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

[Brendan Burgess]

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

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

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

 

[llgon]

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.

 

[cremeegg]

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 !

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.

 

[cremeegg]

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.

 

[Horatio]

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.

 

[Gordon Gekko]

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.

Diversification reduces risk.

 

[Brendan Burgess]

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

 

[cremeegg]

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.

 

[Gordon Gekko]

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.

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.

 

[NoRegretsCoyote]

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.

 

[Seaniemed]

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?

 

[cremeegg]

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.

 

[cremeegg]

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.

 

[Gordon Gekko]

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.