# Average salary, borrow to buy a commercial property?



## galway_blow_in (6 Jun 2017)

i recently sold an apartment which i only owned for eighteen months and rented for four months less than that , i realised a gain of 36% and will not have to pay any capital gains tax due to a loss i made on an overseas property which i sold in early 2009 

anyway , i have come across a commercial property here the tenant has just entered a ten year lease , the rent is 34k per annum and the purchase price is about 370 k , i would need to borrow 150 k in order to make the purchase , 150 k borrowed over fifteen years will see repayments of 922 per month based on a 5.45% interest rate , rates are higher for this kind of purchase 

the alternative to an investment like this is to simply put the money in a dividend paying fund , in this case i would probably see a 10% total return per annum but dividend income would unlikely reach above 6 k on a sum of 225 k 

before anyone wants to know where i accumulated this kind of money , i invested in kerry and glanbia in 2010 and made a tidy sum , again i was able to put these gains against the losses on my overseas property which i owned from 2005 to 2009 , i invested in limerick city in 2015 and sold recently 

the property im looking at now is a pharmacy 

im just wondering if its very high risk , the income is very strong and this to me is attractive as my job is only average and i want to build up a wealth generating asset portfolio , im aware i may be lacking in diversification but unless you have a very large sum to invest, stocks just dont deliver the kind of yields that property does


----------



## Sarenco (6 Jun 2017)

Yes, it's a very high risk investment!

You are reliant on the ongoing ability of a single (presumably relatively small) enterprise to pay their contracted rent on an ongoing basis.  You can't really compare it with an investment in a widely diversified equity fund.

That's a very decent gross yield of 9% on the figures presented but I don't see how you're projecting a (presumably net) total return of anywhere close to 10%.

In my opinion, income investing is an illogical preference and is typically very inefficient from a tax perspective.  But each to their own.


----------



## monagt (6 Jun 2017)

Sarenco said:


> In my opinion, income investing is an illogical preference and is typically very inefficient from a tax perspective.  But each to their own.



As opposed to what?, investing for capital gain, deposits, divs (income)............


----------



## Sarenco (6 Jun 2017)

monagt said:


> As opposed to what?


As opposed to investing for capital growth.

Why would you prefer income over capital growth?  The tax treatment of income is generally inferior so it seems illogical to me.


----------



## monagt (6 Jun 2017)

Sarenco said:


> As opposed to investing for capital growth.
> 
> Why would you prefer income over capital growth?  The tax treatment of income is generally inferior so it seems illogical to me.



I agree but I presume you don't mean property so are we down to Equities that concentrate on capital growth or what?


----------



## Sarenco (6 Jun 2017)

Well, GBI was comparing the yield on an individual commercial property with the yield on a diversified equity fund and this prompted my comment on the (dubious IMO) attractions of income investing.

Bear in mind that capital growth typically reflects anticipated income/profit growth or, increasingly for many companies, paying down debt.


----------



## galway_blow_in (6 Jun 2017)

Sarenco said:


> As opposed to investing for capital growth.
> 
> Why would you prefer income over capital growth?  The tax treatment of income is generally inferior so it seems illogical to me.





Sarenco said:


> As opposed to investing for capital growth.
> 
> Why would you prefer income over capital growth?  The tax treatment of income is generally inferior so it seems illogical to me.



il explain why for me income is as important

take two assets

a fund with an initial investment of 200 k v a three bed house ( not in dublin obviously ) which cost the same to buy ( assume its bought with cash )

over a twenty year period , the fund is likely to be worth more in capital value , however the house can deliver a gross yield of 7% , twice what the fund can , plus the fund may be worth half its original value after five years due to a bear market in equities , the housing market may also dip during these years but the rent is still delivering a yield of 7%

if someone has a high paying job and has no reliance on income from either a property or an equity fund , then i agree that the diversified equity fund in a wiser investment ( and they would be better with an accumulitive fund as opposed to a distributitive one so as to reinvest dividends ) but you cannot live off the movements in a fund

do you see my point ?


----------



## Sarenco (6 Jun 2017)

galway_blow_in said:


> do you see my point ?


Not really.

With an accumulating fund you can always redeem units to pay for your living expenses.

Money is money.  Why would you prefer a dividend over redeeming capital?

There is nothing magical about dividends/rent.  If a share portfolio/house falls in value, well, it falls in value.  Drawing value from the portfolio/house as rent or dividends (as opposed to redeeming capital) won't change this fact.

I do appreciate that people have a psychological aversion to spending capital (as opposed to the income generated by that capital) but I've never understood the logic behind this preference.

When you consider the differing tax treatments of income and realising capital gains/losses it just seems odd to me.

Just my 2 cent - I appreciate this is not a conventional viewpoint.


----------



## Brendan Burgess (6 Jun 2017)

galway_blow_in said:


> the alternative to an investment like this is to simply put the money in a dividend paying fund , in this case i would probably see a 10% total return per annum but dividend income would unlikely reach above 6 k on a sum of 225 k



Do you own your own home outright?  That is, have you repaid your mortgage in full? 

If not, that should be your first priority. 



galway_blow_in said:


> my job is only average and i want to build up a wealth generating asset portfolio



What does "only average" mean? If you are paying tax at the top rate, you can get a much better return by investing in a pension fund. 

Brendan


----------



## galway_blow_in (6 Jun 2017)

Sarenco said:


> Not really.
> 
> With an accumulating fund you can always redeem units to pay for your living expenses.
> 
> ...



its an interesting view

i actually prefer equities to property , i just think property delivers higher income from smaller amounts of asset value and some people need to maximise income 

i know you could sell off some of your equity portfolio but if you enter a bear market for several years  , its hardly wise to do that , with the house or property , you rental income should remain the same even the overall value of the property dips


----------



## galway_blow_in (6 Jun 2017)

Brendan Burgess said:


> Do you own your own home outright?  That is, have you repaid your mortgage in full?
> 
> If not, that should be your first priority.
> 
> ...



yes , thankfully i do not have any debt on my primary residence

my income is only 35 k per annum currently from my job  but i have a commercial  property ( worth 120 k roughly )  which brings in a grand per month and which i pay out 535 per month in loan repayments ( nine years left on a 50 k mortgage ) , i also own some farm land which i receive 6 k per year in rent from , this is tax free under a long term lease scheme

having sold my apartment recently , i have a combined total of 220 k to spend , i already had fifty grand in stocks


----------



## Sarenco (6 Jun 2017)

galway_blow_in said:


> i know you could sell off some of your equity portfolio but if you enter a bear market for several years  , its hardly wise to do that , with the house or property , you rental income should remain the same even the overall value of the property dips


I do genuinely understand that perspective but, if you think about it, really what's the difference?

Why would you be happy to use dividend payments on an equity portfolio that is falling in value to fund your lifestyle expenses but balk at realising a capital loss?

Why wouldn't you reinvest your dividends into your equity portfolio if you are concerned about maintaining its (income producing) value?

The same principle applies to real estate.

I would also note that companies can and do cut dividends.  And rents do fall.  Income on growth assets is never a "sure thing".


----------



## Brendan Burgess (6 Jun 2017)

Is this correct?

You have a 50k mortgage on a property worth €120k. 
You have a mortgage-free farm paying you €6k tax-free a year 
You have €200k in cash 
You have your family home 

I assume you are single. 

You want to borrow €150k to buy a property for €370k 

It's very likely that borrowing €150k to buy a property for €370k will work out fine.  Your three tenants will continue to pay rent. Property prices will probably rise over the long-term. You will be able to meet your repayments and you will reach retirement owning some valuable income producing properties. 

But it could all go wrong.  You lose your job.  Your tenants stop paying.  Interest rates rise.  Property prices go into a long-term decline. 

It seems much less risky for you to pay off the €50k mortgage (assuming it's not a cheap tracker).  You have some taxable income, so contribute enough to stop paying tax at 40%. 

Invest the balance in equities. 

If the world goes bad or mad, you will be in a very good position owing nothing to anyone. 

Brendan


----------



## galway_blow_in (6 Jun 2017)

Brendan Burgess said:


> Is this correct?
> 
> You have a 50k mortgage on a property worth €120k.
> You have a mortgage-free farm paying you €6k tax-free a year
> ...




thanks brendan

im not married but myself and my partner have a young child

 it ( commercial property )  cost me 122 k all in including stamp duty and legal fees , while not a blue chip tenant , the company has twenty electrical stores around the country ,  i contributed 72 k of my own money to the purchase , the rent is 1000 euro per month and the sitting tenants lease expires  in 2024 , after repayments ,  i get to keep over 40% of the rent each month , my instinct was to instead of paying off this 50 k loan , to  buy another asset as the mortgage is so easily covered on the commercial unit   , beit a property or an equity fund , the interest on the mortgage is 100% tax deductible as is the case with commercial property loans 

however , i see where your coming from , were i to pay off the current 50 k loan , what i was paying in loan repayments , i could now contribute that exact amount to a pension each month  which should deliver the same tax write off as the interest on the current mortgage , that is what you meant , yes ?


----------



## galway_blow_in (6 Jun 2017)

Sarenco said:


> I do genuinely understand that perspective but, if you think about it, really what's the difference?
> 
> Why would you be happy to use dividend payments on an equity portfolio that is falling in value to fund your lifestyle expenses but balk at realising a capital loss?
> 
> ...



if i buy a thousand stocks today  at 100 euro each and the company pays 5% of a dividend , provided the dividend is not cut , it doesnt matter from an income POV if the stock price drops to 60 euro at some point , im still earning 5 k per anum gross in dividends from the stock

that is different to doing what you suggest which is selling off a portion of the thousand stocks in order to provide income every so often , if i sell 50 shares in a year in order to provide income , thats ok if the stock price has increased to 120 euro but if the stock has dropped to 60 euro , its not so sweet ?


----------



## Sarenco (6 Jun 2017)

Well, if the value of your stock portfolio falls in half and the dividend yield per share remains constant your income also halves.  

I don't think we're ever going to see eye-to-eye on this one but I hope you can at least partially see my point that there is nothing particularly "magical" about dividends (or any other source of income) to contrast it with capital gains.

Leaving the theory to one side for a moment, what interest rate are you paying on the €50k loan?  Paying that off may well be the best use of your capital on a risk-adjusted basis.

As a suggestion, it might be worth aiming to divide your investable capital in three (very roughly) equal "pots" allocated to real estate, equities and cash/State Savings products.  With zero debt, that should allow you to sleep well at night without worrying unduly about inevitable market gyrations.

It sounds as though you are already in decent financial shape and there's really no need to needlessly "stretch for yield".  Protecting your accrued wealth is an equally important consideration.


----------



## Brendan Burgess (6 Jun 2017)

galway_blow_in said:


> im not married but myself and my partner have a young child



All of this argues for minimising your risk and maximising your liquidity. 

If you need cash suddenly, you won't be able to sell a bit of one of your buildings. 

You should pay down your mortgage, and invest the balance in equities.  If you need cash, you can then sell some of your equities. 

Brendan


----------



## galway_blow_in (7 Jun 2017)

Sarenco said:


> Well, if the value of your stock portfolio falls in half and the dividend yield per share remains constant your income also halves.
> 
> I don't think we're ever going to see eye-to-eye on this one but I hope you can at least partially see my point that there is nothing particularly "magical" about dividends (or any other source of income) to contrast it with capital gains.
> 
> ...



your dividend income doesnt fall just because the capital value of the stock - portfolio slips

good dividends are the only comfort during bear markets which happen in stocks more often than property , anyone who owned coca cola or procter and gamble from the year 2000 to 2010 , still had a 3% dividend yield to cushion the blow of one fairly bad bear market from 2000 to early 2003 and the worst since the thirties from late 2007 to spring 2009 , thats 30% over ten years , better if you reinvested dividends instead of taking the cash

dividends make the likes of johnson and johnson better than the likes of netflix over a very long time


----------



## galway_blow_in (7 Jun 2017)

Brendan Burgess said:


> All of this argues for minimising your risk and maximising your liquidity.
> 
> If you need cash suddenly, you won't be able to sell a bit of one of your buildings.
> 
> ...



im not someone who is paying tax at the higher rate on too much of my income but if i were able to gain as much tax reduction through a pension as i am on the interest deduction on my mortgage , i will pay off my mortgage , i will talk to an accountant about it in detail


----------



## Brendan Burgess (7 Jun 2017)

galway_blow_in said:


> im not someone who is paying tax at the higher rate on too much of my income



So just pay enough pension to use up the bit you are paying higher rate on. 



galway_blow_in said:


> if i were able to gain as much tax reduction through a pension as i am on the interest deduction on my mortgage



It's hard to explain, but this is not a valid comparison. If your lender puts up the interest rate to 10%, you will get a much higher  interest deduction on your mortgage.  By your reasoning, then you should not pay down your mortgage! 

So it's actually the opposite. If you are on a cheap tracker, you should not pay down the mortgage, despite the fact that the tax deduction on the interest is so small. 

Brendan


----------



## Sarenco (7 Jun 2017)

galway_blow_in said:


> your dividend income doesnt fall just because the capital value of the stock - portfolio slips



True but why should that be of any comfort to you?

Let's say you have a €100 portfolio that pays you €3 in dividends.  During the course of the year the capital value of your portfolio increases by 50%.  So, at the end of the year your portfolio is worth €153.  That's a total return of 53%.

If your portfolio value instead falls by 50% - but the dividend income is still €3 - your portfolio is worth €53 at the end of the year.  That's a total return of -47%.

Dividends are not magic and a stock that consistently pays high dividends is not necessarily better than a stock that pays no dividends at all.  I think you are confusing income with value.

Companies with low growth prospects (utilities, tobacco, consumer staples) often pay higher dividends than companies with higher growth prospects (technology stocks, etc.).  Which stock would you have preferred to own over the last decade - Johnson & Johnson or Apple?


----------



## galway_blow_in (7 Jun 2017)

Sarenco said:


> True but why should that be of any comfort to you?
> 
> Let's say you have a €100 portfolio that pays you €3 in dividends.  During the course of the year the capital value of your portfolio increases by 50%.  So, at the end of the year your portfolio is worth €153.  That's a total return of 53%.
> 
> ...



even your capital value increases by 50% in one year , what use is it unless you take profits , over many years , your timing will be off now and again and you will be as well just holding , the point of dividends is you are paid to hold


----------



## galway_blow_in (7 Jun 2017)

Brendan Burgess said:


> So just pay enough pension to use up the bit you are paying higher rate on.
> 
> 
> 
> ...



rate im paying is 5.45% variable with ulster bank  , best i could get for this kind of investment and considerably better than bank of ireland

you are right in saying if ( when ) interest rates rise , this will lessen the attractiveness of the investment return


----------



## Sarenco (7 Jun 2017)

galway_blow_in said:


> rate im paying is 5.45% variable with ulster bank



Wow!  Why are you carrying debt at that rate when you have cash at hand earning essentially nothing? 

In my opinion, you should pay that off ASAP.

What impact do you think a sharp uptick in interest rates would have on property prices?


----------



## Sarenco (7 Jun 2017)

galway_blow_in said:


> even your capital value increases by 50% in one year , what use is it unless you take profits , over many years , your timing will be off now and again and you will be as well just holding , the point of dividends is you are paid to hold



If you draw €3 from a €153 portfolio you will end up with €150.

If you draw €3 from a €53 portfolio you will end up with €50.

Leaving the tax treatment aside, it really doesn't matter whether you take the €3 as a dividend or by redeeming capital.


----------



## galway_blow_in (7 Jun 2017)

Sarenco said:


> If you draw €3 from a €153 portfolio you will end up with €150.
> 
> If you draw €3 from a €53 portfolio you will end up with €50.
> 
> Leaving the tax treatment aside, it really doesn't matter whether you take the €3 as a dividend or by redeeming capital.



your way involves selling stock in order to provide an income , thus reducing ones original asset holding , mine involves retaining the same asset holding and taking the cash dividend payment per annum

their is a difference


----------



## galway_blow_in (7 Jun 2017)

Sarenco said:


> Wow!  Why are you carrying debt at that rate when you have cash at hand earning essentially nothing?
> 
> In my opinion, you should pay that off ASAP.
> 
> What impact do you think a sharp uptick in interest rates would have on property prices?



well the yield on the property is almost 10% so a 5.45% doesnt appear that onerous and the interest rate can be fully written off against tax , unlike with a loan on a residential property , its 70% deductible i believe , there is such a thing as using debt to grow ones wealth , if you pay off everything , you have less cash left to pick up other assets , beit equities or property 

spending the money on a tax deductible pension is probably more sensible however , i will look into it very soon


----------



## moneymakeover (7 Jun 2017)

What age are you Galway blow in?
And how long do you plan to pay off the 200k?

If you can do it in 10 years then I don't see a problem with the property investment


----------



## Sarenco (7 Jun 2017)

galway_blow_in said:


> your way involves selling stock in order to provide an income , thus reducing ones original asset holding , mine involves retaining the same asset holding and taking the cash dividend payment per annum
> 
> their is a difference


There really isn't - it's nothing more than mental accounting.

Contrast an accumulating equity fund with a distributing equity fund. 

An accumulating fund reinvests all income received by the fund on its underlying holdings automatically, so if you want to draw down cash you have to redeem units.  

A distributing fund distributes all income received on its underlying holdings automatically so if you want to reinvest distributed cash you have to subscribe for additional units.

It's the same thing!


----------



## Sarenco (7 Jun 2017)

galway_blow_in said:


> the interest rate can be fully written off against tax


Needlessly incurring an expense so you can make a tax deduction is a classic case of allowing a tax "tail" to wag an investment "dog".

In any event, you have a low marginal tax rate which obviously reduces the value of the deduction.

I think you're nuts to needlessly carry debt at that rate.  Paying it off is a no brainer - you won't find a better use for your capital on a risk adjusted basis.

And it's not a case of "either or" - you can comfortably pay off the debt and contribute to a pension.


----------



## Gerard123 (7 Jun 2017)

On the topic of the original post, it's very high risk. One tenant a pharmacy. Sector is risky, challenges to health budgets, big decrease in the profitability of that sector in the last 10 years and not anywhere as attractive as it was once. What info do you have on the tenant, who, financial background, etc. Lots of questions.  Is there an alternative use? Not a sensible investment IMO based on facts you set out.


----------



## Andy836 (7 Jun 2017)

Why am I the only person who thinks this is an interesting, in the positive way, deal?

Pharmacies will always be with us. Particularly as Irish people get older and fatter and need more medication which the government will continue to dole out so long as people can call liveline and complain. 
Assumption about this property - Pharmacies are normally located in busy, high foot traffic locations. So I am assuming this property is too and will therefor have some alternative use value thereby limiting downside risk.

$34k rent less $8k in interest is $26k to Galway which is a Pre-Tax ROE of 12%. 
Not bad for a simple investment in an asset which isn't going to disappear overnight.

Questions for future Capital Appreciation:
- Is the pharmacy a brand new business or is it an pre-existing well established business which has just renewed their lease?
- Have you seen accounts/projections? 
- If its a new business how much will they invest in fit out .i.e. are they putting meaningful money into it?
- If its a new business do you think a 9% gross yield is appropriate for a brand new retail business?
- What's an appropriate yield for an established pharmacy [7%/8%] as that's what you'll exit at? 

Best of luck with it.


----------



## galway_blow_in (7 Jun 2017)

moneymakeover said:


> What age are you Galway blow in?
> And how long do you plan to pay off the 200k?
> 
> If you can do it in 10 years then I don't see a problem with the property investment



thirty nine , i think you might be confusing the two different properties , i currently have a 50 k mortgage on a commercial property i bought eighteen months ago , its a ten year loan at 5.45%

the property i was reffering to in my opening post would require a 150 k loan which i would need fifteen years to pay off , i recently sold a property in limerick for 161 k NET , bought same property for 123k all in including legal fees and stamp duty in october 2015 , also collected rent of around 8 k on the same property from december 2015 to january 2017


----------



## galway_blow_in (7 Jun 2017)

Sarenco said:


> Needlessly incurring an expense so you can make a tax deduction is a classic case of allowing a tax "tail" to wag an investment "dog".
> 
> In any event, you have a low marginal tax rate which obviously reduces the value of the deduction.
> 
> ...



i do not mean to sound important or to compare myself to gold standard companies in anyway but how come countless large companies with a lot of cash on the balance sheet , still use debt to expand ?

do you view debt as inherently bad ?


----------



## Brendan Burgess (7 Jun 2017)

galway_blow_in said:


> i will look into whether i can write off a pension contribution of 540 per month against tax to the same degree i can with the interest on this mortgage



I am genuinely concerned that your thinking is very muddled on this. If it's this muddled, then you probably should not be doing complex, risky property investments. As Sarenco has pointed out...



Sarenco said:


> Needlessly incurring an expense so you can make a tax deduction is a classic case of allowing a tax "tail" to wag an investment "dog".


----------



## galway_blow_in (7 Jun 2017)

Gerard123 said:


> On the topic of the original post, it's very high risk. One tenant a pharmacy. Sector is risky, challenges to health budgets, big decrease in the profitability of that sector in the last 10 years and not anywhere as attractive as it was once. What info do you have on the tenant, who, financial background, etc. Lots of questions.  Is there an alternative use? Not a sensible investment IMO based on facts you set out.



ive discovered the property is a bank sale and a cash buyer appears to be close to securing it , i agree its high risk

i also know of a commercial property in dublin which has a charity ( fairly large one ) as a tenant , 15 k per annum rent , place can be bought for 198 k including vat , stamp duty and legal costs , thats a yield in excess of 7.5% , commercial property is far less hassle than residential , its not in a tenants interest to neglect the place , the lease on this property has three years left , i could buy this outright with my own money , im not saying i will , have not even called about it ,  i have a friend in the estate agent business who informed me about it


----------



## Sarenco (7 Jun 2017)

galway_blow_in said:


> do you view debt as inherently bad ?


No.  

But I do think it's crazy to try and justify carrying expensive debt when you are in a position to pay it off on the grounds that it is deductible for tax purposes.


----------



## galway_blow_in (7 Jun 2017)

Brendan Burgess said:


> I am genuinely concerned that your thinking is very muddled on this. If it's this muddled, then you probably should not be doing complex, risky property investments. As Sarenco has pointed out...



i will seek advice on the matter brendan from someone who is well versed on the subject ,i accept  my writing style is a little sloppy so perhaps the message does come across as muddled , i am not opposed to paying off the mortgage , im just throwing different viewpoints out to see what people think , i am not wedded to buying another property , i may just put what i can in an equity fund having paid off the mortgage on the commercial property , i do not intend to invest in residential property for letting out again , its not worth the potential problems with tenants , i had no real trouble with mine but  the property was a little far away so i sold it


----------



## galway_blow_in (7 Jun 2017)

Sarenco said:


> No.
> 
> But I do think it's crazy to try and justify carrying expensive debt when you are in a position to pay it off on the grounds that it is deductible for tax purposes.





Sarenco said:


> No.
> 
> But I do think it's crazy to try and justify carrying expensive debt when you are in a position to pay it off on the grounds that it is deductible for tax purposes.



that the interest is tax deductible is not my overarching reason for not having paid off the mortgage before now , my reason ( up to now anyway ) was that by using debt i had cash in reserves to aquire other assets , the rental income from the property i own is a grand per month , the mortgage repayments are 540 per month


----------



## galway_blow_in (7 Jun 2017)

Sarenco said:


> No.
> 
> But I do think it's crazy to try and justify carrying expensive debt when you are in a position to pay it off on the grounds that it is deductible for tax purposes.



if debt is comfortably covered , rather than use what cash is available to clear it , is it not a relatively modest ambition to further grow ones asset holdings through some sort of leverage ?


----------



## Sarenco (7 Jun 2017)

Back in 2000-2008 lots of people thought they could pursue their relatively modest ambitions through the use of (what was then cheap) leverage.  A very significant chunk of that cohort subsequently blew themselves up financially.

You seem to have done extraordinarily well so far on a relatively average income.  Don't blow it now by taking on any more risk then you have to.

Protecting your accrued wealth is every bit as important as growing your wealth any further. 

Take your points and the goals will come.


----------



## galway_blow_in (7 Jun 2017)

Sarenco said:


> Back in 2000-2008 lots of people thought they could pursue their relatively modest ambitions through the use of (what was then cheap) leverage.  A very significant chunk of that cohort subsequently blew themselves up financially.
> 
> You seem to have done extraordinarily well so far on a relatively average income.  Don't blow it now by taking on any more risk then you have to.
> 
> ...



i wasnt bragging earlier , the farm i own i inherited from an uncle , the same uncle willed me the money to buy shares in glanbia and kerry so in truth i was given a major leg up

i bought property in budapest in 2005 which was a duff decision

let me ask you something , lets for a minute assume i paid off the mortgage on my commercial property which yields 10% per annum , lets say i knew of a commercial property which was also yielding 10% , say the tenant is a barber and the unit is 100 k , would you see that as a good investment compared to simply buying a fund which tracks global equities ?

am i right in saying you dont rate property as an investment full stop even its entirely purchased without any debt ?


----------



## Sarenco (8 Jun 2017)

galway_blow_in said:


> am i right in saying you dont rate property as an investment full stop even its entirely purchased without any debt ?


No, that's not my view.

I simply think that you should try to achieve a reasonable allocation across the major asset classes that reflects your need, willingness and ability to take investment risk.


----------



## Brendan Burgess (8 Jun 2017)

galway_blow_in said:


> i have come across a commercial property here the tenant has just entered a ten year lease , the rent is 34k per annum and the purchase price is about 370 k , i would need to borrow 150 k in order to make the purchase , 150 k borrowed over fifteen years will see repayments of 922 per month based on a 5.45% interest rate , rates are higher for this kind of purchase



This raises an interesting issue which I had not thought about. 

You have €220k cash. Assuming you had no other debt would it be a good idea to buy a property for €220k yielding 10%?  I think that the answer here is probably yes.  

Assume you have no cash, would it be a good idea to borrow €150k at 5.45% to buy a property for €150k yielding 10%.  I would think that the answer here is no. Too much can go wrong with a single property and a single tenant. You are exposing yourself to too much risk.  Of course if the tenant pays the rent and the property rises in value, you will get a fantastic return for your zero investment. 

So, I think that the solution is to pay off the €50k mortgage you have and buy a property for €170k. 

In practice, buy the property first and then pay off the mortgage. So, if you have to pay €200k for a property,  you will have only €20k left over to pay down the mortgage. 

A lot of people have €20k and try to borrow €180k to buy an investment property. That is crazy stuff unless their other income and assets allow them to handle the risks.

Brendan


----------



## galway_blow_in (8 Jun 2017)

i would not dream of borrowing 180 k if i only had 20 k , i doubt any bank would look at me if proposed doing so either


----------



## galway_blow_in (5 Jul 2017)

just an update , recently discovered a takeaway in dublin 9 which is going to auction with allsop tomorrow , 18 k per anum rent with ten years left on a fifteen year commercial lease , reserve is 150 k so i would have been prepared to go to 175 k , unfortunately my solicitor could not approve as one of the conditions of sale is there will only be a partial release of title upon sale , i actually took the liberty of contacting the vendor.s  ( a bank ) solicitor direct and he more or less told me he doesnt expect the property to be sold at all tomorrow due to a completely unsatisfactory lack of information re_ title , vat or issues related to the tenancy , he thinks it will end up in a future auction at some point ( presumably when sufficient information is available )

i know some people believe allsop done a terrific job by shaking up the old guard when it comes to moving on property but some of the lots which go to auction , really should not , there is often an absolute dearth of information , buyer beware and all that but surely there needs to be a minimal level of responsibility to provide relevant paperwork etc , for the privelege of signing up to bid , you have to pay a non refundable fee , was the same with attending the live auctions in the RDS , i guess when they can charge fees like that , not being able to sell everything everytime is not so bad


----------



## galway_blow_in (5 Jul 2017)

oh and il be paying off the mortgage on my commercial property in the next few days too


----------



## cremeegg (6 Jul 2017)

Sarenco said:


> There is nothing magical about dividends/rent.  If a share portfolio/house falls in value, well, it falls in value.  Drawing value from the portfolio/house as rent or dividends (as opposed to redeeming capital) won't change this fact.



How is collecting rent from a property investment, drawing value. So long as the property is maintained any excess rent is not drawing value.


----------



## Sarenco (6 Jul 2017)

I would have thought it was self-evident that receiving rent on a property is drawing/deriving/extracting value from that property.

I didn't suggest that receiving a rent payment results in a corresponding reduction in the capital value of the relevant property.


----------



## cremeegg (6 Jul 2017)

There is a difference though between a company paying a dividend, which reduces the value of the company, and a tenant paying rent which does not reduce the value of the property.

If you reinvest a dividend your capital stays the same.

If you reinvest the rent, your capital increases.


----------



## Sarenco (6 Jul 2017)

What's your point?

Again, I didn't suggest that receiving a rent payment results in a corresponding reduction in the capital value of the relevant property.

I am well aware of the effect of a dividend payment on the relevant company's stock price - I actually started a thread on this very point last week:-

https://www.askaboutmoney.com/threads/the-free-dividends-fallacy.204136/


----------



## cremeegg (6 Jul 2017)

Sarenco said:


> What's your point?
> 
> Again, I didn't suggest that receiving a rent payment results in a corresponding reduction in the capital value of the relevant property.
> 
> ...



Yes I read that thread carefully. And the point you make about dividend payments from a company is true. That dividends are not free they reduce the value of the company.

My point is that the same is not the case for rent. Rent payments do not reduce the value of the property.


----------



## Sarenco (6 Jul 2017)

cremeegg said:


> Rent payments do not reduce the value of the property.


Of course they don't.  Again, for a third time, I never suggested otherwise.


----------



## cremeegg (6 Jul 2017)

Sarenco said:


> Of course they don't.  Again, for a third time, I never suggested otherwise.



I have no interest in trying to prove some point against you. I am interested in developing my understanding.

The idea that there is a fundamental difference between a dividend which is a distribution of capital, and rent which is not, is just developing for me. Prompted in part by your contributions.

While this may be well understood by the world at large, (though I strongly suspect not) it is a new idea to me.


----------



## galway_blow_in (6 Jul 2017)

cremeegg said:


> I have no interest in trying to prove some point against you. I am interested in developing my understanding.
> 
> The idea that there is a fundamental difference between a dividend which is a distribution of capital, and rent which is not, is just developing for me. Prompted in part by your contributions.
> 
> While this may be well understood by the world at large, (though I strongly suspect not) it is a new idea to me.



took me a while to see what sarenco  was talking about but i think he means  is that in respect of a stock which pays out a dividend , capital appreciation is inherently delayed - stunted - held back by having a dividend cash payout beit quaterly or twice annually , i.e , upon paying out the cash , the capital  value of the company is reduced

if this isnt what he means , i pledge never to comment on the matter again as im incapable of understanding it better than that


----------



## galway_blow_in (13 Jul 2017)

hi again

ok , just an update , i have transferred 20 k into my ulster bank current account with a view to paying off half my commercial property mortgage (ten year 50 k loan @ 5.45 % taken out fourteen months ago ) , i would then owe 25 k on the property which is delivering a grand per month of an income , i could pay it all off ( and well might do ) but im instead considering strongly the idea of reducing the term as i can comfortably meet the repayments of 540 per month , i.e , continue paying 540 per month for another four years to completion so my instinct is that completely paying off my mortgage on this property is excessively prudent , add to that , i have the other day paid off the remaining 6 k on a 30 k loan i took out on a jeep in 2013 , the interest on this unsecured loan was 6.74%

bear in mind i had 220 k to spend a few weeks ago and went close to bidding on another commercial property in dublin which went to auction last week , i am hoping to invest 120 k in mostly european focussed ( U.S domiciled ) etfs with a view to leaving this money invested for at least ten years , this sum is exactly what i invested in the property i sold a few months back when i purchased in late 2015 , i sold this property for 165 k in the spring and my NET take was 161 k after all expenses , i had no capital gains tax bill on this property due to losses going forward on an overseas property i owned from 2005 to 2009

however , an interesting commercial property i looked at several months ago now seems to be properly ready for sale , there were issues related to a family dispute when i looked at it a while back and the estate agent said it was effectively in limbo , its a private sale of a 600 sqr foot property in waterford city which is let to a barber on a four year nine month lease with one year gone , rent is 10 k per annum , no vat on the property and the current bid is 100 k , the business appears strong in that there were plenty of customers the day i viewed it , its not a glamorous investment but the yield would be almost 9% were it to get it under 107 k if you factor in stamp duty and legal costs , now i would only buy this entirely with cash and this would mean not investing as much in broad based equity etf,s


my question is this , rather than entirely paying down all my debt , would it be reasonable to leave 25 k for another four years and instead use the money towards this kind of purchase , my rationale for perhaps buying another commercial property is a potential replacement income stream were my partner and i to either loose our jobs , that the property in waterford is unlikely to see much in the way of capital appreciation would not really concern me as i would view it as an income play entirely


----------



## LS400 (13 Jul 2017)

As I read the posts regarding your Dilemma, its the same old Pay your debts and whats left put it into a pension. Its only my opinion, but its claptrap.

Having and paying into pension is worth-while but its not the Be-all and End-all for a comfortable retirement.

Were all different and we get our kicks differently. I dont propose to know about dividends and what not, and if I were to follow some of the post here, I for whats its worth would be worse off financially, and for that matter be paying some one to manage something I know nothing about.

Recently I had a chat with an accountant, and he said the same mantra, "probably someone on this forum" keep your debts low and so on, while the guy means well, he is risk adverse. Im not. 
So, although you have followed above posters advice, at 39, I wouldn't have. 

If anyone want a risk free investment, then they should buy prize bonds, see how well you can retire on that, "for it could be them"

Investing is risky, whether its in shares or Property, and you have to be prepared as best you can for whats around the corner, because contrary to some, nobody really knows.
People lost their shirt with the property collapse years ago, but they were not the only ones to loose out massively on investments.  

There are, no certainties with any investment, but with property, you're sure to have to the horror stories of what happened in the property scene years ago rolled out. Yes people got hurt and greedier people got hurt more, it happens, not just in Ireland,  and at some stage there will be another.


----------



## galway_blow_in (13 Jul 2017)

LS400 said:


> As I read the posts regarding your Dilemma, its the same old Pay your debts and whats left put it into a pension. Its only my opinion, but its claptrap.
> 
> Having and paying into pension is worth-while but its not the Be-all and End-all for a comfortable retirement.
> 
> ...




interesting post

when you say you " wouldnt  have " followed another person - posters advice

what advice are you referring to specifically ? , i havent paid off anything yet related to property , i just moved money into an account with a view to doing so

i paid off my jeep loan as the manager could tell me i would pay 400 quid interest between now and next july on six and a half grand


----------



## Sarenco (13 Jul 2017)

@LS400

Nobody advised GBI to contribute to a pension on this thread.

I happen to think its bonkers to carry debt @5.45%, when inflation (CPI) is currently -0.4%. 

Nothing to do with the expected, risk-adjusted return of different investments -  it's just very expensive money.


----------



## galway_blow_in (13 Jul 2017)

Sarenco said:


> @LS400
> 
> Nobody advised GBI to contribute to a pension on this thread.
> 
> ...



sarenco , even when the yield delivered on the investment far exceeds 5.45% ?

the interest rate is not that high for that kind of investment , you wont borrow for a retail unit at the same rate as a thirty year mortgage on a home


----------



## Sarenco (13 Jul 2017)

galway_blow_in said:


> sarenco , even when the yield delivered on the investment far exceeds 5.45% ?



The yield is the yield regardless of the cost any debt associated with the property.

Institutional CRE investors can borrow money at a fraction of that price - it's expensive money whatever way you look at it.


----------



## galway_blow_in (13 Jul 2017)

Sarenco said:


> The yield is the yield regardless of the cost any debt associated with the property.
> 
> Institutional CRE investors can borrow money at a fraction of that price - it's expensive money whatever way you look at it.



institutions dont buy small modest properties in the first place


----------



## LS400 (13 Jul 2017)

By moving your money into the account, you have said it's with the intention of paying down some loans, this is not a bad thing.

The issue here however is, you have also shown your intention, by your detailed research, into purchasing another investment vehicle.

 IMO this, and this is the crux of the post, reduces the strength of your hand when it comes to borrowing, and you seem to be focused on this venture.

If you are happy with your lot at that stage, then, commit to paying off vigorously.


Paying down the car loan is a no brainier in any circumstance where the interest rate is off the wall.

I borrowed once for a car, and it only ever be the once.


----------



## Sarenco (14 Jul 2017)

galway_blow_in said:


> institutions dont buy small modest properties in the first place


And that makes borrowing money at a real interest rate of ~6% reasonable somehow?  

Look, if you want to carry debt at that usurious rate that's your call.


----------



## galway_blow_in (14 Jul 2017)

LS400 said:


> By moving your money into the account, you have said it's with the intention of paying down some loans, this is not a bad thing.
> 
> The issue here however is, you have also shown your intention, by your detailed research, into purchasing another investment vehicle.
> 
> ...



Well in fact 6.74% isn't all that high for a car loan, was doing up my new house when I took it out so money wasn't as plentiful


----------



## galway_blow_in (19 Jul 2017)

just an update , i paid off the remaining 6500 loan balance ( 30 k borrowed ) on a jeep i bought in 2013 , this was @ 6.74% and unsecured 

took a while to transfer the outstanding 45 k to ulster bank from bank of ireland , i now intend to pay off this ten year loan ( rate of 5.45% ) which is secured , i spoke to my accountant and he agreed my interest write off would not be substantial , he argued i would be using cash i might otherwise perhaps use to buy another property but agreed that due to previous capital losses , owning equities is probably a better idea for now than an income producing property which would bump up my income tax bill

decided to retain a fair degree of cash for both emergencies and opportunities in the stock market so after all debt is paid by end of this week , my balance sheet will be

commercial property ( hopefully worth the 120 k i paid for it ) delivering a grand per month NET 

farm let out on a long term lease delivering 6 k per annum tax free 

day job earns me 34 k per annum ( im a driver )

130 k in equities ( 70% in index u.s domiciled funds , 13% in the ishares investment grade corporate bond fund and 17 % in a few companies ( one energy , two autos , one telecom and bank of ireland )  which i bought in the past eight days , i already owned about 50 k in equities  , whatever about growth , this should deliver about 3500 per annum gross in dividends based on yields of the securities involved  ( il worry about the taxes afterwards )

im retaining 50 k in cash as i work in the private sector and also would be willing to spend about 20 k on stocks if we entered a bear market , all in all im pretty happy with my situation , the limerick investment was very worthwhile but i would not invest in residential property again , the commercial property causes zero hassle so i see myself keeping it for years assuming its no vacant 

thanks again for all the views


----------



## LS400 (19 Jul 2017)

Fair play for the update, Above look rather healthy reading to me.

Just curious on the Bank shares, its been niggling away for months if not years, but I see you bought BOI shares. Every one is, and has been going on about AIB being the darling of the banks, Yet with my limited knowledge, it amazes me why, BOI needed much less capital injection than AIBs massive bail out, yet its only a miserable 25c/share as against €5 with AIB.

It probably make sense to everyone else, but, its why I stick with property.


----------



## galway_blow_in (19 Jul 2017)

LS400 said:


> Fair play for the update, Above look rather healthy reading to me.
> 
> Just curious on the Bank shares, its been niggling away for months if not years, but I see you bought BOI shares. Every one is, and has been going on about AIB being the darling of the banks, Yet with my limited knowledge, it amazes me why, BOI needed much less capital injection than AIBs massive bail out, yet its only a miserable 25c/share as against €5 with AIB.
> 
> It probably make sense to everyone else, but, its why I stick with property.



i bought less than 3 k worth so i see it as a bet on the irish economy , i paid 23.5 cents , ive owned shares ( on and off )  in bank of ireland all the way back to 2012 but owned none going into the brexit vote which was a relief , only really made money from 2012 to end of 2013 , they werent large investments at any stage

the PE and book value of bank of ireland appears about at the same level as many european banks but ireland is doing better than most european countries


----------



## Sarenco (19 Jul 2017)

That looks like a sensible, balanced approach to me.

Reasonable split between property and business holdings, with a chunk of cash reserves that will hopefully see you through any tough times.

Getting the "big picture" right is far more important that the details of any individual investments.


----------



## galway_blow_in (19 Jul 2017)

Sarenco said:


> That looks like a sensible, balanced approach to me.
> 
> Reasonable split between property and business holdings, with a chunk of cash reserves that will hopefully see you through any tough times.
> 
> Getting the "big picture" right is far more important that the details of any individual investments.



this will sound funny too but i always used to check the prices of my equities at the end of each day , last week i checked on tuesday and not again until the weekend , have not checked yet this week , checking equity prices often is not only unproductive , it wrecks your head , if there is a black monday situation , il hear about it on the news anyway and will be able to pick up some cheap assets , i think retaining 50 k in cash is wise , you never know when income might dry up  even without a mortgage , always money to be spent on homes , cars , even poor health could arise etc


----------

