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

[ubiquitous]

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

It is hard to take seriously any proposition that a property worth €400,000 today could be worth €8,000,000 in 20 years time, in the absence of hyperinflation in the general economy.

 

[z106]

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

You misunderstood my post.

Repeatedly remortgage to reinvest - using the 5% rate of inflation above and the LTVs involved then the portfolio would be worth that amount.

Obviously you can tweak the figures used above in my example but you see the point i am making.

For what it's worth I started with €85k, (a similar figure to what the OP has available) 3 and a half years ago and using teh approach described above the portfolio is now worth €1.85 mill.
In another 16.5 years if I continue to use that approach - which i plan to do - then I would be very confident of the portfolio being worth signiicantly more than €8 mill.

 

[ubiquitous]

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

Repeatedly remortgage to reinvest - using the 5% rate of inflation above and the LTVs involved then the portfolio would be worth that amount.

...only if property prices continue to rise sharply ad infinitum

 

[z106]

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

...only if property prices continue to rise sharply ad infinitum

Well that's the whole point I'm amking - over the long term property prices do continue to rise - so it's more than reasonable to assume that they will continue to rise over the long term in teh future. And that is the assumption I am going on.
And using a 5% average appreciation rate per year you can get the results I've shown above.
And 5% cannot be described a s sharply by any means - historic data would suggest it is conservative in fact.

I don't see it as being in any way overly optimistic going by data from the last 50 years.

 

[bacchus]

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

What's about borrower repayment capacity?

 

[z106]

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

What's about borrower repayment capacity?

Ok - if you make it your business to buy in good location then you will maximise rental potential thereby decreasing voids and maximising rent.

Note the LTV - even in todays climate rents can pretty much cover an 80% LTV.
To reduce risk someone could also think about going into fixed term mortgages.

However - This does take us back to the original posters question and back to my original point.
n the event where you may have to subsidise a little bit every month then i think the long term rewards due to capital appreciation more than compensate for it.

That is why in one of earlier posts I suggested that if the OP has difficulty topping up then they should remortageg and use this remortgage to ease their cashflow.
Check out my earlier post if you wanna see in more detail what I said.

Also note that in my example above the LTV actually decreased to 50% by the end of the 20yr term - thus resulting in a cashflow positive at that stage.

Obviously someone can decide what LTV they are happy with when they reinvest.

 

[bacchus]

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

Why are you bringing in the notion of LTV to answer my question about repayment capacity?

 

[z106]

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

Why are you bringing in the notion of LTV to answer my question about repayment capacity?

You're on about paying off the loan to the bank ya?
If not then I don't understand ur question..
if you are,then the lower the LTV the less you oweto the bank.

E.g. If i have a propert worth €1m with a yield of say,4%,then that's €40k i receive in rent.
Out of that €40k i must pay the bank back it's interest.

The lower the LTV the less I owe the bank.

With say a 50% LTV at say 5% I owe the bank €25k. i.e. a surplus of €15k.

If I have misunderstood ur question then can you rephrase it please.

PEhaps you mean paying off the capital ? At the end of the 20 year term you could just sell the lot if you wish for a €4m profit before tax.
Personally I wouldn't sell though. I'd never sell\ in fact.

 

[lopin10]

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

Hi qwertyuiop

I like a lot of the points you make. Also the advantage of property leverage is that you can write interest payments off against your tax bill. To give you an example i purchase property in the 1984 and sold 3 years later for 10% less than what i paid for the property (interest rates 15% and 16% unemployment) if i held the same property until 1989 i would have got 20% more than what i paid for it. Its all about taking a long term view at least 5 years provided you dont have to put any money to make up the rent shortfall. Also for anybody considering investing in property try and keep LTV at 75% or less with yelds of at least 4.5% and at least €1,200 pm rent (remember you have the same hassel for 600pm as 1200pm. There are plenty of these properties for sale at the moment

 

[Howitzer]

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

It's good to see the only expenses incurred in property are the interest charges. I might as well be talking to the wall.

 

[minion]

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.

How much averaged over say 20 years would you say all of these various costs might add up to per year.

Would you say 1 months rent per year should cover it, 2 Months?
From my experience ongoing costs are much, much lower than you might think. Not even near 1 months rent. They also have an impact on taxes and losses (if you have them, as the OP does) carried forward.

 

[dodo]

Re: Have an investment property but rent is falling short by €170/mth to cover my cos

If you where to look at this house as a pension in say 30yrs.So about 80% of that pension is paid in by someone else ,that surely cant be bad and also the mortgage is getting smaller each year and in 30years time the house no douth will be worth more than it is today,even with the slow market of today.
So in 30years time (estimate) you have no mortgage house value eg 500K of which you paid 100k and someone else paid 400K, so if you bought house for 150K eg, profit 250K of which you pay CGT 50K, 200K for pension seems ok to me.I know several people who for 30yrs saving in pension fund thought they would have super pension in 30yrs time but rarely does that happen,

 

[dodo]

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

Where does he say it is an interest only mortgage?

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

 

[z106]

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

It's good to see the only expenses incurred in property are the interest charges. I might as well be talking to the wall.

Howitzer - Not sure how much experience you have in letting properties.
But these supposed expenses in practice with property are very small.

In my experience costs on property really are minimal.

Costs for me on multiple properties including void periods and management charges over the last 3 years would add up to €10k max.

Multiply that by 7 (for a 20 year period) and it will have a very small dent on €4mill profit.

 

[Thomas22]

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

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 ?

Yes that is a good demonstration of how in the long term a highly leveraged bet on residential property can pay off.

But this pension provision lacks one of the most basic concepts of long-term investing, diversification. The phrase all your eggs in the one basket doesn't even begin to describe this type of pension provision.

Despite, what you think these returns could be replicated in a pension but it would be madness to do so. Long-term, YES property generally grows at inflation plus 3-4%.
BUT if you look at international property markets then there have been times when even over 20 years property has been a very poor investment. Japan and the UK spring to mind, and there are many more. To ignore these incidents as one off is to ignore how property markets operate.

Long periods of above trend growth , 5-6%, followed by periods of below average growth and sometimes negative growth.

Timing this cycle is very difficult but betting the bulk of your pension on the belief that you can is naive. If this was the only way People saved for their pension then every now and then we could have generations that would have little or no pension.

I believe many in the current generation may have fallen into this trap.

 

[minion]

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

Timing this cycle is very difficult but betting the bulk of your pension on the belief that you can is naive. If this was the only way People saved for their pension then every now and then we could have generations that would have little or no pension.

I agree completely. I dont believe anyone should invest in property or anything else for that matter for the long term until they and their spouse have already maxed out their pension anyway.

 

[Thomas22]

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

I agree completely. I dont believe anyone should invest in property or anything else for that matter for the long term until they and their spouse have already maxed out their pension anyway.

Very few people in Ireland max out their pension entitlements before investing in property

 

[minion]

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

Very few people in Ireland max out their pension entitlements before investing in property

You are right and i would even go so far as to say that very few people , investors or not, max out their pension in Ireland.

If most people examined their pension situation as well as they should examin any investment opportunity they would find that it doesnt cost them as much as they might think to max out their pension.

But we're probably veering slightly off topic now though.

 

[webtax]

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

The fees & charges associated with pension contributions and the lack of clarity in terms of how much they cost you, having to purchase an annuity when you retire and confusion about what happens in the event of death are some of the reasons why some people prefer investing in property - an investment that they understand & can manage themselves.

 

[Thomas22]

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

The fees & charges associated with pension contributions and the lack of clarity in terms of how much they cost you, having to purchase an annuity when you retire and confusion about what happens in the event of death are some of the reasons why some people prefer investing in property - an investment that they understand & can manage themselves.

The fees and charges are much much higher for property investment.
The confusion could be cleared up by talking to a professional about the benefits you are entitled to.

I agree with you that these are reasons people avoid a pension. Just because the individual can manage it themselves it doesn't make it good, sometime a professional is just what a person needs.

For the same risk a pension is a vastly superior method of saving for retirement than property investment.