# Investing in Property



## PDCAT (2 Aug 2013)

Hi Folks

I'm just looking for some feedback/advice on the following:

I have approx 180K sitting in a couple of very low desposit accounts (approx 2.5% PA).
As the interest i'm earning on this amount is low and compounded by 33% DIRT, i was thinking of the posibility of buying a house/apartment to rent instead.

I am married with two kids, own my own house with no mortgage and house is finished inside and outside (apart from couple of small jobs).

I don't have any loans either. Also have approx 30K invested in Shares in two US companies (one i worked for previously and one i work for now).

Was wondering what people think would be my better options.

I was thinking as Deposit rates are so low, plus the fact that i would be a cash buyer, that it might be a good idea for me to look into buying a property to rent. Chances are the rental income after tax would be much higher than i'm currently getting.

What do people think?

Thanks


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## mercman (2 Aug 2013)

This is a very interesting and lucky position to be in. In an effort to answer your question I'll try and offer the pros and cons of your choices. 

If you are considering buying an investment property, yes it has its advantages. But be mindful of the drawbacks of making this decision. This country has to make cuts of over €3.5 billion in the next budget. Now with Labour in joint power, the easiest way for the Government to get funds is to make landlords pay more tax. This could easily help the social welfare bill and cease the abhorrent cuts that look like coming in to Social Welfare.

So purchase another property but be mindful that once you own a property, you won't be able to up sticks and take it somewhere else.

Now with equities, it is another story. The markets have come back very quickly from their lows of a number of years ago. As you are working in an American company, you know this. With a decent firm of brokers and a decent portfolio manager, you should be well able to outperform the poor deposit interest rates structure. 

Sure thing you will have to pay tax on your profits, but with constant changing and re-investing the markets will assist you pursuits in a decent return. Markets go up and down but a good broker should not make too many mistakes.

Keep away from funds of any type if you want to hold on to your money.

You seem as you have done ok to now. Make your choices and Happy Investing.


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## Jim2007 (3 Aug 2013)

mercman said:


> Now with equities, it is another story. The markets have come back very quickly from their lows of a number of years ago. As you are working in an American company, you know this. *With a decent firm of brokers and a decent portfolio manager, you should be well able to outperform the poor deposit interest rates structure. *
> 
> Sure thing you will have to pay tax on your profits, but *with constant changing and re-investing the markets will assist you pursuits in a decent return. Markets go up and down but a good broker should not make too many mistakes.*
> 
> ...



With advice like that how can the OP fail to do anything but go *WRONG*.  And with that I'm away to my bed!


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## mercman (3 Aug 2013)

Jim, I am able to substantiate every thing you have marked for criticism, not by my own thought process, but via the wider circle of professional journalism.


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## Jim2007 (3 Aug 2013)

mercman said:


> Jim, I am able to substantiate every thing you have marked for criticism, not by my own thought process, but via the wider circle of professional journalism.



Well having spent the last 25 years selling the picks & shovels I suggest:  Though and lots of it, together with in depth research as opposed to listening to the talking heads is what is required, if one is to make informed investment decisions!



> Keep away from funds of any type if you want to hold on to your money.



This I expect is generalisation of the fact that returns on some funds are seriously impacted by management fees, transaction fees, enter and exit premiums and so on... but all funds are not the same - there are many different types of funds out there and some of them offer a very good alternative to the DIY approach you are suggesting.



> with constant changing and re-investing the markets will assist you pursuits in a decent return. Markets go up and down but a good broker should not make too many mistakes.



This kind of exercise will result in may of the same problems you are trying to avoid in suggesting that the OP should not consider funds.  To say nothing of the fact that brokers rarely achieve the benchmark over the long haul.



> With a decent firm of brokers and a decent portfolio manager, you should be well able to outperform the poor deposit interest rates structure.



If you look at the risk profile of Irish banks versus that of other Euroland banks, then there is every chance that Irish banks are paying well beyonds the odds on deposits and in a 'Cash or Near Cash' asset class, they are probably among the better options and not to be so easily dismissed.


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## Jim2007 (3 Aug 2013)

PDCAT said:


> Hi Folks
> 
> I'm just looking for some feedback/advice on the following:
> 
> ...



I think the first thing you need to do is establish exactly what your investing objectives are, as this will have a big impact on the type of investments you eventually decide to make.

For instance some people what to save long term for early retirement, may be 30 years or more, where as other are seeking to build a nest egg over the next 5 or 6 years to pay for their kids education, while still more know that they well need the case in say 12 or 18 months time and so on.  Time is a very important factor in investing, if something goes wrong in a long term investment you usually have time to put it right, where as if the same happens to a short term investment your depending on luck to put it right.  In other words you can afford to take on more risk in long term investing that in short term situations.

Which brings me to the next point - risk versus return:  Greater returns always means more risk to you, not matter it is dressed up by the advisors selling you their product.  Believe me no one is going to give you money for nothing!  When dealing with risk there are two objectives: do not take on more risk than is necessary to achieve you objectives and use diversification to reduce risk.

Lets examine the two options you are considering: The deposit option is low risk in terms of capital loss and provides a good return for an asset of it's class, it also has the advantage of being accessible in times of an emergence although you might have to pay fees for break out of a fixed deposit.  A property investment on the other hand may offer potentially a better return, but there is also the risk of capital loss and the fact that you may not be able to liquidate it in a hurry if you need to get your hands on the cash.  Which you choose will really depend on your objectives.

However from your comments, there is two other aspects that you need to consider: you already own a house and that from a risk point of view is probably enough exposure that the asset class.  The other think to think about is your equity holdings - true it is a different asset class, but two holding represents a high risk concentration in that area as well.

So I would suggest that before you proceed, you take some time to learn about the investment process, risk versus return, portfolio management and so on.  Then define your objectives and possibly seek professional help in designing a portfolio of assets (cash, equities, bonds, property and so on) that will enable you to achieve your objectives.


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## Palerider (3 Aug 2013)

At one point I had a substantial life changing amount in equities, well diversified across the main Banks, here and in the U.K., across quoted companies in Dublin, the FTSE and some quoted on the NYSE...I was a happy camper for quite a while, reinvested dividends and added as I could....I got wiped out across my portfolio through 2008 / 2009, I held onto a good amount of cash separately and still retain that.

The do nothing option had I persued it back in 2005 onwards would have kept all my capital secure, not just part of it. 

Be very careful, you have done well, my advice is do not take on risk with your capital, and I mean nothing more than a moderate risk, with a well chosen property you will always have those bricks n mortar.


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## facetious (4 Aug 2013)

Op, you have been given some info on the financial side of renting and other options as regards investing.

On the actual rental side of thing, if all goes well, you may make a 7% yield.

Unfortunately, there are many, many places to get tied up with and things can go wrong as regards tenants and the whole law on renting. An error, and a case brought to the PRTB could cost you 2k, 5k maybe 10k. The highest figure that I have seen was 30k damages to the tenants.

Renting is NOT the easy option that many would-be landlord think it is. As a landlord you will be considered as a business (even if you only have one property) and as in any business, the owner must know the laws thoroughly. There will be no forgiveness because you were ignorant of the law. And to emphasize just how complicated it is, I have seen in claims with the PRTB where even solicitors have got it wrong, so what hope as a private individual?

One of the biggest areas of problems is in regard to "normal wear and tear". A tenant's normal wear and tear is much greater than any householders normal wear and tear. Do you paint your oen house every year or so? With a rented property, it often needed when there is a change of tenant which could mean every year.

Tenants seem to have more problems with appliances and furniture than you would in your own home. They get broken for no apparent reason - it just happened!!

Then you must consider what happens when there are rent arrears - the tenant overholds etc. The process to evict a tenant can be long and arduous. And at the end you will probably not recoup all your losses.

Finally, if you put your money into bricks and mortar, what will you do if you happen to need some of it urgently - loss of job, accident, life-threatening illness to you or one of your family members. Bricks and motar may take a long time to turn into cash.

Just my cents worth.


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## Brendan Burgess (4 Aug 2013)

Palerider said:


> At one point I had a substantial life changing amount in equities, well diversified across the main Banks, here and in the U.K., across quoted companies in Dublin, the FTSE and some quoted on the NYSE...I was a happy camper for quite a while, reinvested dividends and added as I could....I got wiped out across my portfolio through 2008 / 2009, I held onto a good amount of cash separately and still retain that.
> 
> The do nothing option had I persued it back in 2005 onwards would have kept all my capital secure, not just part of it.



Hi Palerider

A friend of mine told me he had lost 90% of his investments although he had a well diversified portfolio. I challenged him on this and he showed me his "well diversified portfolio" 


CRH
Readymix
AIB
Anglo
Barlo
 That was not a diversified portfolio. 

If you built up a well diversified or even a moderately diversified portfolio over a number of years, you should be still well ahead of what you bought in at. 

I worry when I see an expression such as "well diversified across the main Banks". What does this mean?  If you had AIB, buying BoI and/or Anglo was not adding to the diversification. 

Could you list out your portfolio and weights at the peak of the market and show how diversified it was and how "you got wiped out".

It has  nearly always been better investing in equities over property over most 5 year periods.


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## Jim2007 (4 Aug 2013)

Palerider said:


> At one point I had a substantial life changing amount in equities, well diversified across the main Banks, here and in the U.K., across quoted companies in Dublin, the FTSE and some quoted on the NYSE...



While you have not give us the exact holdings, it is clear that this is not by any stretch of the imagination a well diversified portfolio as you have discovered.  First of all 'diversified across the main Banks, here and in the U.K' simply means that you replicated the same risk over several holdings... and that leaves the question of what other risks you replicated in the remaining holdings... on top of that your country exposure appears to have been mainly to the Irish economy.



Palerider said:


> Be very careful, you have done well, my advice is do not take on risk with your capital, and I mean nothing more than a moderate risk, with a well chosen property you will always have those bricks n mortar.



From a risk point of view this is the same as telling someone who has 50% of their wealth in AIB to put the rest in BOI - in other words your advice today is the same as your actions up to 2008/9 replicating risk rather than diversifying risk!



Palerider said:


> The do nothing option had I persued it back in 2005 onwards would have kept all my capital secure, not just part of it.



The do noting option is always a possibility, but it is not a risk free option, in fact may studies show that most investors who follow this route during their life time reach retirement age with substantially less capital than those who build a well diversified portfolio.

And had you in fact built a well diversified portfolio it would probably have dropped about 30% - 40% during 2007/8, but would have by now full recovered and even grown a bit and in addition it would have continued to pay dividends throughout the period.


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## Jim2007 (4 Aug 2013)

facetious said:


> On the actual rental side of thing, if all goes well, you may make a 7% yield.



General expectations right now is that equities will probably achieve a yield of around 6% pa over the next 10 years or so.  From what you say, this would suggest that price of obtaining that extra 1% is high...


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## oldnick (4 Aug 2013)

I note that inheritance/gift thresholds are diminishing rapidly.

Would it be beneficial to gift OP's kids the 180k, and whatever income is earned from the investment ,property or shares, will be tax-free as  they'll each earn less than 16k p.a.

Otherwise whatever OP earns is cut in half by tax. this way he keeps the lot.Well, theoretically his kids do.


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## Palerider (4 Aug 2013)

When I typed well diversified across the main Banks I was referring to Uk and Ireland Banks rather than any specified well diversified holding across differing sectors.

I still stand by my views and admit freely to now being I guess a contrarian, I've heard for so long how in the long run equities out perform all other assets classes and that may be true over any defined period in say 50 years up to 2008, from 2008 on I just don't know.

My portfolio coming into 2008 looked like this.

RBS 61% ( Stg)
BOI 8% (Euro )
Elan 7% ( USD )
Intel 7% (USD )
Exploration shares 5% ( EURO )
Vodafone ( hangover from Eircom ) 6% (Stg )
Deutsche Telekom 4% (Euro )
Ceva 2% (USD )

I have not crystallised my losses, for me the Banks cleaned me out especially the RBOS final share offering which I also unfortunately bought into, I should have had stop losses in place but I didn't, I never saw the drop as the collapse it was and lived in a bubble, I am not alone there I think.


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## Brendan Burgess (4 Aug 2013)

> well diversified across the main Banks, here and in the U.K., across  quoted companies in Dublin, the FTSE and some quoted on the NYSE.


and 


> RBS 61% ( Stg)
> BOI 8% (Euro )


You had 61% of your portfolio in one company and 70% of your portfolio in  banking shares overall.

You were fooling yourself into thinking that you were diversified. You were not diversified at all. You were taking a huge bet on one company.  At the time RBS looked like a good company, but no matter how good a company appears to be, you should not have more than 10% of your assets in it.  And most would say that you should not have more than 1% in it. 

 Were you an employee of Ulster Bank at the time?


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## Jim2007 (4 Aug 2013)

Palerider said:


> I still stand by my views and admit freely to now being I guess a contrarian, I've heard for so long how in the long run equities out perform all other assets classes and that may be true over any defined period in say 50 years up to 2008, from 2008 on I just don't know.



The MSCI World Index feel by about about 40% in 2008, yet today it has not only recover, it has in fact pushed ahead.  Over the past 10 years it has produced an annualized return of 7.82% and 6.83% pa since inception in 1994.

Which compares very favorably with the 7% quoted on property by another poster.  It has a much lower risk profile and would have been a far better option than investing in property.

ETFs on this index are widely available at TERs of about 0.5%, so it is well within the reach of the average investor.


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## Jim2007 (4 Aug 2013)

Brendan Burgess said:


> At the time RBS looked like a good company...



My notes for the period 2006 - 2008 says that the Core T1 Ratio fell as low as 4% on a few occasions and at best was at about 7%, so it was already close to being under capitalized even before it hit stormy waters.  Needless to say we never took a position!


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## cremeegg (21 Aug 2013)

Deciding to be a landlord is a lifestyle choice as much as an investment choice.

A reasonable return would pay for your time as well as your financial investment.

So called Gross Yield (rental income/purchase price) is almost meaningless.

A yield (profit after tax/capital invested) would need to be about 5% to be worth considering. That is more than the 2.5% (less after tax ?) you would get from the bank to compensate for your time and trouble.

I think you would struggle to get that in todays market. But if you put in the time and bought at a good price you might.

Markets are not perfectly efficient, and the Irish property market at present is seriously out of kilter. Demand is suppressed by weak banks unable to lend. However supply is also suppressed by weak banks not repossessing properties where no mortgage payments are being made.

In all this market mayhem it may be possible to find a well priced property. But that is never easy


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