A family member suffered a bereavement last spring, leaving her widowed in her late 30's with 2 young (pre teen children)...She has received a very substantial amount of money between life policies and death in service benefit from her late husband's employment. She will also receive a pension from his employment which will be more than enough to live on very comfortably...she is now in a position where she is considering what to do with the lump sum. She is considering investing in a property which would eventually belong to her children; possibly near UCD... any words of wisdom?
Would you buy a property in this case?
- Thread starter emeralds
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Brendan Burgess
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I presume that the mortgage protection policy paid off the mortgage on her family home?
If so, that means that her portfolio now look something like this:
Family home: €400k
Cash: €400k
Pension for life - enough.
It would not be appropriate to put the cash in another property as she would be too concentrated in property. If property rises anyway over the coming years, she will gain from the increase in her family home.
As she has an income for life and her mortgage paid off, she can handle the ups and downs of the stockmarket. I would think that she should buy a portfolio of shares with her pot. She gets low costs. Potentially good returns. Low long-term risk. Complete liquidity.
If and when her kids go to College, she can then decide whether that is the most appropriate thing to do.
Brendan
If so, that means that her portfolio now look something like this:
Family home: €400k
Cash: €400k
Pension for life - enough.
It would not be appropriate to put the cash in another property as she would be too concentrated in property. If property rises anyway over the coming years, she will gain from the increase in her family home.
As she has an income for life and her mortgage paid off, she can handle the ups and downs of the stockmarket. I would think that she should buy a portfolio of shares with her pot. She gets low costs. Potentially good returns. Low long-term risk. Complete liquidity.
If and when her kids go to College, she can then decide whether that is the most appropriate thing to do.
Brendan
Complete opposite viewpoint here. I've an aversion to the stock market though, so it's important to point that out, and I think that anyone 'investing' there is fair game to the vultures that reduce your capital with hidden management charges etc.
If she does buy property, as I believe she should, she would be better off borrowing the money though because of the tax relief. And it's easier to borrow if you have money. The actual money could be put in as high a safe deposit account as can be found or anything that gives a guaranteed return on capital and interest.
If she does buy property, as I believe she should, she would be better off borrowing the money though because of the tax relief. And it's easier to borrow if you have money. The actual money could be put in as high a safe deposit account as can be found or anything that gives a guaranteed return on capital and interest.
Brendan Burgess
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Bronte
Whatever your views on property vs. shares, it makes no sense to borrow to invest, when you have the cash.
She will not be able to get a "high and safe deposit" rate in excess of the cost of borrowing.
If her financial future is secure, she should not borrow as it just increases risk.
Whatever your views on property vs. shares, it makes no sense to borrow to invest, when you have the cash.
She will not be able to get a "high and safe deposit" rate in excess of the cost of borrowing.
If her financial future is secure, she should not borrow as it just increases risk.
Her payments from policies etc would be over twice what Brendan has suggested..family home worth about 50% more than suggested also...so she would be looking at investing possibly 40% of her savings in property (in an eminently rentable area)....she is just musing at this stage (focusing on getting through Christmas first though...)
I would suggest she thinks long and hard about the implications of being a landlord - have a read of some landlord issues on AAM and other discussion sites. She's on her own with small children - does she want to have to deal with tenant issues day and night? How will she deal with non-paying tenants who refuse to leave? Tenants who damage the property? She can engage a management company to take over the day-to-day management but that will be expensive and won't take all the potential issues away from her. If she actively wants to be a landlord, fine but she needs to be aware that it won't be as simple as 'buy property - collect rent each month'. In her shoes, I wouldn't go near a property purchase.
She has enough money that she can buy shares directly for a once-off fee and hold them - she doesn't necessarily have to buy into a fund with management charges (and for the same reasons as you, I would be wary of signing up to anything with substantial charges as it will really eat away at the returns). I think that's what I would do - a well diversified portfolio of shares with the intention of holding long-term, not trading regularly - and preferably shares with no/low dividends and high capital growth.
Well is there a risk if she already has the 'borrowed' money in a savings account I wonder?
If the yield on a purchased propery to rent is high it might be a good investment. Plus if property prices rise she may gain from capital appreciation, (hope that one is ok as sorry I overstepped the mark yesterday). And should property prices rise she has the added bonus of already having a Dublin property availabe to her kids when they go to college and thereby her outgoings will be less.
One would have to do the figures of course. I don't think owning a family home outright and investing in another property is too risky or having all one's eggs in one basket.
In relation to shares, how would one decide what to buy, there are a lot of people who are nursing sore loses from gilt edge 'investment's' like AIB and BofI shares. And that money is never coming back. At least with a property you always have it even if it loses value you can hopefully wait until it goes back up in value, but a dead share is gone and meantime it's giving you some kind of return. This is coming though from the bricks and mortgage brigade.
Brendan Burgess
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There are two aspects to this. Risk and return.
No investment or deposit is risk-free. If she has money on deposit in any bank, in Ireland or elsewhere, it is at risk of default. A small risk maybe, but it's a risk and not worth taking. Deposit rates in Germany are around 2 or 3 percentage points lower than in Ireland, so that is some measure of the risk in Irish banks.
Banks make their money from taking in deposits at one price and lending them out at a higher price. OK, they may have forgotten this in the recent past, but they are beginning to recall it. It makes no sense to have a risky deposit earning 2% while paying 5.5% on a mortgage. If the bank goes bust, she still owes the mortgage, even if her deposit has vanished.
No need to do any further figures on this one. If Bank of Ireland lent you €100,000 at 5.5% to put on deposit at 3%, what would you say to them?
But property prices may well fall further. Rental yields are strong in the cities at the moment, and it's certainly tempting. But it's still risky.
An investment property may turn out to be a good investment. It may turn out to be better than shares. But both involve risk. The risk in property is probably higher as you can't diversify property very easily.
Investing in AIB shares is definitely riskier than investing in a single property. But, in my opinion, investing in a portfolio of 10 to 20 shares is less risky than buying a single property. It will probably be more volatile in the short term, but over the long-term, it should offer better, less riskier returns. It would definitely be a lot less hassle.
Yes you are right that everything involves risk.
To that specific question I'd say maybe the risk of property rising outweighed the fact that the interest rate on 100K is higher than the deposit rate. I cannot say what I think the likelyhood of property rising on AAM is which is kinda important to this discussion, but we won't go there, you're the boss
. But I can say that I think deposit rates will go down. So one has to decide on the risks in any investment. And I don't think that depositing money in a bank is a risk, could be wrong, as recent history shows, but if I did I'd be investing in gold bars under the bed. Or indeed in bricks and mortar.
Recently banks are not inclined to lend to someone who has cash they could use instead. They want the customer to be as committed as possible to the property purchase. The banks now look for details of all savings – not just to check if there’s something like a CU loan involved but to also to see if the bank is more exposed than they need to be on a loan.Bronte said:
This is the case with loans for PPRs I’m assuming it’s the same with investor loans – possibly even more so.
Banks have learned the hard way that if things go bad the customer is often reluctant to switch surplus cash into the mortgage.