Progress report on my purchase of 2 interest only investment properties

[nbc]

Hi all,

Was here a few months ago under 'investor100' which doesn't seem to be working for me now. Anyway Back in April I was in the process of purchasing two 3 bed semis in a large town down the country and I was a little apprehensive to say the least and was looking for advice here. Have to admit most of the comments were pretty cautious generally. Anyway guess it is a big commitment to make and people were rightly looking at the downside.
Anyway purchased both properties for E175,000. One of them had sitting tenants. Thats working out pretty well. Yhey were paying E650 pcm. I told them that if they signed a year lease I would reduce to E625 and sign they did thankfully. That sale included all contents(in fairness none of which was great but the tenants were happy enough with it). Only prob to date was shower which needed to be replaced in the first week. Last month's rent was lodged perfectly on time.
Other house was E175,000 but felt it was worth a few grand more as higher spec generally...kitchen,fireplace were not standard etc and back garden was twice the normal size and south facing. Turns out previous owner rented it for 6 weeks and during this period put an ad on daft and the chap was able to view the house shown around by previous owner which was great. he agreed to move in as soon as the other guy moved out which was 10 days ago. This chap is eastern european, in his 40's and only interested in working hard and saving a few bob in order to buy a house at home eventually. He has 2 mates with him and they are fine. They are paying E650 pcm.
Overall outgoings are E800 pcm for mortgages(int only) and insurance for both properties. Income is E1275.
Both properties are valued between E185,000 and E190,000 currently going on recent sales and overall am very pleased and glad I made the jump.
Maybe if someone out there has a good idea regarding purchase of a house, good location for renting etc and are apprehensive about it maybe this will give you some encouragement. The most important thing is to research your market well before doing anything and it's important to have some funds available in case renting it takes longer than in my case.
Regards
nbc

 

[ClubMan]

Was here a few months ago under 'investor100' which doesn't seem to be working for me now.

investor100 is not a registered username either here or on the old platform so perhaps you are mistaken regarding the name under which you previously posted?

Overall outgoings are E800 pcm for mortgages(int only) and insurance for both properties. Income is E1275.

Have you factored in tax on rental income, maintenance costs, vacancy periods? Seems to me that €1275 - €800 = €475 p.m. may be assessable for tax depending on what other income you have.

Both properties are valued between E185,000 and E190,000 currently going on recent sales and overall am very pleased and glad I made the jump.

Do you have an "exit price" in mind at which point you will sell up? Or are you prioritising rental income over capital appreciation?

 

[RainyDay]

They are paying E650 pcm.
Overall outgoings are E800 pcm for mortgages(int only) and insurance for both properties. Income is E1275.

What about tax?

 

[nbc]

Hi clubman. Maybe I am mistaken. It's a few months since I logged on and someone asked me at the time to come back in a couple of months and let everyone know how I got on. My 'exit' timeframe is maybe to wait 10 years and sell one. Hopefully the profit will enable me to pay off the other. And yes I realise that capital appreciation is not guranteed. However I feel the liklihood that it will occur is much greater than not.

Yearly profit works out at E5,000 aprox. I expect that after expenses I will be liable for maybe E1,500 tax per annum. I'm quite happy to break even or mabe make a couple of hundred per month. Capital appreciation is my major interest.
nbc

 

[techman]

nbc,

Could I ask you a few questions?

1. What term did you get on the interest-only mortgages?
2. What APR did you get?
3. Do you find that managing the two properties takes up a lot of your free time?

Thanks,

techman

 

[nbc]

Hi techman

Got mortgages through one of the major players in the market. Rate was 3.1% (tracker ECB + 1.1%)
Think there is a small first year discount.
Yes there is some time commitment. I have had to travel down maybe 4 times to meet tenants,purchase furniture etc. However I wouldn't dream of using an agent as they will let anyone into the house as long as they get their few bob.
I have numbers of tradesmen if there are problems etc. I feel it's worth the hassle and at any rate once things settle down I don't feel it will take up too much time.
nbc

 

[asdfg]

Stand corrected on this but this is my understanding

What expenses are you going to deduct from your "yearly profit"

Income 15,300
Expenses
Mortgage Int 9,600
Insurance Approx 700

Yearly Profit 5,000
Other Expenses 1,400

Assessable to Tax say 3,600

Tax at 42% 1,500

Do your other expenses come to 1,400
These may be one off expenses i.e not available next year

 

[ClubMan]

Hopefully the profit will enable me to pay off the other. And yes I realise that capital appreciation is not guranteed. However I feel the liklihood that it will occur is much greater than not.

What is your contingency plan for the scenario in which the properties do not appreciate in value sufficient to pay off the mortgages and cover your costs (i.e. break even)? Do you have some other means/investments which can be used to cover these? Do you have an annual budget for emergency and ongoing maintenance/repairs?

 

[cathybun]

What is your contingency plan for the scenario in which the properties do not appreciate in value sufficient to pay off the mortgages and cover your costs (i.e. break even)? Do you have some other means/investments which can be used to cover these? Do you have an annual budget for emergency and ongoing maintenance/repairs?

If the properties don't appreciate in value, nbc will still only owe the amount he borrowed (ie value - deposit), in which case he will have made a few thousand each year and then be able to sell the properties to pay off the mortgages. I don't see how he wouldn't have enough to pay the mortgage back. The only problem would be if they depreciate, as opposed to remaining stagnant. If this was a real threat, nobody would invest in property.

 

[ClubMan]

If this was a real threat, nobody would invest in property.

Perhaps - but falling property values is still an eventuality with a non zero probaility of occurring regardless of what people do in terms of property investment. Don't forget how many people reckoned eircom was a sure thing and the only way was up. Property is a market like any other (e.g. the stock market) and prices can go down as well as up based on demand and other factors. I'm just pointing out that such eventualities need to be assessed in terms of their likelyhood and, if necessary, contingency plans put in place to deal with them.

 

[onekeano]

nbc - fair play to you, sounds like you did your research and it has paid off. Fully agree with your strategy of getting the tenants yourself rather than using an agency.

Just wondering how much it would have cost to stay away from the interest only mortgage? Personally I don't like that idea, did you think of maybe using the excess (which should grow if rents get even minimal growth) pay off the principal which would provide further insulation from the worst case scenario outlined by Clubman.

Roy

 

[ninsaga]

Asa matter of interest..what is the
....Other Expenses 1,400

ninsaga

 

[Eurofan]

I don't see how he wouldn't have enough to pay the mortgage back. The only problem would be if they depreciate, as opposed to remaining stagnant.

Surely with stamp duty, solicitors fees and estate agent fees (when selling) there is going be have to be a resonable capital appreciation to pay the mortgage back?, especially since the mortgage is interest only so the principle is not going down.

I'd love to see the OPs figures on that, what kind of value does must he reach for break even? Stagnant prices would obviously cost him.

 

[nbc]

Hi again,

I completely forgot to include an extra E120 pcm I pay on a top up on another mortgage(investment property purchased in 1998) as I borrowed 100% and the mortgage company only gave me 85% loan to value.
I spent aprox E3,000 buying furniture for one of the properties. Capital allowance on this work out at E600 per annum which is tax deductable.The house that was bought fully furnished will prob qualify for some capital allowances too but have to talk to my accountant about that.
Each property needs to rise in value by E12,000 before I make one cent due to legal fees, stamp duty and expected estate agents fees on selling. This has already more or less happened.
Thanks for the words of encouragement to the contributer who thought I had done well. I feel as if some people are looking at all the negatives. I didn't post this reply to gloat or to look for possible flaws in it. I simply thought it may be be helpful to others who are considering something similar.
I feel that E175,000 is a very reasonable price for a 3 bedroom house anywhere. People always need a roof over their heads and rent easily covers the outlay. In 10-15years time E175,000 will be considered very little.
Come on guys don't be so negative!
nbc

 

[ClubMan]

I feel as if some people are looking at all the negatives.

...

Come on guys don't be so negative!

Not at all. When looking at any investment scenario it's necessary to look at the realities which includes both the positives and the negatives. There is no point in posting here and expecting only positive reassurance that you have done the right thing. The advantage of a bulletin board such as this is that you are almost guaranteed constructive and challenging feedback which is ultimately to your benefit if you are open minded enough to take it on board without dismissing it as negative criticism.

Eurofan's point above about the need to cover transaction costs through tallies with mine about the need for capital appreciation to at least breakeven. All the positive thinking in the world doesn't obviate the need to crunch the numbers, assess the viability of a venture, have a clear picture of what is necessary for at least a breakeven scenario and have a realistic assessment of the likely future outcome and how this matches one's plans/expectations. One person's negativity is another person's prudence.

 

[demoivre]

Perhaps - but falling property values is still an eventuality with a non zero probaility of occurring regardless of what people do in terms of property investment. Don't forget how many people reckoned eircom was a sure thing and the only way was up. Property is a market like any other (e.g. the stock market) and prices can go down as well as up based on demand and other factors. I'm just pointing out that such eventualities need to be assessed in terms of their likelyhood and, if necessary, contingency plans put in place to deal with them.

Since you mention it Clubman I'm always amused at peoples attitude towards the original Eircom flotation - everyone seems to forget that Eircom shares rose quite substantially after flotation so there was a very good return to be had in a short space of time . Punters didn't bank their profits cause they got greedy! I don't think I have ever heard anyone say " Jeez I was a knob for not selling and taking me profit " . Everyone was baying for the blood of the Eircom directors or it was the big bad market that turned against them! There was ample time for people to sell and make decent money - they just got too greedy and as you rightly said thought that Eircom shares would only head North ! Welcome to financial markets folks.

 

[ClubMan]

I don't think I have ever heard anyone say " Jeez I was a knob for not selling and taking me profit "

I have said it before and I will say it again: I was one of those who was too greedy, didn't sell early on and paid the price. This was totally my own fault and nobody else's. There - happy now? At least I've managed to write off some of my eircom losses against subsequent capital gains in the meantime. And I don't think that shares are evil as a result of my own mistake.

 

[Brendan Burgess]

Hi nbc

I don't think that anyone is being negative or positive. Your case study is interesting. Very few people have given us such detail so it's nice to subject it to analysis.

It's too early to say whether the investment was good or bad. You won't know until you sell the properties. Well, you'll know before that if properties rise considerably and stay up.

I wouldn't worry too much about tax. Paying tax is a good sign - it means you are making profit.

It's good to see your investment doing a little bit better than breaking even. I reckon some investors are losing money and hoping to recover it on capital appreciation. It's always a good idea to have a project making money on its trading account, so to speak.

Your annual rental is 15300
allow 10% for vacancies - say 13500

Interest paid 11,000
Insurance 700
Depreciation/replacement of furniture - 1000
Repairs/Decoration 500
Private Tenants Registration ?
Total costs 13,300

So your profit will depend on how well you manage the property. If your tenants pay on time and you have no vacancies, then you will make a higher profit. If it's vacant for longer than you expected or if interest rates rise, you will lose money.

In the very long term prices of property should rise. In the medium term, they are as likely to fall as they are to rise. I am not making a forecast, just setting out the scenarios.

You have taken a calculated and managable risk. That's what the capitalist system is all about. In the long term, you are about 90% likely to get a return on the effort you put in. In the medium term, I would say it's around 50/50.

Brendan

 

[nbc]

Hi Brandan,

Thanks for your reply. Very reasonable and rational. I agree that in the long term it's going to be hard to lose. Sure there is a chance that I could lose money on it but the amount would be small enough in my opinion. Regarding 50% possibility of losing in the short term I'm not so sure. I strongly believe that 100% mortgages will cause a rise in property values in the short term ie from the start of the autumn season and that I could quite possibly offload both properties next year and easily pocket 20 or 30 grand. However I don't plan to do this.
nbc

 

[demoivre]

I have said it before and I will say it again: I was one of those who was too greedy, didn't sell early on and paid the price. This was totally my own fault and nobody else's. There - happy now? At least I've managed to write off some of my eircom losses against subsequent capital gains in the meantime. And I don't think that shares are evil as a result of my own mistake.

No I'm not happy cause you still won't admit to being a knob on that occasion.
Seriously I didn't even know you had been a holder - when you mentioned Eircom it was just a general point that sprung to mind as I remember all too well the talk at the time. Personally took it with a grain of salt that I didn't sell right at the top but very hard to call a top in any market - was happy anyway with what I did make. Leaving a profit turn in to a loss though , as a lot of people did with Eircom , is inexcusable imo.