Have an investment property but rent is falling short by €170/mth to cover my costs.

[z106]

Re: have an investment property but the rent is falling short by 170 a month to cover

This capital investment is terrible!
The person is on an interest only mortgage therefore the renters are paying nothing off his mortgage.

If the investor sold the property and released the €100,000 equity and put in a RISK FREE investment they would be better off by €524pm. Thats €6,300 per year.

Investing this money into a pension and assuming the investor pays tax at the higher rate this would be worth over €350,000 in 20 years. And they would still have the €100,000 in the bank.

Anyone seriously suggesting he should keep this investment needs to re-examine the figures because they just don't stand up.

I would have to disagree.
We don't know the value of the property of the OP but for arguments sake lets say it is worth €400k.
Lets say it increases at an average rate of 5% per year for the next 20 year period. (which is conservative going by historical data).
That will be worth over €1,050,000 in 20 years.
(let salso assume for arguments sake that the monthly cashflow is zero - (in fact it would most certainly be positive over the 20 year period due to inflation and wage growth).

Keep in mind, your idea of putting the equity in a deposit account means in real terms it pretty much doesn't increase at all.


ALso remember that inflation doesn't nearly have the same eroding effect on a geared investment than it does on a non-geared investment which the pension would be.

 

[Thomas22]

Re: have an investment property but the rent is falling short by 170 a month to cover

I would have to disagree.
We don't know the value of the property of the OP but for arguments sake lets say it is worth €400k.
Lets say it increases at an average rate of 5% per year for the next 20 year period. (which is conservative going by historical data).
That will be worth over €1,050,000 in 20 years.
(let salso assume for arguments sake that the monthly cashflow is zero - (in fact it would most certainly be positive over the 20 year period due to inflation and wage growth).

Keep in mind, your idea of putting the equity in a deposit account means in real terms it pretty much doesn't increase at all.


ALso remember that inflation doesn't nearly have the same eroding effect on a geared investment than it does on a non-geared investment which the pension would be.

A couple of points.
1. 5% return on residential property is about right, it is NOT conservative.

2. I have assumed an investment in a risk free asset over the 20 years.

3. A pension invested in equities would yield about 8.5%pa over the long-term.

4. If the OP wanted a higher return they could just select a leveraged investment within their pension. You get a higher return because it is high risk. This phenomenon is not unique to property.

5. Since the OP is using an interest only mortgage you haven't deducted the mortgage, €250k based on your assumptions, this gives a final accumulated value of €750k.

6. Periodic investment (to take advantage of the tax benefits) in a non-leveraged pension would be worth €1,250,000 after 20 years.

7. If the OP likes the leverage return that they are getting on the property they could do the same in the pension. Assuming a leveraged equity return of 10%(This is conservative). The accumulated value would be well over €1,500,000 after 20 years.

 

[z109]

Re: have an investment property but the rent is falling short by 170 a month to cover

I would have to disagree.
We don't know the value of the property of the OP but for arguments sake lets say it is worth €400k.
Lets say it increases at an average rate of 5% per year for the next 20 year period. (which is conservative going by historical data).
That will be worth over €1,050,000 in 20 years.
(let salso assume for arguments sake that the monthly cashflow is zero - (in fact it would most certainly be positive over the 20 year period due to inflation and wage growth).

Keep in mind, your idea of putting the equity in a deposit account means in real terms it pretty much doesn't increase at all.


ALso remember that inflation doesn't nearly have the same eroding effect on a geared investment than it does on a non-geared investment which the pension would be.

Your assumptions are based on certain future-looking events which may or may not happen. Past performance is not a reliable indicator of future gain.

I can see no evidence that house prices will increase by an average of 5% over the next twenty years.

Monthly cashflow is currently negative to the tune of EUR 170, so your assumption of zero cashflow to make your numbers look good is dishonest. Negative cashflow has a large effect on geared investments.

As a side issue, discussion of house prices is suspended on AAM. Your assertion that prices will increase by an average of 5% is providing a forward-looking statement about house prices. For those of us who don't subscribe to the permanent inflation theory, it is unfair that posts that say that house prices are going to increase is permitted, but posts that say the opposite are not. This is not debate, nor moderating to the site rules, it is allowing one side of the argument only.

So lets make up some more nonsense figures.

Why not say house prices decrease on average by 2% a year over the next 20 years (in inflation adjusted terms)?
Why not say that interest rates move back to their long-term Bundesbank average and are 5% over that period (a 25% increase over what the OP is currently paying)?
Why not say that rents remain flat in nominal terms as over-supply keeps rents low?

 

[Howitzer]

Re: have an investment property but the rent is falling short by 170 a month to cover

Your assumptions ...

Agree 100%

Would be interesting to hear back from the OP now that best and worst case scenarios have been presented.

 

[z106]

Re: have an investment property but the rent is falling short by 170 a month to cover

Your assumptions are based on certain future-looking events which may or may not happen. Past performance is not a reliable indicator of future gain.

I can see no evidence that house prices will increase by an average of 5% over the next twenty years.

Of course it is based on assumptions - Is not every suggestion anyone makes about investing based on guesswork / assumptions ? Like - no one here has a crystal ball - isn't it all about opinions- i thought the whole point of this site was to ecxchange opinions no?

And ya - Past performance is no guarantee of future performance - however it is certainly a good indicator. I'm not talking the last 5 years - try looking at the last 50+ years !
Unless you have very good reasons to think that something drastically different is going to occur in the next 20 years then I'd suggest that historical data is as good as any method for predicting what will hapopen in the future - that would certainly be the conventional thinking anyway !

Monthly cashflow is currently negative to the tune of EUR 170, so your assumption of zero cashflow to make your numbers look good is dishonest. Negative cashflow has a large effect on geared investments.

Yes - current monthly cashflow is negative.
Are you seriously trying to tell me that the OP will most probably still be in negative cashflow with the current mortgage they are on in 10 years time
?
Well if you are then that is absurd.
In fact - it is pretty much a certainly that the aggregate cash flow for the 20 years ahead will be in positive territory due to inflation !
And wIth a bit of luck there may be no shortfall as soon as 2-3 years time - let alone 20 yrs !!

As a side issue, discussion of house prices is suspended on AAM. Your assertion that prices will increase by an average of 5% is providing a forward-looking statement about house prices. For those of us who don't subscribe to the permanent inflation theory, it is unfair that posts that say that house prices are going to increase is permitted, but posts that say the opposite are not. This is not debate, nor moderating to the site rules, it is allowing one side of the argument only.

You are quite right in that discussion of house prices on AAM is banned. However - given the way I interpret that banning I very much doubt the way I discussed it is banned.
The short to medium term prospects on house prices are the difficult discussions to moderate - hence the banning. I think that me briefly stating one fundamental assumption relating to property by claiming that over a 20 year period I expect house prices to rise is not going to cause too much difficulty for the moderators.
That said - if the moderators have any issues with that statement then I apologise to them and am more than happy for them to delete my posts.

So lets make up some more nonsense figures.

Why not say house prices decrease on average by 2% a year over the next 20 years (in inflation adjusted terms)?

The big thing about a geared investment is that it is the nominal increases that matter most - not inflation adjusted figures !

E.g. I have a property that is worth €100k with for arguments sake and simplicity a 100% mortgage - after 1 year inflaion is 5% and property appreciation is also 5%.
Have i made money should i decide to sell? Of course i have.
I have made 5k - however,due to the 5% inflation, that €5k after the year is only worth around €4,800 in todays money - i.e. the inflation only eats into the capital gain.

That is why i said i an earlier post that inflation erodes far more into a nongeared investment rather than a geared investment.
To reiterate - it is nominal terms that matter most with property - not real terms (assuming the property is geared - the more highly geared the less impact )
SO only to discuss property increases after inflation misses the point.

Why not say that interest rates move back to their long-term Bundesbank average and are 5% over that period (a 25% increase over what the OP is currently paying)?

Irrelevant - there were very very high interest rates in the past and over the long term prices still rose.

Why not say that rents remain flat in nominal terms as over-supply keeps rents low?

Historical data strongly suggests otherwise. As i said earlier no one has a crystal ball but we may as well look outcomes that are more likely rather than outcomes that are less likely when making our assumptions.
Put bluntly I think it is fair to say with certainty that your theory on rents over a 20 year period is wrong.

 

[z106]

Re: have an investment property but the rent is falling short by 170 a month to cover

A couple of points.
1. 5% return on residential property is about right, it is NOT conservative.

2. I have assumed an investment in a risk free asset over the 20 years.

3. A pension invested in equities would yield about 8.5%pa over the long-term.

4. If the OP wanted a higher return they could just select a leveraged investment within their pension. You get a higher return because it is high risk. This phenomenon is not unique to property.

5. Since the OP is using an interest only mortgage you haven't deducted the mortgage, €250k based on your assumptions, this gives a final accumulated value of €750k.

6. Periodic investment (to take advantage of the tax benefits) in a non-leveraged pension would be worth €1,250,000 after 20 years.

7. If the OP likes the leverage return that they are getting on the property they could do the same in the pension. Assuming a leveraged equity return of 10%(This is conservative). The accumulated value would be well over €1,500,000 after 20 years.

Some interesting points there which i would need to think about further.

 

[Vanilla]

Re: have an investment property but the rent is falling short by 170 a month to cover

Or indeed, you could say that you are subsidizing your tenants to the tune of 170 a month.

Are you on an interest only mortgage? If not, is the 170 more than the capital being paid off each month? If either of these statements is true (that you are paying some of the interest on the mortgage), you are leasing the house from the bank and sub-leasing at a loss to your tenants.

Is this necessarily a bad thing? After all if one looks at it as a longterm investment, in 20 years ( assuming not interest only or what ever term) the OP will own outright this investment property having heavily subsidised his repayments with the rent taken. Of course there is a possibility that in the meantime the rent will increase to cover the mortgage payment ( taking taxes into account).

 

[Howitzer]

Re: have an investment property but the rent is falling short by 170 a month to cover

Is this necessarily a bad thing? After all if one looks at it as a longterm investment, in 20 years ( assuming not interest only or what ever term) the OP will own outright this investment property having heavily subsidised his repayments with the rent taken. Of course there is a possibility that in the meantime the rent will increase to cover the mortgage payment ( taking taxes into account).

But he's NOT subsidizing his repayments, the rent is only subsidizing the interest. He has to make ALL the repayments himself AND still cough up an extra E170 (at the moment) to cover the cost of interest on the mortgage.

This still takes no account of other costs, of which anyone involved in property knows well can be high, especially over the long term. Insurance, maintenance charges, tenancy voids, furniture, kitchen appliances, beds, roof getting blown off in a storm. You don't encounter these costs every year, and some you may never encounter, but over the long term (which the positive argument is based upon) and with enough properties these costs will be encountered.

PRTB registration, accountants fees, new carpets, broken window needs to be fixed, central heating breaks down, advertising, new wallpaper, new welcome mat.

 

[Vanilla]

Re: have an investment property but the rent is falling short by 170 a month to cover

But he's NOT subsidizing his repayments, the rent is only subsidizing the interest. He has to make ALL the repayments himself AND still cough up an extra E170 (at the moment) to cover the cost of interest on the mortgage.

This still takes no account of other costs, of which anyone involved in property knows well can be high, especially over the long term. Insurance, maintenance charges, tenancy voids, furniture, kitchen appliances, beds, roof getting blown off in a storm. You don't encounter these costs every year, and some you may never encounter, but over the long term (which the positive argument is based upon) and with enough properties these costs will be encountered.

PRTB registration, accountants fees, new carpets, broken window needs to be fixed, central heating breaks down, advertising, new wallpaper, new welcome mat.

I don't understand this at all. Are you assuming that the mortgage is interest only and that when the OP refers to the rent not covering his 'costs' that he has NOT factored in all expenditure?

 

[Howitzer]

Re: have an investment property but the rent is falling short by 170 a month to cover

I don't understand this at all. Are you assuming that the mortgage is interest only and that when the OP refers to the rent not covering his 'costs' that he has NOT factored in all expenditure?

Yes and yes.

 

[teachai]

Re: have an investment property but the rent is falling short by 170 a month to cover

In my opinion, You have to take a long term view with property.

You are currently making a small loss. These losses can be set against profit in the following year. Also only the interest paid can be offset against the income, not any money paid to reduce capital. For this scenario, you will be better off with an interest only mortgage.

Others have suggested shopping around for a better rate. This is a situation in which I would prefer a fixed rate rather than a variable rate as your main expenditure is known.

First thing to consider is can you do anything to the property to increase the rent, in the way of new decor, furnishings etc. If you have good tenants (ie ones that pay rent on time and look after your property) you will probably be better off trying to keep them, and they will probably be happy to pay slightly more if you maintain the property well or even enhance it.

The other thing to consider , is at least you are getting rent. Its better than the property lying idle, which would cost you far more.

If you're going to sell, will you make a profit (after estate agents fees, CGT etc).

If you are going to sell, ask your tenants if they would be interested in buying. You could save a whack on estate agents fees.

 

[z106]

Re: have an investment property but the rent is falling short by 170 a month to cover

If you are going to sell, ask your tenants if they would be interested in buying. You could save a whack on estate agents fees.

I wouldn't go along with this suggestion.

Yes - you will save money on estae agents fees.

However - for all the OP knows, they may easily undervalue the property by say,€5k- €10k - or more !
To avoid this risk I think they are better to put it on the open market decide the real value.

 

[Vanilla]

Re: have an investment property but the rent is falling short by 170 a month to cover my

So can I ask what might be percieved as a naive question- in general terms if one buys an investment property, has a capital plus interest loan, has factored all the expenses, tax etc into the equation and say after the rent, in order to meet all other costs and the balance of the monthly loan payment one must pay a couple of hundred euro into, is this not a form of saving?

 

[demoivre]

Re: have an investment property but the rent is falling short by 170 a month to cover

But he's NOT subsidizing his repayments, the rent is only subsidizing the interest. He has to make ALL the repayments himself AND still cough up an extra E170 (at the moment) to cover the cost of interest on the mortgage.

How do you deduce that from the op Wino's one and only post

I have an investment property but the rent is falling short by 170 a month to cover my costs. The equity is worth about 150K. Would I be better off selling and puttting the equity to better use ,considering the current lack of growth in the housing market.

Wino

 

[Thomas22]

Re: have an investment property but the rent is falling short by 170 a month to cover

Some interesting points there which i would need to think about further.

Did you have time to think further about the points yet?

 

[teachai]

Re: have an investment property but the rent is falling short by 170 a month to cover

I wouldn't go along with this suggestion.

Yes - you will save money on estae agents fees.

However - for all the OP knows, they may easily undervalue the property by say,€5k- €10k - or more !
To avoid this risk I think they are better to put it on the open market decide the real value.

Nothing to stop you calling an agent for a free valuation. You don't have to actually sign up with one.

 

[z106]

Re: have an investment property but the rent is falling short by 170 a month to cover

Nothing to stop you calling an agent for a free valuation. You don't have to actually sign up with one.

Ya - that's true.

However - a lot of people don't even look past myhome.ie - not being on that site seriously decreases the number of potential buyers resulting in less chance of a bidding war.

A bidding war would most probably compensate for the few thosand extra the agent costs.

Obviously it's a gamble - in my opinion i reckon it's a safer bet though.

 

[z106]

Re: have an investment property but the rent is falling short by 170 a month to cover

A couple of points.
1. 5% return on residential property is about right, it is NOT conservative.

2. I have assumed an investment in a risk free asset over the 20 years.

3. A pension invested in equities would yield about 8.5%pa over the long-term.

4. If the OP wanted a higher return they could just select a leveraged investment within their pension. You get a higher return because it is high risk. This phenomenon is not unique to property.

5. Since the OP is using an interest only mortgage you haven't deducted the mortgage, €250k based on your assumptions, this gives a final accumulated value of €750k.

6. Periodic investment (to take advantage of the tax benefits) in a non-leveraged pension would be worth €1,250,000 after 20 years.

7. If the OP likes the leverage return that they are getting on the property they could do the same in the pension. Assuming a leveraged equity return of 10%(This is conservative). The accumulated value would be well over €1,500,000 after 20 years.

Ok - My knowledge of pensions is minimal.

However - am I correct in saying that you cannot borrow against a pension that has risen in value during the course of the term to invest further?

Obviosuly you can do this in property by remortgaging and reinvesting further when possible which enables you to grow your asset base significantly - the difference over a 20 year period between property vs equities would then be many multiples in favour of property would it not ?

But firstly - Is my initial assumption about borrowing correct?

If so, I have gone through the figures and this would be a major reason to go with property resulting in returns of many milluons profit - even with infrequent remortgaging.

I have an example which i could enter to illustrate the significant difference if you wish to go through my figures ?

 

[Thomas22]

Re: have an investment property but the rent is falling short by 170 a month to cover

Ok - My knowledge of pensions is minimal.

However - am I correct in saying that you cannot borrow against a pension that has risen in value during the course of the term to invest further?

Obviosuly you can do this in property by remortgaging and reinvesting further when possible which enables you to grow your asset base significantly - the difference over a 20 year period between property vs equities would then be many multiples in favour of property would it not ?

But firstly - Is my initial assumption about borrowing correct?

If so, I have gone through the figures and this would be a major reason to go with property resulting in returns of many milluons profit - even with infrequent remortgaging.

I have an example which i could enter to illustrate the significant difference if you wish to go through my figures ?

Yes, please post your figures.

But re-mortgaging simple means you are continually increasing your leverage.
Yes, you may get a higher return but you are only getting a higher return because you are taking on more risk each time.

My example assumes that the risk level is about the same as a non-leveraged property. I could repeat my example by assuming that the person is investing in highly leveraged assets like your are.

To me demonstrating that you are getting a higher return by taking on higher risk is just stating the obvious. Long-term Higher Risk = Higher Return.

 

[z106]

Re: have an investment property but the rent is falling short by 170 a month to cover my

Ok - see the figures below - you don't have to go through all the figures as it may wreck your head - just look at the bottom line.
Also - note the LTV isn't all that hight in the example below.
The main point I am trying to illustrate here is that due to the ability of being able to release equity in property and reinvest further it therefore is far more rewarding than any leveraged pension investment.

Firstly - a few assumptions.
Lets say currently the OP has a mortgage of €300k on a €400k property - current LTV 75%.
Lets also assume growth of exactly 5% per year for the 20 years.
Lets also say the OP remortgages and reinvests every 4 years - which isn't all that frequent and remortgages 4 times over teh 20 year period - year 4,8,12,16.
Lets also assume the bank will want to give max LTV of 80%.

And most importantly - my whole point is that over the long term prices will rise - there is no great risk.
I say it is low risk / high return - and not hig risk/high return as you state.

SO -
On year 4
Property worth c. €485k - they could release c. €90k.
Can now purchase another property worth,say,€400k.
They now have an asset base worth €885k - with a mortgage of €700k. Current LTV 79%

On year 8
Properties worth c. €1.075 million - they could release a further €160k - this could buy another property worth c. €600k.
They now have an asset base worth c. €1.675 milion with an outsatnding mortgage of c. €1.3mil. Current LTV 77.5%

On year 12
Property worth €2.035 million - they could release a further €330k - this could comfortably buy property worth €1 mill.
THey now have an asset base of €3.035 mill. with an outstanding mortgage of €2.3 million. Current LTV 75%.

On year 16
Properties worth €4.6 million - they could release a further €650k - could comfortably buy €2mill.
Now have an asset base of €6.6mill - outstanding mortgage of €4.3 mill. Current LTV 65%

On Year 20
Properties worth over €8 mil. Outsatnding mortgage of €4.3 mil.

Pretty much €4 mill profit on an annualised rate of appreciation of just 5% and remortgaging only 4 times during that 20 year period with a 50% LTV.
With a 50% LTV this would produce a very healthy cashflow as well.

Had someone decided to be more aggressive with the gearing then profits could even have been far greater.

And also keep in mind yuo will still have assets worth €8 mill appreciating at a rate of 5% per year.
Presumably this borrowing could not be done with equities - not least because presumably dividends wouldn't nearly pay the interest on the borrowings.

So - here's my question - am I correct in saying somthing similar could not be done with geared equities?
The reason being that the interest would have to be paid on the loans as dividends presumably would not go towards paying the interest.

Also - are you not more exposed to margin calls with equities ?