Should I buy an apartment?

Hi everyone.

I am a 32-year old Irish expat in the middle east. I currently have no debts, and am investing around 60-70k per year in a Bogle-esque portfolio of cheap Vanguard Europe ETFs. In addition, I have an emergency fund of 20k euros in cash. So far I have a net worth of 70k euros; this is increasing at a rate of 5k per month, so I am rapidly accumulating. My strategy so far is to keep the 20k emergency fund in cash and deploy everything else into the ETFs, which are weighted 75:25 stocks to bonds.

But lately, I've been thinking of buying a 2-bedroom apartment back in Ireland, in Cork. My friend has been living in the building for three years and speaks very highly of it, and I have been in the building a few times when visiting him. It has a good location and attracts reasonably well paid to well paid young professionals.

Why would I buy an apartment in Cork if I'm living in the middle east? I can think of a few reasons:

• I get paid in a dollar-pegged currency. With the euro as low as it is, I will get an excellent exchange rate if I borrow the money from a local bank, convert it to euros via my discount brokerage, and send it to Ireland.
• Although the property is first and foremost an investment property, if my wife and I did relocate back to Ireland, we would have a place to live (we don't particularly want a house as our needs are quite simple).
• My wife and I will never be able to buy a property as easily as we can right now due to our strong cash flow (we currently invest 63% of our income per annum, so we have a lot of bandwidth).
• The purpose of the property (in a scenario where we would rent it out) would be to give us part of our required monthly income during retirement. (We're not looking flip it)
• Cork is a location I know well and there are employment prospects there for me if ever we decided to leave the Middle East.
• Although I would propose to borrow the whole amount required to purchase the property (the equivalent in my currency of 150k euro), I would get a reducing interest rate and aggressively pay it down within 24 months. The cost (in terms of interest) would be around 8 to 9k euro.

But I can also think of reasons why I should not do this:

• There would be an opportunity cost, namely, if we borrow to buy the apartment, we would aggressively pay it off. But to do so, we would not be able to contribute to our stock ETFs. So that's a big opportunity cost.
• There is the stress of taking on a debt for two years.
• There is the pain in the neck of managing a property from afar - though I could probably get my friends to help out with that.
• There is the fact that unlike a diversified portfolio of ETFs, property is not very liquid.
• There are costs - maintenance, vacancy, management fees, property tax, rental income tax - associated with the property that frankly do not exist for me with my stock ETFs.
• Finally, there is a slim possibility that my wife and I won't be returning to Ireland to retire.

I would really love some advice.
Thanks!

You are 32. And you are buying an apartment now for your retirement?

Wait until you know where you want to retire to and what sort of accommodation you want, before you buy an apartment to retire to.

It doesn't make much sense to me to invest in property in a location remote from where you are working. You need to be on the ground to sort matters out.

You should take tax advice where you are working. It's possible, but I doubt that owning a residential investment in Ireland would be tax efficient for you.

Brendan

Do you think you can make more money from the apartment than what you are doing now? If so, will the return compensate for the extra work you have to put in to buying and maintaining it?

And you won't be managing it from afar, you will be paying someone to do it for you.

I'd stick with what you are doing.

Steven
www.bluewaterfp.ie

Apologies if I was not clear. The apartment is not a place for us to retire to. It would rather be a source of (rental) income for us during our retirement, wherever we would be.

We rent out two properties close to home (in the UK) and until recently we rented out the family farm in Ireland. We also sorted out a family estate which was spread between a number of countries.

My experience is that looking after a property rental can be a lot of work, unless you pay an agent - but then the returns are a lot less. Personally I would only do it close to home. Also, sorting out an estate across borders is a nightmare with tax etc, so keep all your wealth in one country unless you have a good executor & solicitor. However, I guess you're not planning to die that soon.

paddy

Leaving aside the hassle factor of managing a rental property from overseas, I think the first thing the OP needs to consider are the fundamentals of the apartment as an investment in the first place.

Over the very long term, property prices have historically tended to increase in line with inflation. However, nobody can predict what the future holds in terms of capital values - particularly over the short or medium term - so the only logical way to assess a rental property as an investment is to consider the yield it wil generate on acquisition.

I would suggest checking online sites and/or talking to local agents to evaluate what gross annual rent the apartment would be likely to generate. I would then recommend allowing for 33 per cent of the gross achievable annual rent for all expenses (actual and imputed) relating to holding that rental property, other than financing costs and income tax. In other words, 66 per cent of the achievable gross rent should give you a reasonable estimate of the likely net yield that the apartment would generate, before financing costs and income tax.

Currently Vanguard's REIT Index fund yields approximately 3.5 per cent per annum. I would use this as your benchmark but I would want to achieve a significant premium over this yield on the apartment to compensate you for the concentrated, illiquid nature of the apartment as compared with a REIT index fund.

You then have to consider your tax position. I don't know what taxes you are currently paying on your index fund investments but I suspect it would be favourable when compared to the current tax regime applicable to rental property in Ireland.

The bottom line is that you have to run the figures on the apartment as an investment and decide accordingly.