# Should I buy to rent -I have deposit but am on the fence !



## Mixednuts (25 Aug 2006)

Hi,
I am in 2 minds about borrowing to enter the world of a landlord .
I am 30yrs of age have deposit and feel it may be time to try this.
I will not make any profit each month as rent will pay for mortgage and upkeep , I know its a bit hairy at the moment to enter the buy to lease market due to the increase in interest rates etc but I reckon I can adborb a further 1% hike (but no more) other wise I would be paying a  sum of money each month out of my own hard earned cash.

I have seen a couple of friends buy to rent over the past few years and they are doing fine and have a nice retirement nest egg been payed off at present.

Others seem to be of the idea of investing my 40/50k into the world of the stock exchange.....any pointers or nuggets of wisdom are welcome.

I look forward to your reply.


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## Maine (25 Aug 2006)

From here probably a further 1% rate increase should be factored in.

The next question is long term or not and the next question is location and then your medium job security ?

If the market weakens next year would you be prepared to hold for 5yrs +, it will be important to pick a good location where supply is controlled (very few locations ) and there is lots of renters about, if the economy weakens is your job safe and do you own property already.

As general advice be especially careful with any Section or guaranteed rental stuff.  thats could be buying for the wrong reason. Right now the risk has never been higher for beginner landlords, leveraged upside can also mean leveraged downside.

Get a blue chip adviser if you go to play the stock market and spread ti across a portfolio


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## JohnBoy (26 Aug 2006)

there is very little investment value in residential property in Ireland at the moment. traditionally landlords looked to receive a monthly income above the cost of serviceing the mortgage but many modern buy-to-let investors are happy to forego the net income part of the investment because capital gains have been so spectacular. however, if house price growth slows, and it will have to sooner rather than later, you could be stuck with an investment that is not going up in value in real terms and that produces no income above the cost of the mortgage - hardly a retirement nest egg.

as an illustration divide the annual rent of the type of property that you are looking at into the purchase price. this will give you a very rough price/earnings ratio which you can use to judge the relative worth of this investment.

the p/e in the ISEQ is 16; on the FTSE it is 15.5; on the DAX it is 12.7. i would guess that the p/e ratio of an investment property in Ireland would be at least 30 but probably closer to 45. so your investment property is probably two to three times more expensive than the stock market in terms of earnings multiples. that in itself is not necessairly a bad thing because high p/e usually indicates the prospect of higher than average earnings growth, but the earnings (or rent) that an Irish property can generate are not growing.

if you can find a property that gives you a gross yield of your mortgage rate + at least 30%-50% extra per month then go for it but the time to buy a property in Ireland that produces a healthy rental yield was several years ago.


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## liamwoods (28 Aug 2006)

Have you considered going for an interest only mortgage? Make your payments more affordable, maybe increase your purchase power too.


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## bacchus (29 Aug 2006)

JohnBoy said:
			
		

> the p/e in the ISEQ is 16; on the FTSE it is 15.5; on the DAX it is 12.7. i would guess that the p/e ratio of an investment property in Ireland would be at least 30 but probably closer to 45. so your investment property is probably two to three times more expensive than the stock market in terms of earnings multiples.


 
Agree with you post above. But you can not really compare investing in property and investing in stock unless you do not depend on a mortgage to buy a property. While one can get a mortgage to buy an investment property say €300k, nobody will lend €300k to invest on the stock...


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## JohnBoy (29 Aug 2006)

true yes, but I was just trying to provide some sort of analytical framework for the OP. Residential property investment in Ireland does not make much sense to me and if you have spare cash available there are alternatives uses for cash that are substantially better value than residentail property.


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## dunkamania (29 Aug 2006)

JohnBoy said:


> the p/e in the ISEQ is 16; on the FTSE it is 15.5; on the DAX it is 12.7.


 
Could you post a link to your info source please,having difficulty finding proper index analysis.


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## Lumpsum (29 Aug 2006)

JohnBoy said:


> if house price growth slows, and it will have to sooner rather than later, you could be stuck with an investment that is not going up in value in real terms and that produces no income above the cost of the mortgage - hardly a retirement nest egg.


 
Well the value of the property may not be going up in real terms in this scenario.  But surely the value of your INVESTMENT is. The rental income is paying the mortgage and each year the value of the equity you hold in this leveraged property rises. If you put a deposit of E50,000 on a E150,000 property then, even with the value staying static, your rental income will have turned your E50,000 into E150,000 over the lifetime of the mortgage.  Which doesn't look bad to me.  Or am I missing something - I may be....


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## liteweight (29 Aug 2006)

JohnBoy said:


> if you can find a property that gives you a gross yield of your mortgage rate + at least 30%-50% extra per month then go for it but the time to buy a property in Ireland that produces a healthy rental yield was several years ago.



Even in the days of high rents, the yield an investor expected was 10%. Yield is calculated by taking the annual rental, divided by the cost of the property (incl. stamp duty, fees etc.) and multiplied by 100.

Yields today are much lower  but you should expect it to at least cover inflation i.e. approx 4%.  BOS have a deposit account at the moment which will yield 4.25% on your capital. 

However, with a property, capital appreciation has to be taken into account. Some say we should expect a crash, others a soft landing. In any event you should plan to hold onto the property for at least 5 years, which would safeguard you against any drop in prices i.e. give the market time to recover.

You don't give enough information to help you with your decision. For example, do you own a PPR? If you do not and you buy an investment property then you lose your FTB status and will have to pay stamp duty when you eventually decide to buy a home.

As for friends making a 'killing'...a profit is only a profit when you bank it!


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## JohnBoy (30 Aug 2006)

dunkamania said:


> Could you post a link to your info source please,having difficulty finding proper index analysis.


 
got it directly from Bloomberg. these p/e ratios are based on trailing earnings so would actually be higher if I could get an estimate of future earnings.


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## JohnBoy (30 Aug 2006)

Lumpsum said:


> Well the value of the property may not be going up in real terms in this scenario. But surely the value of your INVESTMENT is. The rental income is paying the mortgage and each year the value of the equity you hold in this leveraged property rises. If you put a deposit of E50,000 on a E150,000 property then, even with the value staying static, your rental income will have turned your E50,000 into E150,000 over the lifetime of the mortgage. Which doesn't look bad to me. Or am I missing something - I may be....


 
quite true. but that is €150k in today's money. inflation will erode the present value of that cash. consequently, why not put the €50k on deposit? if you could earn 4.5% per annum than you you would have €150k in 25 years - the same result as a property that remains static in value.


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## Lumpsum (30 Aug 2006)

Yes sure.  But I was positing the most unlikely scenario of a property remaining static in value over 25 years. Even snail's pace capital apreciation will surely make a leveraged property investment outperform everything else?  No expert, but often think this factor is missing from posts comparing property investment with others.


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## room305 (30 Aug 2006)

liteweight said:


> However, with a property, capital appreciation has to be taken into account. Some say we should expect a crash, others a soft landing. In any event you should plan to hold onto the property for at least 5 years, which would safeguard you against any drop in prices i.e. give the market time to recover.



In the event of a crash property would probably take 5 years to bottom out, having bought near the peak he would want to allow another 5-10 years for price to recover to the level at which he purchased.



			
				Lumpsum said:
			
		

> Yes sure. But I was positing the most unlikely scenario of a property remaining static in value over 25 years. Even snail's pace capital apreciation will surely make a leveraged property investment outperform everything else? No expert, but often think this factor is missing from posts comparing property investment with others.



The value of his property could also fall over the next 25 years. It does happen and it doesn't necessarily take a crash to do it (i.e. the area in which the house is located could become undesirable for any number of reasons).

Property has a place in a well-diversified portfolio. However, unless the rental yield is significant enough to make it a worthwhile investment - to recompense for your time, capital expense and exposure to risk from being leveraged into an illiquid market, I would say there are better investments to be had.

Alternatively, why not put your money into a commercial or residential property fund? At least this way, you will be well diversified from a property perspective.


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## JohnBoy (30 Aug 2006)

this could descend into a Great Debate if we are not careful but to sum my position residential property in Ireland is not a particularly attractive investment prospect at the moment because I feel that the yields on offer are too low for the risk that this type of investment entails. 

for the OP with 40/50k to invest you ought to sit down an think about the risk and returns available from other asset classes - and not just property. Having done that you may decide that property is still your preferred route, but at least the decision that you make will be better informed. 

you could do worse than to read a basic book about investing in order to get a basic understanding of valuations, risks and the time value of money.

a good start would be the AAM guide.


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## bacchus (30 Aug 2006)

liteweight said:
			
		

> Yield is calculated by taking the annual rental, divided by the cost of the property (incl. stamp duty, fees etc.) and multiplied by 100.


 
yield shall be calculated by considering the value of the property at calculation time rather than cost at acquisition time.


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## liteweight (30 Aug 2006)

bacchus said:


> yield shall be calculated by considering the value of the property at calculation time rather than cost at acquisition time.



Incorrect! There's a whole other thread on this topic!


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## bacchus (30 Aug 2006)

can you point out the thread on "yield" subject you are referring to so i'll continue there?


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## whathome (30 Aug 2006)

bacchus said:


> can you point out the thread on "yield" subject you are referring to so i'll continue there?


 
Bacchus, you are correct. In order to compare property with other potential investments, yield should be calculated based on current market value. Otherwise you could be ignoring a couple of hundred thousand euro in equity tied up in a property purchased years ago which would yield more if invested in something else.

Here's a thread on yield vs cap appreciation but I'm not sure if it's the one liteweight was referring to:
http://www.askaboutmoney.com/showthread.php?t=33988


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## liteweight (30 Aug 2006)

bacchus said:


> can you point out the thread on "yield" subject you are referring to so i'll continue there?



Whathome has the wrong thread, it was 'buying property in a thriving midland town'!


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## whathome (30 Aug 2006)

liteweight said:


> Whathome has the wrong thread, it was 'buying property in a thriving midland town'!


 
found it : http://www.askaboutmoney.com/showthread.php?t=34728

You say it here yourself liteweight:
http://www.askaboutmoney.com/showpost.php?p=263386&postcount=10

*"The only reason I can see that you'd do the math on current property price is to ascertain whether, if you cashed in, your money would make more elsewhere."*

So in order to compare yield between investments, the current market price of a property should be used.


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