Maximising 1st mortgage and later acquiring a 2nd property

[Brendan Burgess]

This is where he is seeing it.



Zander

If you are reading this that properties in Dublin are yielding 18.25% , then you should stay out of the property game.

You clearly are out of your depth.

Rent 5.48
Price 100

Yield: 5.48%
Price to Rent = 100 to 5.48 = 18.25

Brendan

 

[Protocol]

Ok, I see what you mean.

Price to rent means the price of the house is 18.25 times the rent.

That 18.25 does not have a % sign.

It's basic maths.

The gross rental rental yield is the inversion of the price-to-rent ratio.

Yield = rent/price

Yield = 10,000 rent / 182,500 = 5.48%.

 

[zander1983]

I think this is a fantastic investment strategy. What could possible go wrong?

Buy a gaff (with somenone else's money) --> ??? --> PROFIT! --> Financial freedom

I knew this was going to be an unpopular post. I wouldn't be looking at this strategy if we all weren't the victim of a reckless monetary policy. CPI is much higher over the last 40 years than official figures - they keep taking stuff out of the CPI calculation, like buying a house, to drive it down, and adding in goods that are overwhelmingly deflationary, like electronic goods, to further manipulate the CPI down. Our ability to save has been taken from us by inflation driven by money-printing.

And so we need to find assets to stop our savings being inflated away. Housing has become an asset class. See the article below for whats happening around Europe (Blackstone is Spains largest landlord, Blackrock is the US's largest landlord). This is a terrible and unfair thing. But Im forced to look at strategies to protect myself.

Affordable housing under threat as large investors buy up European homes

Due to a favourable EU regulatory framework, institutional landlords, such as private equity firms and pension funds, are increasingly buying houses in European cities, sparking fears of rent increases and unfair access to housing, experts warn.

www.euractiv.com

Interestingly, I found this tweet from Gavan Reilly:
"Leo Varadkar told FG PP the problem of ‘cuckoo funds’ swooping in to buy up Irish property is due to ‘banks worldwide printing money’"

https://twitter.com/gavreilly/status/1390024540026253317

So Leo knows the root cause. Interesting.

 

[Brendan Burgess]

Hi zander

The more your write, the more alarm bells ring about your ability to make money.

If you want to invest, do so for yourself, and not for some vague political notion of protecting yourself from evil politicians and banks.

But overall, my advice to you would be to steer clear of property investment.

Brendan

 

[huskerdu]

In Dublin city centre its 18.5%, see here https://www.numbeo.com/property-investment/country_result.jsp?country=Ireland

Can you outline reasons, in your opinion, why this strategy may not work?

Im going to keep this very simple.

One of the reasons, in my opinion, why this strategy is risky is that it based on your assumption that property prices will rise and this is not always true. If you dont understand the risk of owning a highly leverage property portfolio, you are very, very exposed

 

[Sarenco]

Price to rent ratio is not the same as gross yield.

I would suggest you carry out a lot of research before jumping into the property rental business.

There are good reasons why we are currently experiencing an exodus of landlords from this business. It’s become a high risk, low return venture.

 

[zander1983]

This is where he is seeing it.

View attachment 6529

Zander

If you are reading this that properties in Dublin are yielding 18.25% , then you should stay out of the property game.

You clearly are out of your depth.

Rent 5.48
Price 100

Yield: 5.48%
Price to Rent = 100 to 5.48 = 18.25

Brendan

I said "Ireland does have one big advantage over most other places - Rent as a % of Property value in the US is 8.5%, in parts of Dublin its 18.5%" in my post. You misread this as Yield.

You said this may not work in ireland. Can you tell me how this timeless strategy that works around the developed world, may not work here? Im genuinely trying to figure out the potential pitfalls.

 

[zander1983]

Hi zander

The more your write, the more alarm bells ring about your ability to make money.

If you want to invest, do so for yourself, and not for some vague political notion of protecting yourself from evil politicians and banks.

But overall, my advice to you would be to steer clear of property investment.

Brendan

Im genuinely asking you why. And I till haven't gotten an answer, only barbs. Please outline why this strategy works elsewhere, but not in Ireland. By the way, how many properties do you own?

Im saying inflation makes protecting savings via assets essential. If you've got a better suggestion, Im all ears.

 

[Brendan Burgess]

Please outline why this strategy works elsewhere, but not in Ireland.

It's all explained here

Maximising 1st mortgage and later acquiring a 2nd property

Hi Newbie question here - completely new to investing in property. Im in the trying to buy a house in Dublin. I have savings of 165k. The house is costing 400k. I plan to put 40k down and get a mortgage for 360k. Im an IT contractor earning 95k per year (I get paid 425 euro per day). I setup a...

www.askaboutmoney.com

This strategy may work and you might make millions.

But the risk is big in any market, but particularly high in Ireland where landlords are demonised.

You don't seem to understand that borrowing to invest increases the returns but also increases the risks. And it's just not worth it.

Brendan

 

[zander1983]

Price to rent ratio is not the same as gross yield.

I would suggest you carry out a lot of research before jumping into the property rental business.

There are good reasons why we are currently experiencing an exodus of landlords from this business. It’s become a high risk, low return venture.

Thanks, Im currently doing a lot of research. Could you elaborate on what you see as high risk? Im trying to get to a point where I understand the maths of what is high and low risk. Actually identify to point, in numbers, it does from one to the other...

 

[zander1983]

It's all explained here

Maximising 1st mortgage and later acquiring a 2nd property

Hi Newbie question here - completely new to investing in property. Im in the trying to buy a house in Dublin. I have savings of 165k. The house is costing 400k. I plan to put 40k down and get a mortgage for 360k. Im an IT contractor earning 95k per year (I get paid 425 euro per day). I setup a...

www.askaboutmoney.com

This strategy may work and you might make millions.

But the risk is big in any market, but particularly high in Ireland where landlords are demonised.

You don't seem to understand that borrowing to invest increases the returns but also increases the risks. And it's just not worth it.

Brendan

So Im not trying to make millions. Im trying to make passive income from the 160k I have saved. Many people do this - buy assets with savings and generate passive income from them. I'd genuinely be happy with 2k a month passive income. I agree this is a really poor place to be a landlord, and all the metrics are against them. But I do still see it as viable because, once you have the correct time horizon - and Im thinking in decades rather than years - inflation inevitably increases property prices, rents, and decreases debt. Also, we're seeing some recent rhetoric in favour of private landlords from government - as vulture funds buy up properties left right and centre, and the number of properties for rent for rent drops. My parents rent 2 properties btw, and it allowed them to effectively retire early.

How would you generate passive income if you were in my shoes?

 

[Sarenco]

Could you elaborate on what you see as high risk?

The obvious risk is that we have a recession and your tenant loses their job and stops paying their rent. Unfortunately, you also lose your job and you cannot meet your mortgage repayments.

To make matters worse, your defaulting tenant has caused extensive damage to the property and it takes you over two years to evict.

In the meantime the bank moves to repossess your rental and your credit rating is shot. You might even have to think about bankruptcy protection.

You know, risk.

 

[Brendan Burgess]

Sarenco's summary is excellent.

But in case you need to see some case studies, you will find 153 pages of them here:

Mortgage arrears & negative equity case studies

Advice for people facing court repossession proceedings

www.askaboutmoney.com

 

[zander1983]

Im going to keep this very simple.

One of the reasons, in my opinion, why this strategy is risky is that it based on your assumption that property prices will rise and this is not always true. If you dont understand the risk of owning a highly leverage property portfolio, you are very, very exposed

It really depends on your time horizon - and I have a long time horizon. All those people who bought houses in 2006? If they hung in there, their property has gone up in value. But I prefer a longer time horizon. My aunt bought a house in 1987 in Dublin for 36k. She sold it last year for 680k. Any other assets appreciate so predictably over 35 years like houses in Dublin? Will this continue? ECB monetary policy is to keep printing ore money than ever. And so prices of scare assets will inevitably rise.

 

[zander1983]

The obvious risk is that we have a recession and your tenant loses their job and stops paying their rent. Unfortunately, you also lose your job and you cannot meet your mortgage repayments.

To make matters worse, your defaulting tenant has caused extensive damage to the property and it takes you over two years to evict.

In the meantime the bank moves to repossess your rental and your credit rating is shot. You might even have to think about bankruptcy protection.

You know, risk.

So my parents rent 2 houses, and we've certainly learned a thing or two about the type of tenant to allow in. On 2 occasions, tenants have stopped paying rent. 1 moved out pretty quickly. The other stayed for 6 months, then moved out. But overall, we've had about 20 tenants and 18 always paid the rent. I think we've learned who to allow in and who not (in general, everyone with a long history of work has been a good tenant).

As a software engineer/IT consultant, with land to rent, the likelihood of losing my source of income is close to 0. I supposed I could get seriously ill. I do have insurance against this though.

All things considered, I think its worth the risk.

 

[Sarenco]

All those people who bought houses in 2006? If they hung in there, their property has gone up in value.

Per the latest CSO release, Dublin residential property prices are 8.1% lower than their February 2007 peak, while residential property prices in the Rest of Ireland are 1.3% lower than their May 2007 peak.

All things considered, I think its worth the risk.

I really don't think you have arrived at a considered conclusion.

If you put an additional €125k into your new home, you would be guaranteed to save the weighted average rate that you would otherwise have to pay on the additional borrowings.

If you instead used that money to buy a leveraged rental, are you absolutely sure that the net, after-tax profits would exceed the savings on your home mortgage, even assuming that you don't run into any difficulties with tenants?

And, if so, are you sure that you would be adequately compensated for the risk that you are bearing by running a rental business?

This framework might help you run the numbers -

Key Post - Keep property as Rental or Sell?

Updated May 2020 The question regularly comes up on AAM whether somebody should keep an apartment that their family has outgrown as a rental or whether they should just sell up. Borrowers often run projections on the anticipated rental income from an apartment with a cheap tracker and conclude...

www.askaboutmoney.com

 

[zander1983]

Per the latest CSO release, Dublin residential property prices are 8.1% lower than their February 2007 peak, while residential property prices in the Rest of Ireland are 1.3% lower than their May 2007 peak.

Yes Im aware of this. But 2007 was an enormous bubble. Taking the height point of that bubble and benchmarking against that isn't a fair reflection. A better way is to look at house prices, say, 30 years ago, and now, and the average rise per year is a fairer reflection. We're not in a bubble now - whats happening here is happening in most places ie housing shortages and property price rises. Given the trends - big government increasing bureaucracy and so making building stuff harder, along with inflation driven by ECB money printing - the likelihood of property prices rising over the next 30 years as they did over the previous 30 is high. I tend to believe they will rise by even more.

I will check out that thread and get back to you, thanks.

 

[nest egg]

We're not in a bubble now...

Ireland isn't in a credit bubble now, but that doesn't mean we can't still have a property bubble, for some of the very reasons you mention.

If the global economy goes into recession, particularly the US, that will affect employment here, and demand for housing.

On top of that, with the end of QE and increasing interest rates, capital won't be chasing assets, as has been the case for the last decade or so. The pension funds may stop buying our property too.

The combination of the above could well mean the downside for property is greater than any upside. Tread carefully.