Invest in a more expensive house

Colm Fagan said:
I didn't say NOT to go for the bigger house. With their incomes/ assets, they can do that AND buy some equities. Yes, of course they've to pay tax on the income/gains on the equities. So what? It means they can make an even bigger contribution to society than what they're making already. If they get an average gross return of 10% a year, which ends up at (say) 6% after tax (assuming less than 40% tax on gains, more than 40% on marginal investment income), why wouldn't they be happy? In net terms, they'll be earning a heck of a lot more than they'd get from leaving it in the bank. Also, you can't spend imputed rent. You can spend actual dividends and capital gains, even if they've been taxed.
Click to expand...

Reason is risk appetite, it's fierce low!
 
Investadvice said:
Reason is risk appetite, it's fierce low!
Click to expand...

Is tying it up in one, non incoming producing, illiquid asset not risky too? If you ever need to access some of the value of the investment, you have to move house! And you are looking to take advantage of the slow market for €2m properties. Who's to say that it will not be the same if you need to sell yourself?

You have an extremely high risk capacity at present; that is, if you invest in assets, you can afford them to go up and down in value without it having an impact on your life. Remember, property values fluctuate too but are a lot more illiquid and expensive to sell than equities. As Colm said, if you pick quality, it will do well in the long run.

If you have accumulated that amount of cash at a young age, you are obviously working in demanding roles. It's unlikely you'll be getting a golden watch for 40 years service. You need cashflow, access to funds so you can move to a less demanding role (and the lower pay, no share option) but still maintain your lifestyle. You can't sell off a room in a bigger house to do this. Be careful of taking €1m out of cashflow and putting it in an asset that doesn't produce a regular income for you.


Steven
www.bluewaterfp.ie
 
SBarrett said:
Is tying it up in one, non incoming producing, illiquid asset not risky too? If you ever need to access some of the value of the investment, you have to move house! And you are looking to take advantage of the slow market for €2m properties. Who's to say that it will not be the same if you need to sell yourself?

You have an extremely high risk capacity at present; that is, if you invest in assets, you can afford them to go up and down in value without it having an impact on your life. Remember, property values fluctuate too but are a lot more illiquid and expensive to sell than equities. As Colm said, if you pick quality, it will do well in the long run.

If you have accumulated that amount of cash at a young age, you are obviously working in demanding roles. It's unlikely you'll be getting a golden watch for 40 years service. You need cashflow, access to funds so you can move to a less demanding role (and the lower pay, no share option) but still maintain your lifestyle. You can't sell off a room in a bigger house to do this. Be careful of taking €1m out of cashflow and putting it in an asset that doesn't produce a regular income for you.


Steven
Click to expand...

Appreciate you taking the time to answer.

You are absolutely correct on the jobs, we don't see this level of earnings continuing in the long term. Maybe it will but best to plan for it not continuing.

I agree that tying up chunk of money in a house restricts liquidity hence my point on keeping a significant amount in cash savings. Your scenario does not provide a value on the utility derived from the property asset. The utility derived from equities = 0 until one realizes the benefit in a sale or dividend payment. Then what - invest the benefit back into equities, rinse and repeat - for what purpose?

You could also argue the utility from a larger house is high and also spread across generations of a family.

What would a wealth portfolio need to look like before you would advise a client to purchase a property in the price range I provided. Does it need to be 2X hospital consultants on 600k a year with DB pensions and a good passive income?

Who said the public service doesn't pay well!

No offence to any consultants out there, I know many of you work damn hard!
 
Investadvice said:
Appreciate you taking the time to answer.

You are absolutely correct on the jobs, we don't see this level of earnings continuing in the long term. Maybe it will but best to plan for it not continuing.

I agree that tying up chunk of money in a house restricts liquidity hence my point on keeping a significant amount in cash savings. Your scenario does not provide a value on the utility derived from the property asset. The utility derived from equities = 0 until one realizes the benefit in a sale or dividend payment. Then what - invest the benefit back into equities, rinse and repeat - for what purpose?

You could also argue the utility from a larger house is high and also spread across generations of a family.

What would a wealth portfolio need to look like before you would advise a client to purchase a property in the price range I provided. Does it need to be 2X hospital consultants on 600k a year with DB pensions and a good passive income?

Who said the public service doesn't pay well!

No offence to any consultants out there, I know many of you work damn hard!
Click to expand...

An interesting perspective is outlined in a book called "Rich Dad, Poor Dad" - it's a little folksy but it is essentially a "cash flow" view on investing and assets / liabilities. I wouldn't take just on its own but there is merit in it. Cash flow rather than profitability kills businesses and there is an application on a personal level. It questions utility of an "asset" that costs you cash flow every month rather than generates it. While not strictly true in that an asset can be non-cash generative but increase in value, there is a certain trap that people have fallen into where they have a long term cash flow commitment, a falling asset value and a reduced cash inflow (income). That's the thing to be cautious about. I have always measured how many months liquidity I have were I to lose my income - assuming no change in outgoings (or forced liquidation of house). Personally I like to have 24 months liquidity... that's just me.

On the utility thing - yeah maybe you get significantly additional utility from a different house. I'm not sure I would get the same increase. But again, utility is a subjective thing. But it isn't cost free utility. There will be additional monthly cost (property tax, gas, electricity, maintenance etc) - so you pay every month for that. That cost reduces the liquidity reserve you have.
 
Investadvice said:
Appreciate you taking the time to answer.
You could also argue the utility from a larger house is high and also spread across generations of a family.
Click to expand...
Just be aware of the money-pit / high maintence costs ( even for someone with your high incomes) some trophy period houses can demand e.g repairings roofs, "special" windows, old heating systems, electrics, protected structure restrictions/implications, maintaining gardens & maintaining fences , boundary walls ,security gates etc.
 
mtk said:
Just be aware of the money-pit / high maintence costs ( even for someone with your high incomes) some trophy period houses can demand e.g repairings roofs, "special" windows, old heating systems, electrics, protected structure restrictions/implications, maintaining gardens & maintaining fences , boundary walls ,security gates etc.
Click to expand...

This is the one I am finding hard as I don't have experience in owning a 100+ year old house.

I reckon gas/elec, property tax and insurance will cost an extra 6K net a year in running costs.

I am hoping a good survey would uncover the underlying issues, am I being a bit optimistic?
 
Investadvice said:
Appreciate you taking the time to answer.

You are absolutely correct on the jobs, we don't see this level of earnings continuing in the long term. Maybe it will but best to plan for it not continuing.

I agree that tying up chunk of money in a house restricts liquidity hence my point on keeping a significant amount in cash savings. Your scenario does not provide a value on the utility derived from the property asset. The utility derived from equities = 0 until one realizes the benefit in a sale or dividend payment. Then what - invest the benefit back into equities, rinse and repeat - for what purpose?

You could also argue the utility from a larger house is high and also spread across generations of a family.

What would a wealth portfolio need to look like before you would advise a client to purchase a property in the price range I provided. Does it need to be 2X hospital consultants on 600k a year with DB pensions and a good passive income?

Who said the public service doesn't pay well!

No offence to any consultants out there, I know many of you work damn hard!
Click to expand...

While keeping a fair amount in cash, you are tying most of it up in your house. Equities will produce a return through dividends as well as capital appreciation. The purpose is to fund your future lifestyle when you have stepped back from your current roles. Achieving financial independence so you can do what you want without worrying about running out of money.

There is no one size fits all for who can afford a €2m home. A lot depends on the cost of lifestyle and outgoings. Then there is the keeping up with the Joneses effect that may take hold with living in a €2m a house neighbourhood. Even if you can stay frugal, the rest of your family may not. It can have a generational impact, especially if your kids aren't as financially successful as you.


*The public service doesn't pay consultants €600,000 a year, a combination of public and demanding private practice will pay that. And they all work extremely hard for their money and have to deal with the bureaucracy of the HSE on a daily basis. :)




Steven
www.bluewaterfp.ie
 
Just to correct my wording, I was talking about 2 consultants, each on 300k


*The public service doesn't pay consultants €600,000 a year, a combination of public and demanding private practice will pay that. And they all work extremely hard for their money and have to deal with the bureaucracy of the HSE on a daily basis. :)
 
I think that there’s an optimum mix for people like you who are comfortable but not wealthy. Some people might be surprised to hear me describe you as comfortable rather than wealthy, but that’s the reality in my view.

There would be far greater merit in having, say, a €1m house plus a €1m diversified portfolio rather than a €2m house. The opportunity to invest in equities over the long-term is an opportunity to create intergenerational wealth.
 
Gordon Gekko said:
Some people might be surprised to hear me describe you as comfortable rather than wealthy, but that’s the reality in my view.
Click to expand...
A couple in their 30s with a net worth of almost €3m isn't wealthy?! Crikey!:eek:

If I was in such a "humble" position, I wouldn't buy a trophy period house. But each to their own.

The OP can certainly afford to buy a €2m PPR. If he thinks that would add value to his family's lifestyle, well, fire ahead.

It's really a lifestyle choice, nothing more.
 
Sarenco said:
A couple in their 30s with a net worth of almost €3m isn't wealthy?! Crikey!:eek:

If I was in such a "humble" position, I wouldn't buy a trophy period house. But each to their own.

The OP can certainly afford to buy a €2m PPR. If he thinks that would add value to his family's lifestyle, well, fire ahead.

It's really a lifestyle choice, nothing more.
Click to expand...

It’s a strong position, but real wealth is intergenerational. Someone can do well but if their wealth is divided between children who have average jobs, it can dissipate pretty quickly.

The main mistake people make is assessing someone’s financial position in terms of capital rather than income. Is the spinster with the small fixed income rattling around the €3m house “wealthy”? I’m not so sure. I’m a strong believer that one should be spending the income from the capital rather than the capital itself. And to my mind, “wealthy” constitutes €5m or more in return-generating assets ex one’s home.
 
Gordon Gekko said:
I think that there’s an optimum mix for people like you who are comfortable but not wealthy. Some people might be surprised to hear me describe you as comfortable rather than wealthy, but that’s the reality in my view.
Click to expand...

If millions in relatively liquid assets in your late 30s is not wealth, then I am not sure what is.
 
Gordon Gekko said:
It’s a strong position, but real wealth is intergenerational. Someone can do well but if their wealth is divided between children who have average jobs, it can dissipate pretty quickly.

The main mistake people make is assessing someone’s financial position in terms of capital rather than income. Is the spinster with the small fixed income rattling around the €3m house “wealthy”? I’m not so sure. I’m a strong believer that one should be spending the income from the capital rather than the capital itself. And to my mind, “wealthy” constitutes €5m or more in return-generating assets ex one’s home.
Click to expand...

I see the point you are making but don't agree with it. Where is a spinster on a low income going to get the money for a €3m house? Even if inherited, the tax bill would be unaffordable.

Lots of people are income statement wealthy but not balance sheet wealthy. Going back to our consultants, they may earn a lot of money but they spend it too, big house, big car, expensive clothes etc. They have certainty in their occupation and can fund everything through their income. But what happens when they want to retire? Either a large drop in income and a lifestyle they aren't used to or they carry on working to fund their lifestyle.

Pat Kenny is a prime example of this. He said in 2013 that he couldn't afford to retire despite earning €950,000 a year at one stage.

Steven
www.bluewaterfp.ie
 
SBarrett said:
I see the point you are making but don't agree with it. Where is a spinster on a low income going to get the money for a €3m house? Even if inherited, the tax bill would be unaffordable.

Lots of people are income statement wealthy but not balance sheet wealthy. Going back to our consultants, they may earn a lot of money but they spend it too, big house, big car, expensive clothes etc. They have certainty in their occupation and can fund everything through their income. But what happens when they want to retire? Either a large drop in income and a lifestyle they aren't used to or they carry on working to fund their lifestyle.

Pat Kenny is a prime example of this. He said in 2013 that he couldn't afford to retire despite earning €950,000 a year at one stage.

Steven
www.bluewaterfp.ie
Click to expand...

Pay Kenny made terrible investment decisions which were pretty public. Property, bank shares etc

Consultants have DB pensions, circa 100k a year. You would want to have a ridiculous level of lifestyle spending to be hard up in retirement on that kind of money.

In my own case we try and keep our monthly spending at the level of a couple earning 100k gross a year. Not exactly frugal but we know we could easily reduce further if needed.
 
Investadvice said:
This is the one I am finding hard as I don't have experience in owning a 100+ year old house.

I reckon gas/elec, property tax and insurance will cost an extra 6K net a year in running costs.

I am hoping a good survey would uncover the underlying issues, am I being a bit optimistic?
Click to expand...

My parents have a 150 year old house. Probably a bit like something you might look at. A survey will highlight issues but the fact is that an old house will need on-going maintenance... some predictable and some not.

For example - it'll need to be painted regularly. Say every 10 years. That'll be 20k / 25k at least. If the roof tiles haven't been changed in the last 20 years - it will be needed at some point. An older house like my parents, if anything goes wrong with the roof requires full scale scaffolding to just get on the roof. So it's 1,000's to fix even a single tile. Even the garden is not manageable realistically - so that needs weekly / fortnightly help (not including the cost of doing it up in the first place). You probably need to think about setting aside 10k / 15k a year for upkeep.

Then, if you think about fitting it out suitably - you don't fit out an old house from Ikea. You're buying furniture from antique shops and drapery from designer / high end suppliers. The dining table for my parents house took about 5 years and 20k / 30k to sort out. They had to clean up and re-do moulding throughout the downstairs - that was three weeks with a team of specialists.

Put it this way - I can't see any of us stepping up to take the house after they are gone.
 
EmmDee said:
My parents have a 150 year old house. Probably a bit like something you might look at. A survey will highlight issues but the fact is that an old house will need on-going maintenance... some predictable and some not.

For example - it'll need to be painted regularly. Say every 10 years. That'll be 20k / 25k at least. If the roof tiles haven't been changed in the last 20 years - it will be needed at some point. An older house like my parents, if anything goes wrong with the roof requires full scale scaffolding to just get on the roof. So it's 1,000's to fix even a single tile. Even the garden is not manageable realistically - so that needs weekly / fortnightly help (not including the cost of doing it up in the first place). You probably need to think about setting aside 10k / 15k a year for upkeep.

Then, if you think about fitting it out suitably - you don't fit out an old house from Ikea. You're buying furniture from antique shops and drapery from designer / high end suppliers. The dining table for my parents house took about 5 years and 20k / 30k to sort out. They had to clean up and re-do moulding throughout the downstairs - that was three weeks with a team of specialists.

Put it this way - I can't see any of us stepping up to take the house after they are gone.
Click to expand...

Good points, thank you.
 
You must log in or register to reply here.
Back
Top