# Brendan - Property Investment advice 2004



## ccbkd (26 Aug 2008)

Brendan said:


> Hi Gunar
> 
> If you are going to invest in property, you should borrow the full 100% of the property. Effectively, you can borrow at a cost of 1.6% after tax. You can invest your cash in an equity fund and hope to get a much better return.
> 
> ...


 
I am wondering is this still relevant advice and would the bank entertain giving 100% loan for investment property: taken from *Key Post: Interest only mortgages for investment property *


----------



## jhegarty (26 Aug 2008)

I presume that related to the very cheap discount rates available at the time....

I got mine at a discounted rate of 2.69% for the first 2 years in 05...


----------



## Brendan Burgess (26 Aug 2008)

The rates are out of date, but the principle is the same. 

Over the longer term, equities should outperform property. The only advantage of investing in property is that you can get tax relief on the borrowing. 

If you are going to invest in property, you should borrow the maximum allowed. 

You can still borrow 100% of the price of an investment property if you have other properties on which to secure the loan.

Brendan


----------



## z106 (26 Aug 2008)

Brendan said:


> Over the longer term, equities should outperform property. The only advantage of investing in property is that you can get tax relief on the borrowing.
> 
> Brendan


 
I certainly wouldn't say the 'only' advanatge.

There are a lot more differences between property and equities than that.

Far too simplistic surely.


----------



## Brendan Burgess (26 Aug 2008)

You are quite right. There are lots of other advantages.

Calls in the middle of the night to fix broken lights. 
Evicting problem tenants. 
Taking legal action to recover unpaid rent.
Registering with the Tenancies Board


I am sure I am leaving some out. 

Brendan


----------



## z106 (26 Aug 2008)

Well one disadvantage of equities is the volatility.

Assuming that someone wants to make a levarged investment,  the volatility of equities completely diminishes the power of  leverage as it results in margin calls depending on how leveraged you are.

(If you are buying equities outright compared to a leveraged property investment then it definitely doesn't compare.)


----------



## z103 (27 Aug 2008)

> Well one disadvantage of equities is the volatility.


How would a basket of equities across all types of industries and countries etc be less volatile than just investing in a property, where the risk probably isn't spread at all?


----------



## jhegarty (27 Aug 2008)

Property and equities have always gone up in the long run, the only question is rate the growth and how long you are investing for


----------



## ccbkd (27 Aug 2008)

Brendan said:


> The rates are out of date, but the principle is the same.
> 
> Over the longer term, equities should outperform property. The only advantage of investing in property is that you can get tax relief on the borrowing.
> 
> ...


 
With this in mind, a lending institution would look more favourably on the amount paid of an existing mortgage rather than cash deposit on investment property, i.e as an investor you would be better advised to try and pay of existing PPR mortgage rather than saving money for a deposit on another investment which you should try and borrow as much as possible to gain write-offs on tax?


----------



## Thomas22 (27 Aug 2008)

Brendan said:


> If you are going to invest in property, you should borrow the maximum allowed.
> 
> Brendan



I would consider this to be bad investment advise Brendan.

This could be a disastrous investment strategy

An investor who borrows the maximum allowed to purchase a number of investment properties could subsequently suffer longer than expected void periods. If they do not have sufficient cash or other liquid assets to pay the mortgages they run the risk of losing their whole property investment portfolio.

A serious investor should NEVER borrow the maximum they are allowed by the banks they should borrow the maximum they can afford to repay. They may be the same amount but they most certainly not the same thing.


----------



## coppers (27 Aug 2008)

Thomas22 said:


> I would consider this to be bad investment advise Brendan.
> 
> This could be a disastrous investment strategy Brendan
> 
> ...


 
I'm sure by maximum he means as close to a 100% mortgage as possible(the correct strategy for property investment imo), not borrow as much money as he you can get your hands on.


----------



## ubiquitous (27 Aug 2008)

100% mortgages and interest-only mortgages are grand if you believe that the value of a mortgaged property will never, ever fall below the amount you have paid for it. Otherwise they carry an inherent risk of negative equity, that in my mind is best avoided.


----------



## MugsGame (27 Aug 2008)

> If you are going to invest in property, you should borrow the maximum allowed.



Brendan, I see two ways of interpreting this statement. If you've decided to buy property you should either
1. leverage all your assets to borrow the maximum amount you can
OR
2. decide how much makes sense for you to invest and then maximise the tax efficiency of the investment. Under current interest offset rules this would mean borrowing the full cost of the house, even if you have to secure it on other assets. 

I assume 2. is what you are recommending rather than 1.? The context isn't completely clear from this thread.


----------



## coppers (27 Aug 2008)

The support group for non homeowners is calling your advice into question

http://www.thepropertypin.com/viewtopic.php?t=12873


----------



## Brendan Burgess (27 Aug 2008)

Hi Mugs

I was not and I don't recommend investing in property. 

It's too much work. The returns are not as good as equities. There is risk - which people see now in retrospect, although when this was pointed out a few years ago, a lot of people said "property never falls in value". 

However, if you are going to invest in property, which I don't recommend, then you should borrow the maximum allowed by your bank. 

If you were investing when the rate was 2.5% it was because you expected a long term return in excess of 2.5%. 

If you are investing now when you can get a risk free rate of return of 5% on cash, it must be because you expect that you will get  a long-term return in excess of 7%.  If you believe that, then it makes sense to borrow at 7%. 

Of course, it makes sense to pay off all other loans such as the mortgage on your PPR first.

Brendan


----------



## ubiquitous (28 Aug 2008)

Brendan said:


> However, if you are going to invest in property, which I don't recommend, then you should borrow the maximum allowed by your bank.



Its hard to believe that anyone should base their investment strategy entirely on what their bank tells them or offers them. I thought that that would have been obvious given the fallout from the recent banking excesses worldwide.


----------



## z106 (28 Aug 2008)

ubiquitous said:


> Its hard to believe that anyone should base their investment strategy entirely on what their bank tells them or offers them. I thought that that would have been obvious given the fallout from the recent banking excesses worldwide.


 
I think you may be a bit pedantic there.

I think it is reasonable to assume that Brendans underlying assumption is that the person has firstly done their figures and reckons they actually can afford the debt. (Be it through owning other assets or through salaries or whatever)

I think it is highly unikely that he is suggesting that someone should borrow excessively just for the tax benefit even though they can't afford the debt.


----------



## jhegarty (28 Aug 2008)

ubiquitous said:


> Its hard to believe that anyone should base their investment strategy entirely on what their bank tells them or offers them



You must be new here


----------



## ccbkd (28 Aug 2008)

My original reason for posting this was an attempt to fish some information for investment strategy, I have a sum of savings which I wish to invest Long Term, but I am undecided as to what to do with it, I was thinking of maybe using a small portion of it to pay off PPR and remainder in Blue Chip Shares, or either take a punt on investment Property at home in falling market or maybe abroad, but reading Brendans remarks about 100% borrowing would suggest I would only need money for legals and stamp.. but on the flipside I was also considering that if I did pursue objective number 1 i.e lump sum against mortgage and shares the Bank would consider this as leverage against investment property - I suppose its a strategy that needs a little more thought or feedback!


----------



## Brendan Burgess (28 Aug 2008)

Hi cc

It might be better to post full details in the Money Makeover forum. 

I have always stressed that one should not make financial or investment decisions in a vacuum. You must look at your overall position. 

Borrowing to invest is always risky. As a general principle, borrowing to invest in property is less risky than borrowing to invest in shares. Many would believe that this general principle does not hold in the current market conditions. In other words, despite the tax advantages, it might be safer to borrow to invest in shares than property, at this point in time.

Brendan


----------



## Brendan Burgess (28 Aug 2008)

I have just found the Key Post from which the above quote is taken.

If you have time, read the entire thread for the context. If not, here are some quotes. Some have interpreted the quote in the first post to mean that I was recommending investing in property.




> IF YOU are investing in property, you should take out an interest-only mortgage





> You should borrow the maximum amount possible, bearing in mind the usual warnings about borrowing to invest.





> However, if you are not paying tax at 42pc, you should probably not be borrowing to invest in property at all.





> You should not look at any individual property or individual loan in isolation. Look at your total assets and borrowings.





> *Investing in property is a risky business...*


Bear in mind that this was October 2004 when I was frequently criticized for daring to suggest that investing in property was risky! 



> If there is some long-term change to the investment environment, where you can no longer expect returns to exceed the after -tax cost of borrowing, then you should pay off your loans.





> If the interest rates rise to such an extent that you no longer expect to get a net return on your investment in excess of your net cost of interest, then you should repay some of the capital.


So even back in 2004, I was pointing out the possibility that interest rates could rise. 




> It's a risk which you can afford to take, if you believe that property will rise.


All in all, at a time when property prices were rising and few believed that they might fall and at a time when interest rates were low and people felt that stress testing was over regulation, it was a balanced, conservative piece of advice. 

Would I say anything different now with the benefit of four years? 



> Over the long term, you can expect to get a return well in excess of 1.9pc a year in an equity fund. So you should invest this money rather than pay it off your mortgage.


With the benefit of hindsight, the best decision back then would have been not to invest in either properties or equities, but to stay in cash. 



> You should borrow the maximum amount possible, bearing in mind the usual warnings about borrowing to invest.


If I was writing this article today, I would place more stress the risks of borrowing to invest

I believe that the equity market is really great value at the moment. If I had an interest only loan on an investment property, I would not be paying it off. I would be buying shares instead.


brendan


----------

