# Irish Properties worth €1m... Time to diversify?



## ThirstyLizard (29 Jul 2022)

Hi all,

We currently have two rental properties and have been considering selling one of them to diversify our investments. Our tenant has just informed us that they will be ending the tenancy, so now could be an opportune time...

Interested to get other's thoughts on this.



*Personal details*

Age: Late 30's
Spouse’s/Partner's age: Late 30's

Number and age of children: 2 kids both under 4yo


*Income and expenditure*
Annual gross income from employment or profession: €14k
Income from rental properties: €54k
Annual gross income of spouse: 0

Monthly take-home pay: ~€3.8

Type of employment: self-employed

In general are you:
(a) spending almost everything we earn


*Summary of Assets and Liabilities*
Family home worth €450-50k with no mortgage
Cash of €170k
Defined Contribution pension fund: €10k
Company shares : 0
Buy to Let Property x2 worth €600k (€300k each) with no mortgages.

*Other borrowings – car loans/personal loans etc - *No other borrowings

Do you pay off your full credit card balance each month? No credit cards.

*Buy to let properties*
Value: €600k
Rental income per year: €54k
Rough annual expenses other than mortgage interest: €2k
Lender: None
Interest rate: n/a

*Other savings and investments:*

Do you have a pension scheme? No

Do you own any investment or other property? As above.

*Other information which might be relevant*

Life insurance: None


*What specific question do you have or what issues are of concern to you?*

We are wondering if it would be wise to sell one of our investment properties and reinvest the funds (€300k) into other investments e.g. Diversified stock market funds.

We currently rely on the income of both properties, however we have the opportunity to increase our self employed earnings to replace this income. Albeit, we won't have as much 'free time' which we very much cherish in our current stage of life with young kids.

We've always been somewhat scared of putting large sums into the stock market, but realise we are highly exposed to the Irish property market.

Trying to weigh up our options.

Any advice or help to steer us down the right track is much appreciated*.*


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## moneymakeover (29 Jul 2022)

Why sell a good investment?

You have 170k in cash: why not start with putting some of that into stock market see how that goes for you?

Selling property sounds like a slippery slope
You might be tempted to go on holidays, buy a car etc etc


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## jpd (29 Jul 2022)

You say gross income 14k, monthly take home pay 3.8k - is this correct?


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## ThirstyLizard (29 Jul 2022)

jpd said:


> You say gross income 14k, monthly take home pay 3.8k - is this correct?


Sorry, the monthly take home is our total after tax income (self-employed + rental income) combined.


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## Brendan Burgess (29 Jul 2022)

ThirstyLizard said:


> Cash of €170k
> Defined Contribution pension fund: €10k
> Company shares : 0
> Buy to Let Property x2 worth €600k (€300k each) with no mortgages.



At present you have €1m in property and €170k in cash.

Even if you have a very positive view of Irish property, stuff can go wrong.  It can fall in value. You can get a bad tenant. A new government could restrict rents even further.

So, I think you should diversify into equities.

Given your low income outside rent, you are very vulnerable to your tenant not paying the rent.  That is another reason for having  liquid assets such as shares.

So, sell one property and invest the proceeds and the €170k cash in a diverse portfolio of shares.

Your dividend income, rent and self-employed income might not be enough to cover your expenses. However, you can always sell some shares when you need cash.

I think you should also plan to increase your earnings - whether that is to continue as self-employed or to get a PAYE job.  You should then maximise your pension contributions.



Brendan


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## Brendan Burgess (29 Jul 2022)

Are you distributing your income among both of you equally? 

If one spouse has all the income, you have €45,800 at 20% 
If the other spouse has at least €27,800 of income in their own name, you get €73,600 at 20% 

Brendan


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## ThirstyLizard (29 Jul 2022)

Brendan Burgess said:


> Are you distributing your income among both of you equally?
> 
> If one spouse has all the income, you have €45,800 at 20%
> If the other spouse has at least €27,800 of income in their own name, you get €73,600 at 20%
> ...


Yes, all income is split 50/50 and we are separately assessed.


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## hubble (30 Jul 2022)

how would you go about deciding what stocks to purchase.  I think holding for the longterm and not going into an ETF (41% tax every 8 years) is a good strategy especially if you are thinking of leaving the shares in your Estate.  However what 10? stocks would you purchase?


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## cremeegg (30 Jul 2022)

Apologies to all the normally excellent posters I am about to insult.

The OP has received hopeless advice here, among the worst I have seen on AAM.

No one has asked the first question. How much Capital Gains Tax would be payable on the sale of each investment property. Without knowing that no meaningful comment can be made.


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## Brendan Burgess (30 Jul 2022)

Hi cremeegg

Interesting point and for a fuller understanding of his situation, we should have got all the facts.  It had occurred to me to ask what the prices were to decide which was the most tax efficient to sell. But I thought it more important to establish whether he should sell or not. 

And I think it's pretty clear that he should do so. 

But this is a case where the tax tail should not wag the sound financial planning dog. 

Let's say that he bought both properties for €200k and so if he sells one, he has a CGT bill of €33k. 

It is still right to sell one property.  The diversification is more important than paying €33k CGT now, rather than paying it at some stage in the future. 

Brendan


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## ThirstyLizard (30 Jul 2022)

cremeegg said:


> Apologies to all the normally excellent posters I am about to insult.
> 
> The OP has received hopeless advice here, among the worst I have seen on AAM.
> 
> No one has asked the first question. How much Capital Gains Tax would be payable on the sale of each investment property. Without knowing that no meaningful comment can be made.



Good point.

CGT bill would be around €12k for either property. 

Unfortunately it's not higher! haha


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## ThirstyLizard (30 Jul 2022)

hubble said:


> how would you go about deciding what stocks to purchase.  I think holding for the longterm and not going into an ETF (41% tax every 8 years) is a good strategy especially if you are thinking of leaving the shares in your Estate.  However what 10? stocks would you purchase?


I feel like I'd have trouble pulling the trigger on any equity investments tbh, whether that was an ETF, investment trust, individual stocks or combination of same.

We are pretty risk averse by nature and having seen the markets pull back over the past few months is scary.


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## Brendan Burgess (30 Jul 2022)

ThirstyLizard said:


> CGT bill would be around €12k for either property.



In the scheme of things, that is not a material figure. 

Brendan


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## NoRegretsCoyote (31 Jul 2022)

ThirstyLizard said:


> We are pretty risk averse by nature and having seen the markets pull back over the past few months is scary.


If you think that's bad recall Irish house prices fell 50% 2007-2012 and still haven't recovered.


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## cremeegg (31 Jul 2022)

BTL property realisable value €580k after CGT and fees.

Return €54k. That is 9.3% before tax.

While there are no guarantees in life, that return is very secure. When Irish property prices were falling 50% rents declined 20% approx.

There is also the possibility of capital appreciation, that is in addition to the 9.3% rental return.

While I think trying to predict the future (or anything else ) is a fool's game, inflation needs to be considered. As a real asset housing is unaffected by inflation. (That is not the same as saying inflationary times do not affect house prices).

Diversifying away from an asset yielding 9.3% to an asset yielding 1.69% (S&P dividend yield at present) needs a fairly strong justification imho.


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## llgon (31 Jul 2022)

Brendan Burgess said:


> Given your low income outside rent, you are very vulnerable to your tenant not paying the rent. That is another reason for having liquid assets such as shares.
> 
> So, sell one property and invest the proceeds and the €170k cash in a diverse portfolio of shares.



I would say that selling one property would leave the OP much more vulnerable if they had a tenant not paying rent. With all their rental income gone they would have to eat into their capital pretty rapidly.

With two properties they are highly unlikely to have both with non-paying tenants.


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## NoRegretsCoyote (31 Jul 2022)

cremeegg said:


> Return €54k. That is 9.3% before tax.
> 
> While there are no guarantees in life, *that return is very secure. *


Higher yield usually means higher risk.

9% yield is more likely to be apartments outside of Dublin or rural houses. Your tenants are more likely to be delinquent and voids between rentals higher.




cremeegg said:


> Diversifying away from an asset yielding 9.3% to an asset yielding 1.69% (S&P dividend yield at present) needs a fairly strong justification imho.


It's not at all an apples-to-apples comparison. The value of your house will not increase due to share buybacks the way an equity portfolio will!


I'm reluctant to give advice that's too specific here, but having >80% of your wealth in one pretty specific asset class is probably not great long term.


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## Brendan Burgess (1 Aug 2022)

llgon said:


> I would say that selling one property would leave the OP much more vulnerable if they had a tenant not paying rent. With all their rental income gone they would have to eat into their capital pretty rapidly.
> 
> With two properties they are highly unlikely to have both with non-paying tenants.



Hi Ligon

If you have €300k each in two properties and no other assets, you are very vulnerable to a catastrophic outcome. Both tenants stop paying and you have no income.  While you are a bit right in saying that two defaulting tenants is less likely than one, there probably is a correlation.  When the next economic crisis hits, a lot of well meaning tenants will default. 

On the other hand, if you have €300k in one property and €300k in a portfolio of 10 equities, then you will have dividend income from 10 companies. Some may pass their dividend, but your likely to get some income. 

But the most important point is that equities are liquid.  You can always sell some of your shares. If you have two properties and you need cash, you can't sell €10,000 worth of one property.  You must sell the entire property and it may take you months to do so. 



llgon said:


> they would have to eat into their capital pretty rapidly.



This is a common misconception to discriminate between income and capital.

Which would you prefer 
A) A company which pays no dividends but whose share price grows at 10% a year
or
B) A company which pays 5% a year dividend, but whose share price does not grow? 

You should prefer A) and feel quite happy to sell some of the shares when you need "income". 

Brendan


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## Brendan Burgess (1 Aug 2022)

NoRegretsCoyote said:


> 9% yield is more likely to be apartments outside of Dublin or rural houses. Your tenants are more likely to be delinquent and voids between rentals higher.



Hi Coyote

Have you any evidence for this?  Or is it just anecdotal? 

Brendan


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## llgon (1 Aug 2022)

Brendan Burgess said:


> This is a common misconception to discriminate between income and capital.
> 
> Which would you prefer
> A) A company which pays no dividends but whose share price grows at 10% a year
> ...


You' ve misinterpreted my post if you think I am under that misconception.

That hypothetical scenario is true and I could be happy out if growth of the share price matches or exceeds my income needs.

However in this real case I would expect share price growth to fall far short for the OP's income needs if they had no rental income to rely on. There are options C) keep two properties(their current situation), D) keep one property.

I agree that the risks are high but so are the rewards and the rental properties are allowing the OP have the lifestyle they want. On recent performance investment in equities would not cover it and they would most likely be seeing a reduction in their capital.  

In either case, increasing employment or self-employed earnings would be the best option to reduce risk, as you have alluded to.


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## Brendan Burgess (1 Aug 2022)

llgon said:


> You' ve misinterpreted my post if you think I am under that misconception.



Apologies. But I am still not sure of your point. 




llgon said:


> However in this real case I would expect share price growth to fall far short for the OP's income needs if they had no rental income to rely on.



So you are saying that "If you invest in property the returns will be higher than investing in shares"? 

I am saying "I can't tell whether the returns on property will be higher or lower than the returns on shares, therefore you should diversify". 

Brendan


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## llgon (1 Aug 2022)

My points are related specifically to the OPs situation rather than generalities.

Their current investments allow them to lead the lifestyle they desire, this may continue, it might not.

Selling a property and diversifying into shares in the current environment make it more likely, in my opinion, that they will have to eat into their capital in order to meet their income needs.

I agree that overall the risk of keeping two properties is higher but up until now it is one that the OP has taken and it has worked out for them. 

It is a personal choice whether to continue to take this risk or not but increasing earned income would be the best option to reduce their risk. This would decrease their dependence on investment income and facilitate a more diversified portfolio.


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## cremeegg (1 Aug 2022)

NoRegretsCoyote said:


> 9% yield is more likely to be apartments outside of Dublin or rural houses. Your tenants are more likely to be delinquent and voids between rentals higher.



It is a well known fact that the further from Ballsbridge, the more likely a tenant is to be a delinquent !



NoRegretsCoyote said:


> The value of your house will not increase due to share buybacks the way an equity portfolio will!



Equally well known is the fact that share buybacks magically increase the value of shares without any cost to the company, the continuing shareholders, or the selling shareholders.


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## cremeegg (1 Aug 2022)

Brendan Burgess said:


> Hi Coyote
> 
> Have you any evidence for this?  Or is it just anecdotal?
> 
> Brendan


It's a widespread anecdote in West Kerry, the honest Dubs who would never cheat a poor landlord vs the deliquent types to be found in rural areas.


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## Horatio (1 Aug 2022)

I think it is broadly agreed that you are over exposed to the Irish property. That doesn’t mean you have to sell one or other of the properties. 

You could for example mortgage your PPR property with the bank to release equity and invest that equity in stocks and shares as you had mentioned in your post. 

You will of course then have a mortgage payment to service but if you can increase your self-employed income by that amount then you get the best of both worlds: you get exposure to equities, you get to reduce your exposure to the Irish property market and you get to work just enough to cover the mortgage while maintaining the freedom with your children that you hold dear. 

I hope this makes sense.


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## Gordon Gekko (1 Aug 2022)

llgon said:


> My points are related specifically to the OPs situation rather than generalities.
> 
> Their current investments allow them to lead the lifestyle they desire, this may continue, it might not.
> 
> ...


Diversification reduces risk.


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## Brendan Burgess (1 Aug 2022)

cremeegg said:


> It is a well known fact that the further from Ballsbridge, the more likely a tenant is to be a delinquent !



I was actually crafting a serious answer to this.

 

Brendan


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## cremeegg (1 Aug 2022)

Gordon Gekko said:


> Diversification reduces risk.


In the context of efficient market theory and investment in equities, a diversified share portfolio is less risky that a concentrated one, the so called free lunch. That is a matter of maths within the efficient market theory.

Beyond that, as here where we are looking at property investment versus equity investment, it just a piece of good advice which may or may not be applicable.

Property yielding 9% vs shares yielding 1%

Even allowing for a 3 to 4% difference for equity risk premium, this is a very large difference.

Lets look at how these could equalise.

1 Dividend's could increase. 
2 Share prices could fall to bring the yields into line.
3 Rents could fall. (Rents are not going to move to reduce arbitrage opportunities in the market.)
4 Property could appreciate.

So either either property continues to deliver a huge premium to equites or one of the above happens, that is arithmetically true. I think 1 and 3 are unlikely, that leaves 2 and 4, both of which favour property investment.


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## Gordon Gekko (1 Aug 2022)

cremeegg said:


> In the context of efficient market theory and investment in equities, a diversified share portfolio is less risky that a concentrated one, the so called free lunch. That is a matter of maths within the efficient market theory.
> 
> Beyond that, as here where we are looking at property investment versus equity investment, it just a piece of good advice which may or may not be applicable.
> 
> ...


This is nonsense.

Arguing against diversification in favour of bricks and mortar yielding 9% on a little rock on the Western edge of Europe.

You couldn’t make it up.


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## NoRegretsCoyote (1 Aug 2022)

Brendan Burgess said:


> Hi Coyote
> 
> Have you any evidence for this? Or is it just anecdotal?


I don't know of any research on the rental market. But CBI research on mortgage arrears generally points to higher delinquency for non-urban and low-income people on average.

@cremeegg rental yields approximately double between Ballsbridge and rural Limerick. That's a big difference! There are lots of factors but I think it's fair to infer that higher risk is one of them. If it wasn't it would get arbitraged away pretty easily.


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## Seaniemed (1 Aug 2022)

I'm not a financial expert but does this whole lifestyle not strike anyone as incredibly risky? It seems that in your late 30s neither of you have an established employment (which is an admirable lifestyle, I won't lie) - when your kids are getting older or if your tenancies take a hit, how will you establish yourselves into a reasonable income stream? 

Won't you need time to reestablish yourselves in the market, work longer hours to build up a customer base/work longer hours to gain promotions?

I'm not advocating to rejoin the rat race but it seems that if you needed to boost your primary income you'd have to do what we all did in our twenties but with a busy family life and the fatigue of your 40s...

Open to clarification from all sides, but wouldn't a good step be for one of you to at least build back up to 50% working weeks so that you have a well established customer base that you can build on? 14k a year, that's 650 a month what sort of self employed work would bring that in? 2 days a month work?


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## cremeegg (1 Aug 2022)

Gordon Gekko said:


> This is nonsense.
> 
> Arguing against diversification in favour of bricks and mortar yielding 9% on a little rock on the Western edge of Europe.
> 
> You couldn’t make it up.


At least I am arguing my point rather than throwing out words like nonsense without any effort to support them.


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## cremeegg (1 Aug 2022)

NoRegretsCoyote said:


> I don't know of any research on the rental market. But CBI research on mortgage arrears generally points to higher delinquency for non-urban and low-income people on average.
> 
> @cremeegg rental yields approximately double between Ballsbridge and rural Limerick. That's a big difference! There are lots of factors but I think it's fair to infer that higher risk is one of them. If it wasn't it would get arbitraged away pretty easily.


Or looked at another way the pool of investors who are comfortable in Ballsbridge but would fear the delinquents of rural Limerick is far larger than the pool of investors from rural Limerick who wish to avoid the junkies of the south inner city.


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## Gordon Gekko (1 Aug 2022)

cremeegg said:


> At least I am arguing my point rather than throwing out words like nonsense without any effort to support them.


Nonsense isn’t worth wasting time and energy on.

Feel free to go and read any of the millions of articles out there on diversification and risk.

It’d be like spending time on whether water is wet.


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