# Buy property but stay renting



## States (24 Dec 2013)

I have been renting for a number of years & have never owned a property. 

However, I am now looking to invest in a property that I can rent out but want to stay renting where I am. (nice areas & convenient for schools etc.)

I'm looking to have the rent of the investment propert cover the mortgage & possibly some surplus profit.
Is there such a thing these days as a "buy-to-rent" mortgage that was avialable in the years past?
Am I better looking for an appartment or a small house for rental purposes? (I am in Dublin area). My budget would be around €200-250K.
Thanks


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## Brendan Burgess (24 Dec 2013)

Why would you not buy a house in the area you are living in? 

If you can't afford it, could you consider waiting until you could afford it?

If you are worried that you will never be able to afford it because you expect house prices to rise, then buying a house now as an investment would give you some "hedging".  You will pay CGT on the sale of the house unless you keep it for 7 years. 

Brendan


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## States (24 Dec 2013)

Thanks Brendan,
I would not get a mortgage big enough (or affordable enough) to live where I'm living now and the rent is very low for where I live so I'm getting a good deal.  Given my age (46), I will never be able to afford to buy in my area - unless I come in to some money of course!!

So to "hedge" as you say, I can afford to spend around €200K on a property & use the rent to pay the mortgage. If it comes to it later (kids have moved out etc.) I could move in to this property I guess.

I know the rental market is showing good returns at the moment but was wondering if an appartment or a house easier to rent (I'm thinking of  2 bed property)?


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## Brendan Burgess (24 Dec 2013)

States said:


> If it comes to it later (kids have moved out etc.) I could move in to this property I guess.



I think that this should be the key factor in your choice.  If you may end up living in it, choose a property which you would like to live in yourself. 

Brendan


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## Jim2007 (24 Dec 2013)

States said:


> I know the rental market is showing good returns at the moment but was wondering if an appartment or a house easier to rent (I'm thinking of  2 bed property)?



The only reason that you are in a strong financial position today is because you did not invest in property so far.  When it comes to investing, property is a high risk investment with a very average return when compared to other alternatives.  Look at the facts and not the Irish sentiment that property is a good investment...  

Before you make this move be aware that by investing in property Irish people, break every rule in the book:
- A low risk portfolio should have no more than about 6% in property! No we'll go for 100%
- Do not borrow to invest, No we'll borrow 100% if we can
- Diversify your holdings to reduce risk, no we'll concentrate everything in one location and in a single property in that location
- invest in liquid assets for an easy exit strategy, no we'll invest in something that will be really hard to dispose off
- and on we go....
Anyone who thinks they are making a wise financial decision when they buy a house are only fooling themselves - they are actually entering into a very risky investment where they are ignoring all the best advice going.

Most of my Swiss neighbors and colleagues consider buying a house to be akin to financial recklessness and boy have we proved them right!

The other thing to keep in mind is that most money lost during a bubble is not lost when the bubble burst, but in the aftermath, when "the smart people" try to get in on the ground floor for the next ride...

The other thing to keep in mind is your age - you've got about 10 or 12 years in which you can be fully invested, after that you need to start reducing risk big time to safe guard your assets for retirement, that means government bonds, AAA corporate bonds and blue chips and a house does not even fall into that category!


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## cremeegg (28 Dec 2013)

Jim2007 said:


> The only reason that you are in a strong financial position today is because you did not invest in property so far.  When it comes to investing, property is a high risk investment with a very average return when compared to other alternatives.  Look at the facts and not the Irish sentiment that property is a good investment...
> 
> Before you make this move be aware that by investing in property Irish people, break every rule in the book:
> - A low risk portfolio should have no more than about 6% in property! No we'll go for 100%


This is not relevant to some one starting a business



Jim2007 said:


> - Do not borrow to invest, No we'll borrow 100% if we can



Borrowing to invest in a new business can be very useful. In property you can borrow over an extremely long term at very attractive rates.



Jim2007 said:


> - Diversify your holdings to reduce risk, no we'll concentrate everything in one location and in a single property in that location


 Would you advise a business person to keep away from opening a shop because everything would be in one location



Jim2007 said:


> - invest in liquid assets for an easy exit strategy, no we'll invest in something that will be really hard to dispose off



This is absolutely true and any one getting into the rental business should recognise it. As long as you are comfortable with that whats the problem.



Jim2007 said:


> - and on we go....
> Anyone who thinks they are making a wise financial decision when they buy a house are only fooling themselves - they are actually entering into a very risky investment where they are ignoring all the best advice going.
> 
> Most of my Swiss neighbors and colleagues consider buying a house to be akin to financial recklessness and boy have we proved them right!



People buying property in the hope of selling it later for a profit with no economic reason for them to make a profit may have proved your Swiss friends case, however a there is no reason why a landlord renting property in Ireland should not have a successful business.



Jim2007 said:


> The other thing to keep in mind is that most money lost during a bubble is not lost when the bubble burst, but in the aftermath, when "the smart people" try to get in on the ground floor for the next ride...



Can you expand on this. I don't follow your point.



Jim2007 said:


> The other thing to keep in mind is your age - you've got about 10 or 12 years in which you can be fully invested, after that you need to start reducing risk big time to safe guard your assets for retirement, that means government bonds, AAA corporate bonds and blue chips and a house does not even fall into that category!



Renting is a long term business, I agree that the OP at 46 would need to consider that aspect.



Jim, here you are again looking at buying property to rent through your asset management glasses.

The asset management perspective has little to say to the buy to let landlord.

Renting out property is a business not an investment portfolio.

To give a concrete example, from my own experience. I purchased a property in 1999 with a 90% mortgage, and have rented it out continually since. Each year since 1999, the rent has exceeded the interest on the mortgage. I have been able to make capital repayments and I now own well in excess of 10% of the property. 

The gyrations in the value of the property over that time are irrelevant to my property rental business. The value will of course be relevant when I decide to retire from the rental business.

I have today, what I purchased nearly 15 years ago, a property that provides good living accommodation for a family, in a central location.

The market value (rental income) of this has fluctuated by no more than 10% from the average over those 15 years. By the way I consider this a disappointing performance.

The rental business is inherently stable. When there was a huge increase in the demand for property there was a corresponding increase in supply, keeping rents stable. Looking forward from the present time, I foresee inflation (good) and higher interest rates (bad).

Of course there are risks to buying property on borrowed money to rent out. It is essential that the net rental yield exceeds the borrowing cost. 

Since 1999 this has become much more difficult to achieve, property taxes, restricted tax-deduction of interest, USC on rental income.


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## Brendan Burgess (28 Dec 2013)

This is a really excellent thread. 

Is a buy to let property an investment or a business? 

If it's a business should the assessment be different? 

Let's see if it is good business.

*The big negative is that the return on capital employed is likely to be less than a passive investment in equities 
*The best measure of the success of any business is the ROCE.  Historically, it has been lower than the return on equities.  If you factor in the time input of the landlord, the ROCE could well be negative. 

If you view investing in equities as a business, it is less risky, less time consuming and the ROCE is likely to be higher. So it seems to trump property as a business. 

*However, the tax treatment is more favourable than investing in shares *
The tax treatment is more favourable than  investing in shares.  75% of  the interest on any money borrowed to invest is allowable for tax  purposes. There is no such deduction for borrowing to invest in shares.   From time to time, there are tax incentives e.g. if you buy before the  end of 2014, you will be exempt from CGT if you keep the property for 7  years. 

*Most of the other factors suggest that residential  property investment is not a good business* *for most people 
*
It requires a fair amount of skill which is often underestimated by the business person. They usually have made money on property by buying the family home and so they feel that they are experts. In practice, they have little skill in buying and selling property, having done it only once or twice in the past.  They lack the skills in vetting tenants and dealing with them when things go wrong.  Property maintenance skills are also required. 


It is very time consuming.  The property must be maintained. Tenants must be chased for rents.  Bills must be paid. 

There is excessive regulation - e.g. the PRTB which protects tenants, and while it protects landlords in theory, in practice it can't enforce that protection. 

It's a risky business because you will be depending on very few assets and often just one asset.  

It is very risky as a business because you will usually be depending on just one customer i.e. your tenant. If they stop paying, then your business will be loss making.


It's capital intensive. You probably need around €200k to start. You can start for less, but fixed costs such as PRTB make up a higher proportion of low rentals.

You can borrow to get involved, but that makes the business very risky.  If your rental income stops, you won't be able to make your repayments and are at risk of losing your entire investment.


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## cremeegg (29 Dec 2013)

Brendan Burgess said:


> This is a really excellent thread.
> 
> Is a buy to let property an investment or a business?
> 
> ...





Brendan Burgess said:


> *The big negative is that the return on capital employed is likely to be less than a passive investment in equities
> *The best measure of the success of any business is the ROCE.  Historically, it has been lower than the return on equities.  If you factor in the time input of the landlord, the ROCE could well be negative.



What data are you basing this on. The only data I have seen only deal with residential property prices. i.e. they ignore the rental income.



Brendan Burgess said:


> If you view investing in equities as a business, it is less risky, less time consuming and the ROCE is likely to be higher. So it seems to trump property as a business.



Active investing in equities, that is selecting particular companies to invest in, may be a business, however that is not the same thing as building a portfolio using asset allocation principles as advocated by Jim. 

There are no data available for the first approach, by definition each case is unique. It is meaningless to talk about ROCE except on a case by case basis. Or to put it another way, just because Warren Buffet made 11% (or whatever) last year does not mean that I will make 11% next year.



Brendan Burgess said:


> *However, the tax treatment is more favourable than investing in shares *
> The tax treatment is more favourable than  investing in shares.  75% of  the interest on any money borrowed to invest is allowable for tax  purposes. There is no such deduction for borrowing to invest in shares.   From time to time, there are tax incentives e.g. if you buy before the  end of 2014, you will be exempt from CGT if you keep the property for 7  years.



Now you have mentioned borrowing for the first time.



Brendan Burgess said:


> *Most of the other factors suggest that residential  property investment is not a good business* *for most people
> *





Brendan Burgess said:


> It requires a fair amount of skill which is often underestimated by the business person. They usually have made money on property by buying the family home and so they feel that they are experts. In practice, they have little skill in buying and selling property, having done it only once or twice in the past.  They lack the skills in vetting tenants and dealing with them when things go wrong.  Property maintenance skills are also required.



Some skill is required and it is very dangerous to fail to recognise this. However it is hardly rocket science. You need to understand what the net rental yield will be. The buying is crucial, get that wrong and you are in trouble. Vetting tenants etc. well this is something you can learn on the job. Any mistake is not too serious.




Brendan Burgess said:


> It is very time consuming.  The property must be maintained. Tenants must be chased for rents.  Bills must be paid.



You have got to enjoy the business, just like any other business you hope to succeed in.



Brendan Burgess said:


> There is excessive regulation - e.g. the PRTB which protects tenants, and while it protects landlords in theory, in practice it can't enforce that protection.



Most landlord tenant relationships are between reasonable people and the regulatory environment is not tested.



Brendan Burgess said:


> It's a risky business because you will be depending on very few assets and often just one asset.
> 
> It is very risky as a business because you will usually be depending on just one customer i.e. your tenant. If they stop paying, then your business will be loss making.






Brendan Burgess said:


> It's capital intensive. You probably need around €200k to start. You can start for less, but fixed costs such as PRTB make up a higher proportion of low rentals.
> 
> You can borrow to get involved, but that makes the business very risky.  If your rental income stops, you won't be able to make your repayments and are at risk of losing your entire investment.



Maybe we can come back to the issue of borrowing


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## Brendan Burgess (30 Dec 2013)

Hi creme egg

I certainly looked at the data 10 years ago where I compared Irish property prices with equities and included dividend income and rental income for both. Equities were far ahead then as far as I can remember. I think that the gap would be further ahead now. Not sure if there is any more up to date data.

I am not suggesting that investing in equities is a business. It is not. I am suggesting looking at it as if it were a business, to make a fair comparison. Most of us who are interested in the topic don't believe that there is any added value from "selecting particular companies to invest in". The comparison is always done with indexes and not particular stories. 





> Some skill is required and it is very dangerous to fail to recognise  this. However it is hardly rocket science. You need to understand what  the net rental yield will be. The buying is crucial, get that wrong and  you are in trouble. Vetting tenants etc. well this is something you can  learn on the job. Any mistake is not too serious.



Sounds like plenty of landmines there.  The problem is that when one of them goes off, it's very serious. 9 out of 10 landlords may well have reasonable tenants. But the horrors of a tenant who just refuses to pay the rent and just plain refuses to leave should not be underestimated. 



> Maybe we can come back to the issue of borrowing



Borrowing is one of the big advantages for property investment over  equities. It's easier to borrow against property. There is  good tax  relief on the interest. If one is prepared to take the risks associated  with borrowing, then property may be better. But the risk is hugely  magnified.  

If one has a family home, it can be remortgaged to invest in equities, although I would not recommend this either. 

Property investment may not be "rocket science" but there are many thousands of Irish residential property investors who cannot meet their repayments at the moment and face losing their investment property and also their home.  That is really the key problem. Most of the time, investing in property gives a reasonable return on your money. But there is a small risk of catastrophic consequences. It seems to me that it is just not worth taking.


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## States (30 Dec 2013)

Well - I'm glad that I've generated such interest!

A few points to add. 
1.  I almost bought a property at the height of the boom (2007 I think it was) but got sense at the last minute.  I'd even made a down payment before I got cold feet.  Needless to say, I am glad I took this path.  I have continued renting ever since.  So I'm not a typical Irish peron who is obsessed with owning  a property.

2. I am worried about my pension & am looking to purchase an appartment/house as an investment. Seeing that rental yield is good at the moment, this seems a sensible approach &, as mentioned, I could end up living in the place if needed.  I see that my existing pensions will not cover me or my wife enough to be comfortable.

I am assuming the following:
1. The rent will at least cover the mortgage and any other costs
2. The property will gain in value over the next 10 years at a rate higher than equity investment

Thanks to all for your input
Kevin


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## Brendan Burgess (30 Dec 2013)

States said:


> I am assuming the following:
> 
> 2. The property will gain in value over the next 10 years at a rate higher than equity investment
> 
> ...



Hi States

We don't allow speculation about residential property prices on askaboutmoney, although it is inevitable in a discussion like this.

Suffice it to say, that there is absolutely no basis for your assumption.  Over the long term, equities have outperformed residential property prices in all mature markets. There is no reason for assuming that this won't continue.


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## cremeegg (31 Dec 2013)

States said:


> Well - I'm glad that I've generated such interest!
> 
> ..... Seeing that rental yield is good at the moment,



I am not sure that this is the case.

Gross yields i.e. rent as a % of purchase price may appear good at the moment, but that can be a very misleading metric.

USC, PRSI, restricted deduction of the interest expense and property tax all push down net yield.

I would be surprised if you could easily find a property with a net yield of 3% and thats too low in my opinion, especially if you were borrowing at 5%


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## Brendan Burgess (31 Dec 2013)

Hi cremeegg

That is a very interesting observation.  A separate thread on the current gross and net rental yields in Irish residential property would be very useful. Would you like to compile it?

I have heard people saying that they can get 10% by buying properties at the Allsops auctions.  And the rents compared to the prices do seem high. But it would be well worth a systematic analysis.

Brendan


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## cremeegg (1 Jan 2014)

Brendan,

I have made a start here http://www.askaboutmoney.com/showthread.php?t=184415


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