# Wisdom of buy to let



## Centless (5 Apr 2006)

Hi there,

I would really appreciate it if people could offer their opinions on the following situation. Is it wise or sheer madness?
Currently we have a mortgage of €230k on a property worth €400k. 
A potential buy to let property is selling about €320k. 
I want to borrow €350k (to cover stamp duty and initial outlays). 
This will be financed by 92% investment loan and remainder by remortgaging current house. 
It will end up giving a combined LTV of about 80%
Monthly income / rent will be about €850 and interest only repayments will be about €1150
This shortfall can be met from normal income of else from a small lump sum drip feeding into the mortgage repayments each month. 
Similiar properties have appreciated by at least €25k pa in the area over the last while.
I am a pretty much risk adverse person but view this as a potential good investment. Does anybody have anything to offer on this?

All the best,
Centless


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## gearoidmm (5 Apr 2006)

You need to factor in a projected increase of 0.5-1% in interest rates over the next year to your equation.  Also, most calculations of income from rental properties would presume a vacant period of 1 month each year.

If, after all that, you can still afford the repayments, and you're sure it will continue to appreciate at the current rate, it might be worthwhile.


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## Centless (5 Apr 2006)

Yeah I'm assuming taking a hit on interest rates and can absorb this unless they go really high. I was also assuming 2 months vacancy (1 to cover management company and maintenace and 1 to cater for vacancy).

Thanks,


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## ClubMan (5 Apr 2006)

- I had to move the thread from _Mortgages and Home Buying _to _Property Investment_.

See this thread.


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## Theo (5 Apr 2006)

I would discourage anyone to buy an investment property whose rent does not cover its mortgage payments, regardless of whether you can make up the difference or not.  You simply do not know what return you will get otherwise.  No professional investor goes into a deal without knowing exactly how much they'll get back.  Your deal is a loss maker from the start - why would you take that risk?  

I was offered a "great" capital opportunity in London recently - i was dismissed when I pointed out that the rent did not pay the mortgage payments (let alone maintenance, mgt, voids, insurance, council tax etc.)- the answer i got was that the capital appreciation will pay for it.  Trouble is, I would only know that for sure the day I sold it.  I prefer to know the day I buy it.


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## Calina (5 Apr 2006)

Theo said:
			
		

> Trouble is, I would only know that for sure the day I sold it.



I thought I was the only one in the country who saw capital appreciation in that way.


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## dodo (5 Apr 2006)

Where did u buy
Look I said here before, you are putting 300E a month which is 3600 a year over 5 yrs is say 18K even if rates go up say  you pay 25K which u say u can afford,  alone this year houses are said to go up 15% , so even take a very calm increase in houses say 5 % a year for 5 years with compound   interest your house would be worth around 80K plus  more than now take away tax and the 25 K spent still make you a nice increase,  but if houses continue as expected you are talking over an 150K increase and then your deductions which is what I expect to happen,  there is no investment houses now bought with 90% mortgage or more that cover the payments each month,  but people still buy to let because they believe houses will still go up,  they expect Dublin alone to have more than 1 million more people living here not sure by when I think it was by 2025,  people are told all the time that they have to add to their pensions and so on,  Think of yours 300 a month as part of you future, there is risk in everything, If we knew what the future held 5 yrs back we all would have bought more houses but fact is some people did,  Bill Gates took a risk when he dropped out of college and he did alright for himself


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## Centless (5 Apr 2006)

Is this not the idea of risk? I might be new to investing in property but am not naive. If everyone took this approach to investing in property there would be a far less vibrant construction sector.


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## Centless (5 Apr 2006)

Dodo,

Buying in Oranmore, Galway


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## Theo (5 Apr 2006)

dodo said:
			
		

> Where did u buy
> Look I said here before, you are putting 300E a month which is 3600 a year over 5 yrs is say 18K even if rates go up say you pay 25K which u say u can afford, alone this year houses are said to go up 15% , so even take a very calm increase in houses say 5 % a year for 5 years with compound interest your house would be worth around 80K plus more than now take away tax and the 25 K spent still make you a nice increase, but if houses continue as expected you are talking over an 150K increase and then your deductions which is what I expect to happen, there is no investment houses now bought with 90% mortgage or more that cover the payments each month, but people still buy to let because they believe houses will still go up, they expect Dublin alone to have more than 1 million more people living here not sure by when I think it was by 2025, people are told all the time that they have to add to their pensions and so on, Think of yours 300 a month as part of you future,


 
No matter what way you dress it, you are still betting about the future.  I fail to understand anyone who decides to lose money every month in the hope that it'll work out with prices.  Why even risk it?  Put your money into a project that doesn't take that chance.  There are loads of other properties if you are patient and take the time to look that don't give you this risk.  But, then, most people want everything now and are not prepared to put in the effort or time to find the right investment.  This is the problem.


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## dodo (5 Apr 2006)

look as I said above I think it is a good idea galway along with Dublin and Cork will always be strong


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## Centless (5 Apr 2006)

Theo said:
			
		

> There are loads of other properties if you are patient and take the time to look that don't give you this risk. But, then, most people want everything now and are not prepared to put in the effort or time to find the right investment. This is the problem.


 
Time is not the issue - I actually should have jumped a while back - I view this as a long term thing (at least 15 years) and the intention is to evaluate what to do at this time. Pension has been pretty well sussed out and I view this as a very real potential.


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## Afuera (5 Apr 2006)

Centless said:
			
		

> Is this not the idea of risk? I might be new to investing in property but am not naive. If everyone took this approach to investing in property there would be a far less vibrant construction sector.


 
 Remortgaging your house to gamble on the future is certainly pushing risk to the max though.

Nobody can see into the future but many of the current indications from the property market are that in the coming years there will not be the kind of capital appreciation that has existed for the last few years. A 5% annual gain might be optimistic when the OECD has identified the Irish market as being 30% overvalued already.



			
				dodo said:
			
		

> look as I said above I think it is a good idea galway along with Dublin and Cork will always be strong



I'm sure they were saying the same about Tokyo 20 years ago.


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## tiroileain (5 Apr 2006)

So you have a shortfall of €300 pm. Let's say in a year the property value declines by 10%. You've paid €30K on outlays, €3600 covering the shortfall and are down €32K with the loss in the value of the house. That's over €65K. Add another €5K if you need to sell it. Oh, and because of your existing exposure to the market in your own residence, you'll be down another €40K on top of that. 

If you are prepared to accept the risk that house prices can also fall, and can sustain such a loss, then... well I still can't understand why anyone would consider an investment that has a shortfall on an interest only mortgage. And remember, Oranmore is not Beverly Hills..


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## Howitzer (5 Apr 2006)

I don't want to jump on the bandwagon here in stating the negative, I wish a few more professional investors would jump in with their opinions as it seems only people with a negative opinion open their mouths, but here goes .....

You say you are risk averse by nature as an investor yet you are prepared to risk your family home to jump on the property investment graveytrain. I would suggest that this train has already left the station. Maybe prices WILL continue going up for the next 5 years but the numbers you're presenting don't tally with a low risk investment. I don't know what will happen in the next 5 years but neither do you. I'm not arguing with your numbers but by definition that is not low risk.

You say you wish you had done this a long time ago, jumping in with both feet after it's too late is the classic reaction of people who feel they've missed out on a good thing. If you feel you missed out on property investment then forget about, put it too the back of your mind and move on.


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## RainyDay (5 Apr 2006)

1) Ensure you take tax issues into account in your calculations
2) Ensure you take the risk of losing your family home into account in your assessment


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## Purple (6 Apr 2006)

Also take the entry and exit costs into account and the fact that you are buying a very illiquid asset. 
I would not borrow against my family home for an investment property that costs you money every month, even on an interest only mortgage. If you were paying back the capital over a short time period then you could make the argument that even if prices dropped you would be left with an asset that had been 80% paid for by someone else.

You should also remember that the primary attraction for many people in property investment is that the rent can be offset against mortgage interest. I am open to correction but AFAIK if you borrow partially against your PPR you cannot offset that portion of the interest.

In my opinion you are too exposed to a downturn in the market. I would say that you are probably going to make money on the investment but the risk is too high. You are not just risking the shortfall in servicing the mortgage and any interest rate hikes that will increase that shortfall. You are also risking negative equity in 10 years on an investment that has cost you money in the mean time. Without repaying the loan it’s the property equivalent of spread betting.


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## Trustmeh (6 Apr 2006)

Purple said:
			
		

> You should also remember that the primary attraction for many people in property investment is that the rent can be offset against mortgage interest. I am open to correction but AFAIK if you borrow partially against your PPR you cannot offset that portion of the interest.


 
I believe you are wrong, you CAN offset that portion.

However, I agree that this sounds very risky.


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## JohnnyBoy (6 Apr 2006)

let's call a spade a spade,I have to say that Centless needs his head examined(there I said it)!


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## MugsGame (6 Apr 2006)

> AFAIK if you borrow partially against your PPR you cannot offset that portion of the interest.



It's the purpose of the borrowing that counts, not what it's secured on.

Or at least, that's how it is today. It could of course change in  any budget. The Government could roll-back the provisions allowing investors to offset interest against rent for income tax purposes -- it's happened before. Don't think they'd risk it, but I wouldn't bet my house on it!


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## Purple (6 Apr 2006)

I stand corrected, thanks all.


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## Theo (6 Apr 2006)

Centless said:
			
		

> Time is not the issue - I actually should have jumped a while back - I view this as a long term thing (at least 15 years) and the intention is to evaluate what to do at this time. Pension has been pretty well sussed out and I view this as a very real potential.


 
Hi Centless, I'm not suggesting that you haven't taken time over it.  However, the numbers you present do not add up to a low risk investment.  You are going to be losing money every month in the hope that the cap appreciation makes up the difference over time.  Maybe it will, maybe it won't.  My point is not to take that risk at all.  Why even risk it?  There are infinite investment possibilities around that will make your money work harder without risking a family home on it.  
Is there something else that you really like about this property?  
I only buy property based on numbers - i have no emotional attachment whatsoever to them.  So maybe there is another element to your decision making process that I do not understand.  If so, fair enough, each to their own.  But my opinion is still to stay away from that property you describe - on a purely financial basis, it makes absolutely no sense to buy it.


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## gearoidmm (6 Apr 2006)

If, as you say, this is a long-term investment, do you suppose that rents will have increased substantially by the time the interest-only period of the mortgage is over such that at that stage the shortfall will be manageable?


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## Centless (6 Apr 2006)

Thanks for all the good advice - food for thought indeed. 
However, over the next couple of years I am looking at realising nearly 80k through maturing with profits policies, SSIA's and Standard Life demutualisation and in the same period will be freeing up about €1300 per month of an expense I currently have (childcare). I know that realistically it won't all be freed up as kids don't come with zero running costs after all!! Some of this cash will be used to pay capital costs off primary residence. Also, at the moment I am pretty confident that cost of remortgaging can be met. The structure of the mortgages would be such that there is not a cross charge on the other.


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## JohnG (6 Apr 2006)

Centless said:
			
		

> The structure of the mortgages would be such that there is not a cross charge on the other.


 
I believe that this is a common mistake made by investors. While the loan might be secured on the investment property it remains an obligation of yours even if the property value falls. The bank can and will go after you for any shortfall if they believe you have other assets.

You appear to be using short term interest rates (variable) for an asset you plan to hold for a number of years.  I think you need to use a 5 year fixed loan as a minimum therefore increasing monthly interest only payments to €1260.  Also remember to factor in the additional life assurance, house insurance etc. etc.

One additional point to consider - you will pay tax on the increase in house prices (if any) but will not be able to offset the loss on monthly rentals.....

John


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## onekeano (6 Apr 2006)

Centless said:
			
		

> Thanks for all the good advice - food for thought indeed.
> However, over the next couple of years I am looking at realising nearly 80k through maturing with profits policies, SSIA's and Standard Life demutualisation and in the same period will be freeing up about €1300 per month of an expense I currently have (childcare). I know that realistically it won't all be freed up as kids don't come with zero running costs after all!! Some of this cash will be used to pay capital costs off primary residence. Also, at the moment I am pretty confident that cost of remortgaging can be met. The structure of the mortgages would be such that there is not a cross charge on the other.



Centless, when I started reading the thread as a fellow landlord I would have strongly advised against the proposal however you seem that have covered most of the risks and have cushion through the €80k and you €1300 per month so risk is minimal in the event of a large blip. So if you taking a long term view - go for it!

Roy


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## lucyg (6 Apr 2006)

I'm in a similar-ish situation as Centless.

I'm living in Galway city and have 140k mortgage on a house worth approx. 425k.

I am currently looking at buying an apt to let for 175k. The rental income would be approx. 500 pm and the mortgage (180K) on the buy to let would be approx 830 pm, so it would cost me 330 pm. Given 2 months downtime + management fees, I would have to spend 4800 per year on the apt.

I have a good pension and my SSIA matures next year. I see this investment as longterm - 10 years or more.

I consider myself lucky to have bought my house when I did.  Am I completely crazy to be risking this? If yes, what low risk investment could I make with approximately 500 per month which I will well be able to afford, certainly after the SSIA scheme ends?

Would welcome any opinions....


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## bearishbull (6 Apr 2006)

lucyg said:
			
		

> I'm in a similar-ish situation as Centless.
> 
> I'm living in Galway city and have 140k mortgage on a house worth approx. 425k.
> 
> ...


why not make avc's to your pension and have an even better pension fund.


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## lucyg (6 Apr 2006)

thanks
might sound like a dumb question but what kind of return do avcs make?


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## Centless (7 Apr 2006)

Sound advice about tying any element to the existing family home- and I have decided against. I still do not want to use any current existing cash on deposit for buying a rental property as this will act as a cushion should the event arise. 
Instead I intend to source another loan to put with the 92% investment loan. This will be indeoendant of and not tied to any of the properties. This loan can easily be cleared from SSIA cash later this year. Any other incoming cash will be used to reduce the outstanding capital on the family home only.
As already suggested I also will be contributing more to AVC's - current contribution is 10% of salary added to a DB scheme.   

Thanks again ........


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## bearishbull (7 Apr 2006)

lucyg said:
			
		

> thanks
> might sound like a dumb question but what kind of return do avcs make?


have a look under pensions section here. you get very good tax relief through avc's which close to doubles your contribution from net income as soon as you pay it in and then pension returns average around 10% per annum,you can put at least 15% of your income into your  pension per year and this increases with your age.


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## JohnG (10 Apr 2006)

Centless said:
			
		

> This will be independant of and not tied to any of the properties.


 
Centless,

Just in case you misunderstood my point.  When you borrow money from a bank, be it secured or unsecured, that bank is entitled to go after you for the repayments.  If you have assets or the potential ability to repay then they will certainly go to the trouble and expense of taking you to court if necessary.

John


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