tenants.

antoinolachtnai

I think you are not correct to say that what you are doing is less risky than buying shares. There are plenty downsides to both.

On the other hand, you clearly know a good bit about houses and property west of the Shannon. This is a good reason in itself to favour this plan. You are investing in your own area of knowledge.

Make sure you have the whole tax angle covered and that you fully understand and account for this. I would get an accountant/tax adviser to work this out for you rather than a financial/investment adviser if you are in any doubt.

Pkiernan

GGTrek wrote: »

Agree on not having all your eggs in the same basket (called diversification, improves risk/return profile). Now could you just point me to non-equity mutual funds that make 7-10% p.a.? If you believe Irish property is in a bubble, the current equity bubble is way worse.
To the OP, your plan only makes sense in the following cases:
1) you are not in the high tax rate band
2) you need to have at least 4-5 separate tenancies so that you diversify tenants risk. One of the tenants is almost sure to cause you thousands euros loss in the long term and with broken Irish legal system you have no way to recover the loss. No landlord can always pick the good tenants.

There are dozens available from Fidelity, Vanguard etc etc. Do a Google search.