# A home,  a buy to let, a commercial property and oil shares....



## galway_blow_in (15 Dec 2015)

my income is as follows

income from work = 40,000 

income from property = 10,000


borrowings = 720 per month on BTL ( income from this is listed above ) due to be paid off january 2023 

car loan = 580 per month due to be paid off july 2018

total = 1300 per month


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## 44brendan (15 Dec 2015)

And the question is!!!


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## galway_blow_in (15 Dec 2015)

according to an american site , my debt ratio is around 32% which they deem as risky

wondering what folks here think


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## 44brendan (15 Dec 2015)

I have not seen this system used at all in Ireland. In my view it is too simplistic to reflect repayment capacity. I.e. can you apply the same ratio to a borrower earning net 300k pa as to one earning 30k pa. Not in my experience. Your income is input gross but repayments are from net salary. You could be single, married with zero or 4/5 children. If you are inquiring on a further borrowing proposal you will need to supply more detailed and specific information in order to receive advice.


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## galway_blow_in (19 Dec 2015)

i earn just shy of 50 k per year , my partner earns 30 k pre tax , we have one child on the way 

i dont have a mortage on our dwelling 

the car will be paid off in june 2018 and currently costs 580 per month

the investment property cost 140 k , produces 12 k per anum and i have a 50 k loan on it over seven years @ 5.74% costing me 723 per month

i might add that 25 k of my income is tax free ( wont go into more detail but its full legit )


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## Brendan Burgess (19 Dec 2015)

You own your home mortgage free. 
You have a mortgage of €50k on a property which is probably worth around €80k 
Your rent covers your full mortgage repayments. 
So far, you are doing very well.

You have a joint income of around 65k net - other than your rental income, so that is pretty good for a family of three with no accommodation costs.

You have a car loan of about €30k ?  I presume that the car is worth at least that.   Seems about ok and easy enough for you to afford. 

The investment property mortgage rate seems high for a low loan to value.  Could you switch it to a cheaper lender?  Could you take out a mortgage on your home to replace the investment property? You might be able to reduce the rate by about 2% which would save you €1,000 a year. 

In fact, why not include the car loan in the remortgage and pay off that bit of the loan over the remaining 2.5 years anyway?  Check though if there are early repayment penalties on your car loan. 

Brendan


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## galway_blow_in (19 Dec 2015)

Brendan Burgess said:


> You own your home mortgage free.
> You have a mortgage of €50k on a property which is probably worth around €80k
> Your rent covers your full mortgage repayments.
> So far, you are doing very well.
> ...



Thanks Brendan, the property was only bought recently , its a commercial property worth 120 k , it pays 12 k per annum

5.74% was the best seven year rate I could get , asked for a ten year but they wouldn't lend that amount for that duration ( ten years )


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## galway_blow_in (19 Dec 2015)

Just to be clear , the income from investment property is included in my 50 k income


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## Fella (19 Dec 2015)

If it was me I wouldn't be investing in property and taking out a car loan , if I was going to invest 120k I would make sure I had a lot of savings first and be able to buy stuff like cars outright . But maybe your doing well hard to know , I dislike loans if I had to get a loan for a car I'd probably buy a cheaper car or save and buy it outright.


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## Brendan Burgess (19 Dec 2015)

OK, so you had €70k cash.

You borrowed €50k to buy a property and €40k(?) to buy a car? 

It seems to me that this was very risky.  Borrowing at 5.75% to invest in anything other than a business is probably not a good idea. You will be in trouble if you get a bad tenant. 

Given that you needed a car, it would have made more sense to buy the car for cash. 

But that is all a bit late now.

Brendan


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## galway_blow_in (20 Dec 2015)

apologies to the room , i was a bit messy in my detail , i listed my income after loans are paid , i will now list gross income before loan payments 

my basic income is 35 k per anum

i own two investment properties ( one residential and one commercial ) 

i only have borrowings on one of them ( the commercial )

i have two and a half years left on a car loan ( its actually for a 4 wd jeep )

my gross income is as follows

35 k from my job ( its secure but little scope for increased wage  )

8400 ( 700 per month )  from my two bed apartment ( managment fee is a grand per year , property tax and contents insurance combined is around 250 euro  so 8400 - 1250 , tenants are there four years so i dont see them leaving anytime soon or not paying so lets perhaps pretend i dont have a problem with non paying tenants ) property  in limerick city 

12 k from my commercial property ( in a large town with a population of 25 thousand people )  which is rented to a tenant who is there fifteen years and has another nine years left on their lease 

i also have a four k income from dividends as i have fifty grand in a major oil company which i bought when yield is 8% ( i know this is poor diversification but i cant see this company going bust )


i currently pay out 723 per month on the commercial property , the property cost 120 k + vat and i borrowed 50 k of that over seven years @ 5.74% , i only took out this loan in the past month 

i currently pay out 580 per month on the jeep which will be paid off in june 2018

if push came to shove i could sell the stock and after paying capital gains , pay off a good bit of the commercial property loan


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## Fella (20 Dec 2015)

You borrowed 50k @ 5+% 
You invested 50k in stock market , you 
Should of sold your stock and had no borrowings , this to me is terrible money management , your hoping to beat 5*% after tax in fees in stock market it's a gamble.


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## galway_blow_in (20 Dec 2015)

Fella said:


> You borrowed 50k @ 5+%
> You invested 50k in stock market , you
> Should of sold your stock and had no borrowings , this to me is terrible money management , your hoping to beat 5*% after tax in fees in stock market it's a gamble.



i see the stock as a pension plan who,s capital can grow over time while at the same time paying me a solid dividend  , is the concept of good debt v bad debt no applicable here ? , 100% of mortgage interest on commercial property is tax deductible 

unfortunately i was unable to get a lower rate than 5.74% on the commercial property , thats with BOI , none of the other banks were interested at all , KBC said they dont even lend of those kind of investment properties ,  ive been with BOI my entire life


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## Sarenco (21 Dec 2015)

Borrowing @ 5.74% to purchase shares in a single energy stock certainly wouldn't be my idea of "good debt".

It's an expensive, high-risk, leveraged bet - what's "good" about it?  The fact that the interest payments may be deductible for income tax purposes doesn't transform the leveraged bet into a sensible decision.


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## Brendan Burgess (21 Dec 2015)

You own your own home mortgage free. You also have a residential investment mortgage free. You have €70k of equity in a commercial investment property.   You have a big car loan. 



galway_blow_in said:


> i also have a four k income from dividends as i have fifty grand in a major oil company which i bought when yield is 8% ( i know this is poor diversification but i cant see this company going bust )



I wouldn't be terribly worried about diversification. It seems to be about 10% of your total assets. If the company went bust tomorrow, and you lost €50k, you would be sore but not wiped out. 

What interest rate are you paying on the car loan? Probably around 10%.  So you are borrowing at 10% to invest in shares.  The dividend yield is 4% net.  The company doesn't have to go bust. The stock market may simply revalue it downwards to make this a terrible investment.  Sell the oil shares and pay off the car loan assuming that the net interest rate is much higher than the net interest rate on the commercial property. 

Brendan


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## galway_blow_in (21 Dec 2015)

Sarenco said:


> Borrowing @ 5.74% to purchase shares in a single energy stock certainly wouldn't be my idea of "good debt".
> 
> It's an expensive, high-risk, leveraged bet - what's "good" about it?  The fact that the interest payments may be deductible for income tax purposes doesn't transform the leveraged bet into a sensible decision.



who said anything about borrowing money to buy shares ? , i didnt even know it was possible to do so


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## galway_blow_in (21 Dec 2015)

Brendan Burgess said:


> You own your own home mortgage free. You also have a residential investment mortgage free. You have €70k of equity in a commercial investment property.   You have a big car loan.
> 
> 
> 
> ...




brendan , im paying 6.75% on the jeep loan , it will be paid off in june 2018 , dividend yield on the stock is 8%


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## Brendan Burgess (21 Dec 2015)

galway_blow_in said:


> who said anything about borrowing money to buy shares ? , i didnt even know it was possible to do so



You had shares which you could have sold when you borrowed the money, so in effect, you are borrowing money at 6.75% to buy shares. 

You should sell them promptly and pay off the Jeep loan at least.

Brendan


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## galway_blow_in (21 Dec 2015)

Brendan Burgess said:


> You had shares which you could have sold when you borrowed the money, so in effect, you are borrowing money at 6.75% to buy shares.
> 
> You should sell them promptly and pay off the Jeep loan at least.
> 
> Brendan



do you not see any merit at all in putting debt on the commercial property ? , 100% of the interest on the loan is tax deductible


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## Brendan Burgess (21 Dec 2015)

The net interest rate on the commercial property is 3%.  So maybe the net return will exceed that. But you have plenty of property already, so you are over concentrated in it.  If you pay off the loan on the commercial property, you will save 3%. If you pay off the loan on the Jeep you will save 6.75%.

Brendan


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## Sarenco (21 Dec 2015)

galway_blow_in said:


> who said anything about borrowing money to buy shares ? , i didnt even know it was possible to do so



As Brendan says above, continuing to hold equities while you have (in this case, high interest) personal debts is exactly the same thing financially as buying stocks on margin.

Your oil stock may currently be priced to reflect a trailing yield of 8% but there is obviously there’s no telling what the future holds for the company.  If oil prices remain depressed for an extended period, management may be forced to cut dividends into the future.  There is also always the risk of another environmental disaster - look at what happened to BP's dividends in 2010/11.

Even if none of these risks materialise, you will still have to pay income tax at your marginal rate on any dividend payments received.  In contrast, paying off your high interest loans is risk free and tax free.


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## galway_blow_in (21 Dec 2015)

Brendan Burgess said:


> The net interest rate on the commercial property is 3%.  So maybe the net return will exceed that. But you have plenty of property already, so you are over concentrated in it.  If you pay off the loan on the commercial property, you will save 3%. If you pay off the loan on the Jeep you will save 6.75%.
> 
> Brendan



the yield on the commercial property is slightly above  8.5% , cost me 140 k all in , rent is 12 k per anum


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## Sarenco (22 Dec 2015)

galway_blow_in said:


> the yield on the commercial property is slightly above  8.5% , cost me 140 k all in , rent is 12 k per anum



When you take all expenses and taxes into account, I doubt your net, after tax rate of return will exceed your effective financing rate to any material extent - certainly not to an extent that adequately compensates you for the risks involved.

A gross yield of 8.5% is likely to translate to a net yield of around 6-7% when you take all expenses into account and you apparently pay tax at a marginal rate of 50% on any net profits.


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## Bronte (22 Dec 2015)

galway_blow_in said:


> who said anything about borrowing money to buy shares ? , i didnt even know it was possible to do so



I did it the one time I bought shares.  Eircom.  Made money on it too.  The banks were throwing out the money for it.

Your figures are all over the shop on this thread.  Can you not do the money makeover, ie start again.  Sometimes I do it for posters who are desparate but you're not !.  And list each loan with it's costs, borrowings, income and taxes please.


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## galway_blow_in (22 Dec 2015)

Bronte said:


> I did it the one time I bought shares.  Eircom.  Made money on it too.  The banks were throwing out the money for it.
> 
> Your figures are all over the shop on this thread.  Can you not do the money makeover, ie start again.  Sometimes I do it for posters who are desparate but you're not !.  And list each loan with it's costs, borrowings, income and taxes please.




nice to finally meet someone who made money on eircom shares


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## galway_blow_in (22 Dec 2015)

Sarenco said:


> When you take all expenses and taxes into account, I doubt your net, after tax rate of return will exceed your effective financing rate to any material extent - certainly not to an extent that adequately compensates you for the risks involved.
> 
> A gross yield of 8.5% is likely to translate to a net yield of around 6-7% when you take all expenses into account and you apparently pay tax at a marginal rate of 50% on any net profits.



interest on commercial loans is 100% tax deductible


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## Sarenco (22 Dec 2015)

galway_blow_in said:


> interest on commercial loans is 100% tax deductible



Yes, it means your effective financing rate is slightly less than 3%.  Will your rate of return on the property (after expenses and taxes but excluding any capital appreciation/depreciation) materially exceed 3%?


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## thedaddyman (22 Dec 2015)

The shares are the first thing that jump out at me, how many people lost their "pensions" in shares in Anglo, BOI, AIB etc and they were deemed to be "blue chip". You've invested a year's salary in an industry that is notioriously volatile and impacted by factors outside of your control (war, ISIS etc etc). Given the collapse in oil prices in recent months I'd be seriously thinking about selling those shares.
Secondly you mention you have a car loan finishing in 2018- and then what? At some stage within a few years you will be replacing it. And why do you need a 4WD anyway?
The only costs you seem to have included for your comercial investments are the loan repayments. What about costs such as insurance and property charges. Income is not profit.
Does your commercial tenant have a break clause?. How would you be fixed if he went into receivership?
Are you going to have to reinvest any money back into your commercial property?
I don't understand how 25k of your income is tax free. Have Revenue confirmed that and since it's Christmas, could you share your secret with the rest of us?
Do you need to look at how your investments are structured. For example, is your commercial property ring-fenced so if something happened there, any creditor cannot come after your apartment as well.
Credit for having this level of assets given your income and for stepping back and looking at the big picture. Plenty of people who had similar investments in the boom time probably wish they had done the same


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## galway_blow_in (22 Dec 2015)

thedaddyman said:


> The shares are the first thing that jump out at me, how many people lost their "pensions" in shares in Anglo, BOI, AIB etc and they were deemed to be "blue chip". You've invested a year's salary in an industry that is notioriously volatile and impacted by factors outside of your control (war, ISIS etc etc). Given the collapse in oil prices in recent months I'd be seriously thinking about selling those shares.
> Secondly you mention you have a car loan finishing in 2018- and then what? At some stage within a few years you will be replacing it. And why do you need a 4WD anyway?
> The only costs you seem to have included for your comercial investments are the loan repayments. What about costs such as insurance and property charges. Income is not profit.
> Does your commercial tenant have a break clause?. How would you be fixed if he went into receivership?
> ...



ive listed the costs associated with my residential property , i.e , property tax , insurance etc , as for the commercial property , no property tax and the tenants pays all costs like insurance


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## galway_blow_in (22 Dec 2015)

i invested savings in glanbia , kerry and bank of ireland this past number of years , the dairy companies especially , made me a lot of money , my brother is a dairy farmer so i know that sector pretty well , returns on dairy companies have been as strong as ryanair etc since 2010


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## galway_blow_in (22 Dec 2015)

Sarenco said:


> Yes, it means your effective financing rate is slightly less than 3%.  Will your rate of return on the property (after expenses and taxes but excluding any capital appreciation/depreciation) materially exceed 3%?



by some distance , yes


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## Sarenco (22 Dec 2015)

Really?  I understood the gross yield on the property is 8.5% and your marginal tax rate is 50%.

I assume you will have costs associated with managing and maintaining the property but even if you had absolutely no such costs your effective rate of return is only 1.25% above your effective financing rate.  Hardly "some distance" in view of the very considerable risks involved.


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## galway_blow_in (23 Dec 2015)

Sarenco said:


> Really?  I understood the gross yield on the property is 8.5% and your marginal tax rate is 50%.
> 
> I assume you will have costs associated with managing and maintaining the property but even if you had absolutely no such costs your effective rate of return is only 1.25% above your effective financing rate.  Hardly "some distance" in view of the very considerable risks involved.



tax is paid on every form of income , you dont build income tax into the workings out of a yield on property , anymore than you do on savings rates , if a bank is paying 3% on savings ( i know none are right now ) and the dirt is 33% , you dont claim to be getting 2% on savings

with commercial property leases , the tenants covers all expenses , insurance , maintenance etc

8.5% would be viewed as a very strong yield on a property , few businesses have more than a 10% return each year , well not average business up and down the country


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## Brendan Burgess (23 Dec 2015)

galway_blow_in said:


> tax is paid on every form of income , you dont build income tax into the workings out of a yield on property , anymore than you do on savings rates , if a bank is paying 3% on savings ( i know none are right now ) and the dirt is 33% , you dont claim to be getting 2% on savings



Actually, anyone doing a proper analysis would consider the net yield and not the gross yield. 

For example, you would not compare the gross deposit rate on a savings account with the gross rate on Savings Certs, as the Savings Certs are tax-free.

And if you were not taxed at the top rate, then the net yield would be higher.


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## Sarenco (23 Dec 2015)

galway_blow_in said:


> ...you dont build income tax into the workings out of a yield on property...



Agreed - I didn't mean to suggest otherwise.

For clarity, this is what I mean by the following terms:-

The *gross* yield on a property is simply the gross annual rent that a property can generate, expressed as a % of the purchase price for that property, plus acquisition costs (or the estimated realisable value of the property, where appropriate).

The *net* yield on a property takes account of all costs and expenses, actual and imputed, relating to the management and maintenance of a rental property.  It is the capitalisation rate for the property - in effect, the equivalent of a firm's E/P ratio.

Even if a property is self-managed, a landlord should still account for his time in calculating the net yield on a property in order to arrive at a figure that can be usefully compared with the return on truly passive investments, such as bank deposits and publicly traded securities.

With a long lease, a tenant will typically be responsible for repairing, maintaining and insuring a commercial property but a landlord should still include a provision in his calculations for future expenditure on items such as the property's roof, windows, floors, etc that become dilapidated over time as these will not typically be the tenant's responsibility.

Finally, there's the *effective* (or after-tax) annual *rate of return, *which takes account of the taxman's share of the net income on an investment.  If you have a marginal tax rate of 50%, then your effective rate of return is obviously half your net yield.  In contrast, the effective rate of return on repaying a loan is simply the annual interest rate that would otherwise be charged on that loan.

A gross yield of 8.5% on third generation, prime office space in Dublin's CBD would certainly be considered a very strong yield.  For retail or industrial property in a provincial town, that kind of gross yield would be considerably less impressive, given the increased risks inherent in such an investment.

To be honest, I think a (properly calculated) net yield in excess of 6% on any property is pretty attractive in the current environment.  But not if it's being finance at 5%+....


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