# Buying a third property but think we can afford it?



## aristotle (5 Jan 2017)

Age: 39
Spouse’s/Partner's age: 39

Annual gross income from employment or profession: €112,000
Annual gross income of spouse: 0 (€280 per month children's allowance)

Monthly take-home pay 5,300

Type of employment: PAYE employed

In general are you:
saving average 1300 per month

Rough estimate of value of home: 260,000, 4 bed semi in commuter belt around Dublin
   Amount outstanding on your mortgage: 140,000
*What interest rate are you paying? 0.5% tracker, €600 per month*

Other borrowings – car loans/personal loans etc 0

Do you pay off your full credit card balance each month?  Yes

Savings and investments: 186,000

Do you have a pension scheme? Yes DC scheme value at 230,000 (I am maxing out AVC's), spouse DC scheme value at €50,000 (no contributions made in 4 years)

Do you own any investment or other property? 3 bed semi in Dublin suburb. Value €280,000, renting at €900 per month but market rate is €1400 per month. Tracker mortgage 0.5% at €875 per month, €185,000 remaining

Ages of children: 2 and 4

Life insurance: employer covers 4 times salary. Also have separate 19 year policy for 700,000 so plenty of cover I think. No serious illness or income protection cover however.


*What specific question do you have or what issues are of concern to you? 
*
Generally I think we are in a good position. I am not sure there is much more we can do than perhaps charge the full market rate on the investment property (I know about the new rent rules).

We may in the next 2-3 years buy a new house to live in and rent out the current one. I would borrow 300k and use up to 150k savings so that might be too much property based borrowing?

My wife intends to return to work or part-time work in the in 2020\2021 and should earn 35-40k if full time.

It doesn't make sense to pay off the cheap trackers for now.

Any other obvious things I am missing?


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## Brendan Burgess (5 Jan 2017)

Overall, this plan is fine.  You are in a very comfortable position. If mortgage rates rise and rents fall and the tax treatment of landlords worsens, you can sell your investment properties.

However, if your mortgage is with one of the active banks, which I suspect it isn't, then you should probably get a tracker mover product instead. Your position would be as follows which would be almost risk-free. 



Brendan


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## Steven Barrett (5 Jan 2017)

What are your savings in? Cash? Investments? 

If you intend moving soon, keep the money in cash so it can be used for a deposit. If not, invest it. 

I am always wary about people being over concentrated on property in Ireland, especially the way the market is going at present. It's a big world out there and there are plenty of opportunities to make money off companies with a global reach while keeping your assets liquid. 

You should also look at insuring some of your income. If you can't work, all your plans go out the window. With your level of income and age, it will be expensive (although you do get tax relief on the premiums) to take out the maximum cover, but you should consider insuring part of your income...just in case. 

You should also think about education for your kids. Do you want them to go to private or public school? If private, there will be a quite a few years where you will be paying for 2, that's €12,000+ out of cashflow each year. Add in college afterwards. That's 10 years of education costs to pay for. 

Overall, you are in a very good financial position. Debt at low interest rates, good pensions and savings in place. Keep it up. 


Steven
www.bluewaterfp.ie


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## gnf_ireland (5 Jan 2017)

Brendan Burgess said:


> However, if your mortgage is with one of the active banks, which I suspect it isn't, then you should probably get a tracker mover product instead. Your position would be as follows which would be almost risk-free.



I would agree here - this is exactly what I was in the process of writing !



SBarrett said:


> I am always wary about people being over concentrated on property in Ireland, especially the way the market is going at present. It's a big world out there and there are plenty of opportunities to make money off companies with a global reach while keeping your assets liquid.



100% agree here again, especially with the level of government interference in the market at the moment. We are property obsessed as a nation and we really need to break this and think outside the 'bricks & mortar' box


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## Brendan Burgess (5 Jan 2017)

aristotle said:


> Savings and investments: 186,000





SBarrett said:


> If you intend moving soon, keep the money in cash so it can be used for a deposit. If not, invest it.



A difficult one and I agree with Steven. But what does soon mean?  If you had your eye on a house now, cash would be clear.

If you were not planning to move for 5 years, you should buy a portfolio of shares.  There is risk, but you can handle the risk comfortably.  



aristotle said:


> We may in the next 2-3 years buy a new house to live in



That is in between so it's not clear. In my view, you can handle the risk, so I probably would invest it all in equities.  Avoid any products with initial costs. 

Brendan


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## Brendan Burgess (5 Jan 2017)

An important point in the decision making process here: 

You do not have to make a decision on your current properties until you are ready to buy. So don't waste time or energy on that decision. Make that decision when you are around 6 months away from buying.  

Focus on what to do with your investments in the meantime. 

Brendan


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## gnf_ireland (5 Jan 2017)

aristotle said:


> We may in the next 2-3 years buy a new house





aristotle said:


> Ages of children: 2 and 4



There is a solid argument that if you are really planning to move you should do so before the eldest starts school and therefore reduce disruption once they do. It also makes it easier to get places in schools - especially in over subscribed areas (depending on where you are planning to move to).

I am not sure when you are planning to send your eldest to school - September 2017 or September 2018, but it is something to keep in mind. If it was me, I would be looking to move now, doing the tracker move if I could and then seeing how the next while goes with your wife going back to work etc (if she does)


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## aristotle (5 Jan 2017)

Thanks for the replies, some good points.

To answer some of the questions:
1) Currently 145k cash, 40k shares. 12 months ago it was the other way around, I have been selling shares to free up cash in anticipation of house buy. But also, I here on intend to keep maxing out the pension AVCs and maybe keep a small amount in shares. With the tax on dividends and CGT on sales, plus all the time I spent reading and checking shares I would rather just do the pension as my long term investment.

2) Kids will go to public school as I and my wife did. Personally don't believe in paying for private schooling.

3) Mortgages are not with Irish Banks and no option for a tracker move product.

Income protection is one I will do.

Yeah Irish property always seems the one to go for. We might just sell one of the properties and have a smaller mortgage on the new house and keep one house as investment. Other thing I am aware about is my level of income may not always be this high. I started work right at the dot.com crash and obviously we all know about the last 8-9 years. Have been in companies and seen plenty rounds of redundancies.


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## aristotle (5 Jan 2017)

gnf_ireland said:


> There is a solid argument that if you are really planning to move you should do so before the eldest starts school and therefore reduce disruption once they do. It also makes it easier to get places in schools - especially in over subscribed areas (depending on where you are planning to move to).



Yeah it will be September this year. We always felt we could push it to moving within his first 3 years of school. Not ideal but should be ok.


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## Sarenco (5 Jan 2017)

aristotle said:


> Currently 145k cash, 40k shares. 12 months ago it was the other way around, I have been selling shares to free up cash in anticipation of house buy.



I think that's absolutely the right approach and I strongly disagree with Brendan that any money that will be required in 2-3 years could be prudently invested in equities. 

The probability of stocks materially outperforming cash over such a short holding period is modest and the downside risk is substantial.  This chart shows the historic probability of suffering a real loss on stocks over different time periods (based on long-term S&P500 data through 2015):



In my opinion, 15 years is the minimum sensible time horizon for investing in equities (and there have been periods of at least 30 years in all advanced economies where domestic government bonds have outperformed stocks).

Personally, I would realise the ~€100k equity in your current rental so you can have a smaller mortgage on your new house.  It's a very poor yield at that rent (which you are pretty much stuck with now under the new rent review rules) and I would be uncomfortable with the level of exposure to Irish residential property and interest rate risk that you would otherwise be carrying by retaining the three properties.

I think you should definitely look at taking out PHI cover as a priority.


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## gnf_ireland (5 Jan 2017)

aristotle said:


> Yeah it will be September this year. We always felt we could push it to moving within his first 3 years of school. Not ideal but should be ok.



If I was you, I would consider doing it for when the second starts. You will be in a transitional phase at that stage anyway, and adding the extra bit into it will probably be easier. So assuming the two year old is starting in September 2019 or September 2020, its a good time to consider it.
This works even better if the eldest is going into 1st from Sr Infants at the same time - again its a transitional thing and can be sold to the child

But if education is exceptionally important to you, and you are looking at moving closer to Dublin, you need to consider the secondary schools you will consider, and then work backwards to identify the feeder national schools. This will work back to a parish most likely, and suitable places may not come up in those too often. This will drive a lot. Also needs to consider the after school care options (if you will need them etc). Obviously also keep in mind the whole idea of fee paying secondary schools, as you may wish to consider those for your children. Some secondary schools open waiting lists for children from birth, others wait until the child is in 3rd class or so.

BTW, I have two children as well - one starting in September and the other the September after - so know what they are like at that age.


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## aristotle (5 Jan 2017)

I also agree that equity investment needs a longer minimum timeframe, 10 years or more in my view. 

The yield is low on the investment property but I will be able to charge the full rate if I need to. Basically I have 3 bed house rented to one person. I believe there is a clause in this new legislation saying if nature of the tenancy changes you can go beyond the 4 %. If I rent to a family then the nature of the tenancy has changed in my view and I will charge the full rate. Regardless I like the idea of in 18 years time having that house with no mortgage and generating rent as part of retirement plan. Even with the low yield its ok as it is unless interest rates go back up to 3/4/5% which they will at some stage.

We are looking at schools now as well. We wont go into Dublin and could well end up staying where we are.

Appreciate all the responses.


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## Sarenco (5 Jan 2017)

aristotle said:


> I believe there is a clause in this new legislation saying if nature of the tenancy changes you can go beyond the 4 %.



Not quite.  There has to be a substantial change in the nature of the accommodation provided (not the number of tenants) to exceed the 4% cap.  Discussed here:-

http://www.askaboutmoney.com/threads/government-to-introduce-rent-caps-in-dublin-cork.201713/page-5

I'm afraid you are particularly badly hit by this daft legislation.



aristotle said:


> Even with the low yield its ok as it is unless interest rates go back up to 3/4/5% which they will at some stage.



Fair enough but it's a sub-optimal use of your capital if the return on the rental, after all costs and taxes, does not exceed the interest rate on the additional mortgage amount that you would otherwise be paying on your new PDH.  Higher risk with lower return - not a good combination!


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## aristotle (5 Jan 2017)

You are correct. "a substantial change in the nature of the accommodation provided under the tenancy occurs" - in this case I will say 2 bedrooms were not liveable and now are which is true. That assumes current tenant leaves or I don't renew their fixed term lease (I know they can claim part 4 tenancy so hoping they wont!).


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## gnf_ireland (5 Jan 2017)

@aristotle  I think you should re-evaluate this property investment on the basis of the new rules and whether this is something that you can work with and make a reasonable return on in the foreseeable further based on the equity invested. If not, I do think you need to consider selling it, and focusing on the house move (even look at the option of renting out your current house once you have moved at market rate).

Sadly, I think residential property investment in Ireland is a risky business for the next number of years until the current 'crises' stabilises. There will be too much interference in it for it to be a reliable return. You can always re-enter the market again in a number of years, via a pension vehicle if you wish, if the conditions change.


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## Brendan Burgess (5 Jan 2017)

Sarenco said:


> The probability of stocks materially outperforming cash over such a short holding period is modest and the downside risk is substantial. This chart shows the historic probability of suffering a real loss on stocks over different time periods (based on long-term S&P500 data through 2015):



Hi Sarenco

You would have to show the full picture - the Expected Return which would combine the probabilities with the % return. 

Telling someone that you you have a 25% loss over two years isn't very meaningful.  

What is the extent of that loss? 

What is the extent of the gain which happens 75% of the time. 
If the losses are equal to the gains, and I don't think that they are, then a 75% win/25% loss would be well worth taking, especially for someone like aristotle who can handle the risk.

Brendan


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## Sarenco (5 Jan 2017)

Hi Brendan

I obviously can't predict the future but this graphic hopefully gives a pretty good picture of the variability of stock returns in the past over various time periods. 



It shows the top and bottom deciles (dashed lines) and quartiles (solid lines) of the annual real returns of stocks, as functions of the investment length (in years).

The graphic indicates that the uncertainty of stock returns decreases as the investment length increases. It shows that over five years there is an 80% probability for the annual return to be between −3% and +18%. Over thirty years, the range narrows down to a 4.5–9%. 

Obviously returns over individual time periods can be significantly more extreme.  The DJIA lost 90% of its value between 3 September 1929 and 8 July 1932 (and it took 25 years for the Dow to regain its 1929 high).  The DJIA actually fell by over 22% in a single day in 1987!

Needless to say, the above ignores any investment costs or taxes.



Brendan Burgess said:


> ..especially for someone like aristotle who can handle the risk.



This isn't really about an individual's risk tolerance. 

It's about whether the odds of equities outperforming cash over such a short holding period are such that it's "worth" taking a punt with money that you know you are going to need at the end of that period.


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## Brendan Burgess (5 Jan 2017)

Sarenco said:


> This isn't really about an individual's risk tolerance.
> 
> It's about whether the odds of equities outperforming cash over such a short holding period are such that it's "worth" taking a punt with money that you know you are going to need at the end of that period.



It is absolutely about the odds in this case. 

If aristotle buys shares and they drop by 50% over two years,  his plans will not be affected. He can still sell one of his investment properties and do the trade up he wants. 

If they rise by 50% he will have a lot more money and will need to borrow less. 

Let me put it another way. If you are worth €1m and someone offers you a coin toss where heads are 60% and tails are 40% on a bet of €1,000, you should take it.  Sure you will lose €1,000 some of the time, but you will win on average. 

If you have €100k deposit for a house and no other assets, and someone offers you the same odds on a €100k bet, you should not take it.  You can't afford to take the risk. 

People who can handle the risk should invest in the stock market, even over medium term periods of 4 or 5 years. Of course, some will lose out, but the majority will gain from this strategy.

Brendan


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## Sarenco (5 Jan 2017)

Brendan Burgess said:


> If aristotle buys shares and they drop by 50% over two years,  his plans will not be affected. He can still sell one of his investment properties and do the trade up he wants.



Unless the value of his investment property simultaneously drops to a similar extent.  Just think back to what happened here a few short years ago.

As Warren Buffett said in describing the 1998 collapse of Long Term Capital Management: “To make money they didn’t need, they risked what they did have and did need.”


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## ixus (5 Jan 2017)

If the US stock markets drop by 50%, I'd be willing to bet house prices in Ireland would follow.

OP, question on your current rental. Would you owe much, or any CGT if sold now? CGT losses can be carries forward.

Also, are you an employee or do you have your own company?

If you hold onto current PPR, may be liable to cgt in the future.

Have you looked at the prospect of setting up a company, loaning it funds and buying one of your properties? You could release the equity in your PPR or carry forward losses in rental to write off against other cgt incurred.

There are various taxes and costs to understand and figure out.

At 55, you would be entitled to retirement relief of 750k per director ( your spouse).Edit:Apologies, rental properties not covered by this.

I'm missing the nuts and bolts of all this as it's not my area of expertise. I just wanted to open you up to other options.


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## Brendan Burgess (5 Jan 2017)

Presumably the house he would like to buy will fall as well? 

Of course, the stock market could fall 50%, his two current properties could fall 50% and the house he would like to buy might rise by 50% over the next two years. 

LTCM was highly leveraged. aristotle is investing €150k cash. While he has borrowings, they are at 0.5%. 

Brendan


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## Sarenco (5 Jan 2017)

Brendan Burgess said:


> Presumably the house he would like to buy will fall as well?



Sure but there won't be a corresponding reduction in his mortgage balances.  On a net basis, he will still have lost capital - irretrievably.

In any event, my main point is that short term gambling on stock returns is simply not a risk worth taking.


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## T McGibney (5 Jan 2017)

ixus said:


> Have you looked at the prospect of setting up a company, loaning it funds and buying one of your properties? You could release the equity in your PPR or carry forward losses in rental to write off against other cgt incurred.
> 
> There are various taxes and costs to understand and figure out.
> 
> At 55, you would be entitled to retirement relief of 750k per director ( your spouse).



No you wouldn't.  Crazy advice.


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## Gordon Gekko (5 Jan 2017)

Think about the capital gains tax position in respect of your current investment property. Is it still "underwater" relative to when you bought it?

PPR relief, even when diluted, will help with any uplift in respect of the family home.

I would be concerned about the effect the new rules might have on your underrented investment property. As the new rules stand, the value of your property has been devastated (as a future owner is stuck with the €900 rent). I would wait for this anamoly to be addressed before thinking about selling it.

You do have enough exposure to Irish property though and don't need more. It's only the 0.5% mortgages and potential CGT shelters that have me thinking.


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## aristotle (6 Jan 2017)

I don't agree the value of the property has been devastated, it still has the same value to owner occupiers as it did before the rent rule changes. But I don't plan to sell it anyways unless I really need to.


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## gnf_ireland (6 Jan 2017)

aristotle said:


> I don't agree the value of the property has been devastated, it still has the same value to owner occupiers as it did before the rent rule changes.



Correct - but it has been impacted for investors. You are basically targeting owner occupiers only when you do decide to sell.



aristotle said:


> But I don't plan to sell it anyways unless I really need to.



I think this is what the guys are challenging. Your return on the property is very poor and unless that rule is lifted, or likely to be lifted relatively soon, then it may not be the best investment for your money. However, only you can do the sums on that


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