Using equity in investment property to fund further property

C

cd31

Guest
Hi,
a while back I met with an authorised advisor who reckoned the best way for me to build a property portfolio was:

- buy a property in an area where capital appreciation was strong and where I could secure a mortgage against the property, rent the property out, rent to cover mtg repayments

- wait 6/12 months and once property has appreciated sufficently re-mortgage at higher value using money released to fund deposit on a second property

- reapply this process on the second property, then repeat over and over, aiming to acquire 7 to 10 properties

Obviously I'm simplifying, this would take a lot of careful planning and budgeting to make work and all hinge on continuous capital appreciation, but I'm curious if anyone has tried taking this or similar approach and if they've any advice or tales to relate...
 
house of cards

Hi cd31,

I haven't done this (I think anyone who has is possibly either lucky or ruined) but I'm going to reply anyway.

Maybe for clarity you've left out some important advice from your advisor, so I'm missing the point, but it sounds like you're talking about 7-10 properties in the same market?

If so, this plan will leave you over-leveraged and under-diversified; equity is not the same as profit until you sell.

Nothing is certain about which way property prices will go in any market--they will either go up, or go down. Your proposed portfolio would have a 50/50 chance of leaving you with bricks and mortar worth less than the debt you've taken on to acquire them. Quicker and easier to go to Vegas.

Better to diversify as much as possible. One property in Ireland, where, if the worst happens, you've got something you can use. One property in an established European market, maybe France. One property in a non-Euro denominated market, say, New Zealand. One property in an emerging market, Romania possibly. And so on. You won't be able to build as big a portfolio as quickly, because the amount of leverage available to you will be limited. But your risk will be spread and you'll have a good chance at building long-term real wealth.

J.
 
Re: house of cards

It sounds like a great path to riches, in theory. Some lucky people have actually managed to do just as described, and are quite wealthy as a result. But the key ingredient for their success was a very fast rising market. People who bought in Ireland in the late eighties early nineties for instance would have been well positioned to try this. Not only did Property A need to rise in value sufficiently to enable an equity release to fund a deposit for Property B, but also the rent on Property A must rise sufficiently to cover the higher repayments incurred as a result of the extra debt. The faster the market is rising, the quicker both should occur (assuming interest rates and tax law remain unchanged!).
 
house of cards????

Cd31,

I am not sure about the time-frame you have mentioned, ie being able to refinance every 6/12 months but the I do not see anyting wrong with your strategy if adopted as long term plan

Scotty,
With all respect where did you come up with the idea of buying property all over the world
How are all of these properties going to be paid for, mortgages in each country
That will involve re-financing or do banks in these countries just give money to foreigners to invest with, with not come back

Have you ever tried to borrow money in Ireland to invest in a foreign emerging market

Long term if you want to make money from property you need a set plan and a simple plan, buying property in New Zealand becasue the return seems higher than somewhere else is nonsense

You have to take account of interest rates , standard rental practices, exoected vacanct periods, tax laws, etc in the particular country you are investing in

I do not have any problem with your idea of diversifying your portfolio but maybe looking at between equities and property in Ireland might be a lot easier less costly and a bit more realistic

cd31, a long term approach of what you are saying is not unrealistic or particularily risky, get in on paper and see how it stacks uo

[email protected]
 
Re: house of cards????

Hi All

Very interesting posts. The rights and wrongs of different investment strategies can be a highly emotive topic! Just to comment on a few points ...

>> 'wait 6/12 months and once property has appreciated sufficently re-mortgage at higher value using money released to fund deposit on a second property'

The willingness of banks to refinance is based on a number of factors and not just the LTV. For example, lenders also take the debt-service ratio into account i.e. the ability of income producing properties to self finance. As you attempt to add additional investment properties then the lenders are likely to keep a very close eye on your risk profile. In fact many may limit the total amount (across all properties) that they will lend to you. All of this generally means that the amount you can borrow directly or through refinancing is tightly controlled by the LTV but also the amount you and the properties earn. Because of the low rental returns found in Ireland this investment strategy is likely to be a slow burner unless you have a knack of finding BMV (below market value) properties with higher than average yields (and prices continue to increase). This is difficult in the Irish market but still very possible in some overseas markets.

>> 'How are all of these properties going to be paid for, mortgages in each country. That will involve re-financing or do banks in these countries just give money to foreigners to invest with, with not come back'

Of all countries with a developed real estate market, I don't know of any that doesn't in one way or another offer mortgages to non-resident foreign nationals. You may sometimes (but not always) find that the LTV is lower or the rate higher but it is generally possible to raise the loan on the property. In fact experience of these markets will show how primitive and limited our lending situation is in Ireland.

>> 'buying property in New Zealand becasue the return seems higher than somewhere else is nonsense'

Yield is an important ingredient. I believe if you do look outside of Ireland, you will find higher returns, as low interest rates (and in some cases lower), more favourable tax laws, ... etc. For example, I believe there is no CGT in New Zealand!

>> 'I do not have any problem with your idea of diversifying your portfolio but maybe looking at between equities and property in Ireland might be a lot easier less costly and a bit more realistic'

I would agree that there are many elements in a diversified portfolio. However, I wouldn't restrict myself to shares for companies listed on the Irish stock exchange ... neither would I limit myself to Irish property. Depending on what one is hoping to achieve and on available resources, Irish property isn't necessarily the best option. I believe you also need to diversify elements of your portfolio i.e. there is little point in loading the property part of a portfolio with assets having identical risk profiles.

>> 'reapply this process on the second property, then repeat over and over, aiming to acquire 7 to 10 properties'

Refinancing to high LTVs (or highly leveraged portfolios) can be extremely risky. It means in the case of price corrections or soft rentals, you may not be able to meet your loan requirements through either renting or selling i.e. a Plan B may not be available to you. With Irish loans being full recourse this means that the lenders can chase other assets (e.g. your home) in order to meet any deficits. LTV restrictions are there for the benefit of the lender and the investor.

Perhaps a longer term or value strategy may be a safer option. Anyway cd31 best of luck with your investing.

Regards,
Paidi
 
Re: house of cards????

find that the LTV is lower or the rate higher but it is generally possible to raise the loan on the property

That was the point I was raising when I was asking how these properties will be paid for. With normally a reduced LTV and ignoring a higher interest rate it makes it makes raising deposits for further investment a matter of producing cash

finding BMV (below market value) properties with higher than average yields (and prices continue to increase). This is difficult in the Irish market but still very possible in some overseas markets.

A lot of the "new" emerging markets have the possibility of very good capital appreciation. But is there a chance of realising the gain without selling there, i.e. could you refinance and still have the property "wash its own face". And if you re-finance can you take the money out of the country or do you have to re-invest in that country. If that was the case you may as well build a portfolio here as there

I would agree that there are many elements in a diversified portfolio. However, I wouldn't restrict myself to shares for companies listed on the Irish stock exchange

I may have phrased it a bit better, I was referring to shares or the Irish property market. However, having heard Jim Power speak Tuesday night Irish shares were something to shout about. 25% growth overall for the year
That said Irish shares are largely based on the building industry, construction companies and banks being the main players on the exchange

rights and wrongs of different investment strategies can be a highly emotive topic!
Probably correct, I was in awful mood the other night when I replied

Yield is an important ingredient. I believe if you do look outside of Ireland,
Unfortunately, so are exchange rates. € gained 52% on $ in past 2 years. How about capital appreciation on US property

Finally, I would not discourage anyone from investing overseas but to think that there is "big idiots" all over the world who do not understand the value of property is a little naïve

May as well buy into a .com sure no one seems to be able to see the real value in tem anymore

A property or two in a portfolio which might give a good return is not risky strategy but one from every corner of the world would just not work

If anyone has ever purchased a property overseas, then they will understand what I am talking about, once OK, twice maybe, but after that a third set of restrictions, “funny” laws, legal practices, unforeseen costs, management charges, large deposits, opening bank accounts and dealing with estate agents you will pull your hair out

[email protected]
 
Re: house of cards????

Hi Oilean

Many thanks for the reply. In response to your points ...

>> 'With normally a reduced LTV and ignoring a higher interest rate it makes it makes raising deposits for further investment a matter of producing cash'

My experience is that there isn't often an increased interest rate or reduced LTV for overseas buyers. For example, an Irish investor can get a mortgage of up to 96% secured on a French property and at a lower interest rate than Ireland. In the US Irish investors can get funding of at least 75-80% on a non-recourse basis secured against commercial property ...

>> 'A lot of the "new" emerging markets have the possibility of very good capital appreciation. But is there a chance of realising the gain without selling there, i.e. could you refinance and still have the property "wash its own face"'.

I wasn't referring to the emerging countries in my post. I believe that buying in some emerging markets is speculation rather than investment. Investment to my mind is where you are looking at the ability of the asset to generate income rather than hoping that it's price will increase in order to realise a profit. The average rental yields in Ireland are currently very low and therefore offer little safeguard against interest rate increases, price corrections, softening rents, etc. However, if you look carefully at countries with proven real estate markets then you can achieve higher rental yields in investor-friendly environments. You can realise profits by selling or refinancing and can take money out of the country (subject to double tax treaties etc).

>> 'I may have phrased it a bit better, I was referring to shares or the Irish property market.'

In my opinion, many investors (rightly) do not restrict themselves to Irish stocks and neither should they necessarily restrict themselves to the Irish property market. Just because something is local doesn't mean it it best. Also, for serial investors diversification is an important (and often over looked) element of their strategy.

>> 'Finally, I would not discourage anyone from investing overseas but to think that there is "big idiots" all over the world who do not understand the value of property is a little naïve'

Is this not a bit unfair and a slur on people's intelligence? Irish investors have repeatedly proven their credentials across the globe and continue to be linked with some of the largest and most successful real estate transactions in the property world.

Are you questioning the rental returns that can be earned outside of Ireland? Multi-unit residential properties in many parts of the US offer an 8-12% net operating return. Slightly lower rates can still be found in many parts of the UK. France offers 5-10% net rental returns (and some cases guaranteed) ... On the other hand there have been postings on this forum about the returns from Irish property.

Despite this I still believe there are legitimate reasons for investors to buy Irish property. However, these are also reasons for looking further afield.

>> 'A property or two in a portfolio which might give a good return is not risky strategy but one from every corner of the world would just not work'

I don't think anyone is suggesting buying property in every corner of the world. Buying local does not necessarily reduce the risk. In fact it could be argued that on average the rewards may be higher elsewhere.

>> 'If anyone has ever purchased a property overseas, then they will understand what I am talking about'

Apologies but I can't agree with this. I hope you don't feel I'm attacking the Irish property market because I'm not. However, I think it is shortsighted to discard options just because they are not local and the laws, taxes, procedures, etc. may be different to what we're used to in Ireland.

Regards,
Paidi
 
Re: house of cards????

Thanks for all the responses, just to clarify one of the original questions, the advisor wasn't talking about sticking to one market only but having said that all his previous investments seemed to be focussed on the Irish and UK markets.

So to try and sum up its a strategy that involves a lot of different risks: capital appreciation, rental appreciation, vacancy levels, tax etc. Given the right market conditions it can work, but if those conditions change then it could come unstuck quite easily
 
Back
Top