Dilosk option re Potential Purchase

[Gordon Gekko]

Hi Folks,

A friend of mine is toying with the idea of a particular investment.

He’s 45, and he has around €135k to spare. A property that he’s familiar with has come on the market for €450k. It rents for €2,250 and it has good tenants.

The plan is to borrow €315,000 from Dilosk interest only over 15 years. The rate is circa 5.5%. He’ll get €440k of a lump sum net of tax in 15 years’ time from his pension fund. Some of that would be used to repay the capital. He may use the small annual surplus to chip away at the capital, or not.

He has no debt other than on his PPR which is at 2.3% and sub 50% LTV, fully repaid pre retirement.

My sense is that it’s not the worst idea in the world, but I’d be interested to hear people’s thoughts.

Gordon

 

[Brendan Burgess]

He has no debt other than on his PPR which is at 2.3%

It seems to me that clearing this loan would be a better investment. It's the equivalent of a risk-free , tax-free return of 2.3%.

I would not be comfortable borrowing at 5.5% for a risky property investment.

Brendan

 

[Sarenco]

I don't think it would be a terribly sensible move.

All going well, that's €27pa in rent, less around €17k interest, less (say) €4k in other deductible expenses. So, €6k gross or around €3k net of taxes. And presumably there will be acquisition costs (legal, stamp, etc.).

Alternatively, your pal could just throw the €135k at his PPR mortgage for a risk-free, net return of €3k.

 

[RedOnion]

Personally, I'd be looking for a bit more than 6% gross yield if I was going down that route.

The proposal really makes sense only if there's an expectation of capital appreciation - after tax return on their equity isn't a huge amount more than their mortgage costs. Any increase in interest rates, or high repairs, would wipe out the benefit over repaying PPR. So it's purely a capital appreciation play.

Break it into 2 parts: forget about the pension lump sum for a minute. Would they be comfortable with the investment, on the assumption they'd sell to clear the mortgage in 15 years?

 

[Gordon Gekko]

His PPR mortgage is fixed, so there’s limited scope to overpay (10% I suspect). But that could be done over a few years I guess.

I suspect that Sarenco’s €4k of ancillary costs is a little high but no harm being prudent.

What would attract me is the ability to buy 70% of a property at the 2019 price without having to pay for it until 2034. I would expect capital appreciation over that period.