Property or equities for 130k Investment

flowstone

Registered User
Messages
20
Hi

We have moved house and will have a reasonable mortgage on the new property. When we sell our old home next month, we will also release about 130k in equity. With our level of earnings and current savings, I do not necessarily want or need to use this equity against the new home.

The question is what should I do with it. I already own some shares and these in the large have given a great return. Equally, we have 2 kids, 7&4, whereby a 2 bed apartment in the city might be very helpful in 10 years time whilst also serving as an investment right now. It would also shore up my private sector pension for when I retire in 22 years.

I estimate that 100k would be needed for a deposit on a buy to let mortgage for a prime rental apartment and should give a return of 6-7% PA before costs and taxes but also delivering an asset in 20 yrs debt free. On the other hand a good investment fund spread might deliver 10-12%. What would be prudent?
 
On the other hand a good investment fund spread might deliver 10-12%.

I am a big advocate of equities, but the chances of a return of 10% a year, are very small indeed. A loss of -5% a year is far more likely than a gain of 10%. The most likely outcome will be 3% to 4% over the longer term.

So the question is this: Would you borrow money at 4% to invest in a risky investment which will give a return of around 4% which would be subject to tax at your marginal rate? The answer should be a clear no.

So it should be clear that you should pay down the mortgage on your home. This will give you a tax-free return of around 4% a year.
By reducing your LTV, you may get a lower mortgage rate on the entire mortgage.

The only exception would be if you have managed to keep a cheap tracker on your new house. If you are paying a mortgage rate of just 2%, you might be prepared to invest in equities.
 
Brendan,

"This will give you a tax-free return of around 4% a year" - how is this the case? If one were to pay down their mortgage would they not still suffer CGT down the line when they realise whatever equity they have built up from paying down their mortgage?

"Would you borrow money at 4% to invest in a risky investment which will give a return of around 4% which would be subject to tax at your marginal rate?" what if you were to borrow money at slightly less than 4% for a arguably safe property investment giving return of 7 or 8% atho obviously still subject to tax? - surely this is a clear yes and only in the situation you describe or worse then its a clear no?
 
"This will give you a tax-free return of around 4% a year" - how is this the case? If one were to pay down their mortgage would they not still suffer CGT down the line when they realise whatever equity they have built up from paying down their mortgage?

Sorry jim, that makes no sense at all. There is no CGT on a home or on a mortgage. But that was not the point I was making in any event.

If he puts €100k into a portfolio of shares and earns €4,000 gross dividends. He will get €2,000 into his hand
If he pays down the mortgage by €100k , he will save €4,000 of interest. So it's the same as a tax free return of €4,000.


"Would you borrow money at 4% to invest in a risky investment which will give a return of around 4% which would be subject to tax at your marginal rate?" what if you were to borrow money at slightly less than 4% for an arguably safe property investment giving return of 7 or 8% atho obviously still subject to tax? - surely this is a clear yes and only in the situation you describe or worse then its a clear no?

Property investment is very risky. So "arguably safe" is not a good way to describe it. It's unlikely that you will get a return after costs and before tax of 8% on property investment. But even if you do, you will pay 51% tax on the profit and 33% tax on any capital gain.

Could you get a mortgage for less than 4% for a residential investment property? I think it unlikely.

If you want to take all the risks of borrowing to invest, then property is probably better because of the tax write off on 75% of the interest.

Brendan
 
Thanks for the replies, it's very helpful. I guess I have been lucky with Equities but have made a return of about 10% historically. Mind you have not liquidated them so need to factor CGT at that point in the future!

Although I am drawn towards the property option, I have to be realistic that personally I would be biased like a lot of Irish people and wanted to get this rational view from you guys.

We are lucky in that The new property mortgage will be 1700 Pm and we would have average monthly incomes of 6500 PM so will probably over pay anyway as no other debts.

Would also have savings of 30k in a rainy day fund for cash purposes. Paying down the mortgage at this point is not appealing but could be wrong with that view.

Would a mix of 100k to a buy to let and 30k to mortgage or equities be right or should I bump up the rainy day deposit in light of a second property exposure?
 
You don't need a rainy day deposit at all.

1) You have good incomes
2) If you have a short term cash need, your bank will probably give you an overdraft facility
3) You have shares which could be sold if you needed money in a hurry.

It's crazy to have a mortgage costing you 4% while having €30k on deposit at probably 1% after tax.
 
That's exactly the reality check type comment I need, many thanks!

Cannot argue with your logic. Following this brief discussion, I am beginning to think the best course of action would be a good fee based advisor given there could be 160k in the mix.

Thanks again.
 
You don't need a rainy day deposit at all.

I disagree with that 100%. Of course you need an emergency fund. What if they get a bill for €5,000 for something? Get an overdraft and pay massive interest rates?

Everyone should have some level of cash reserve. How much depends on your circumstances. The OP is a public servant, so will not be made redundant, so he knows that he will get an income. Whereas someone who is self employed would need bigger cash reserves as their income is not guaranteed.

...Also Flowerstone, you do know that if you are sick and can't work past 6 months, your salary stops? Some of your excess cash should be redirected to insuring your salary, just in case.

Steven
www.bluewaterfp.ie
 
Get an overdraft and pay massive interest rates?

Sure. Why not?

€5,000 @ 12% a year is €100 for two months.

Anyway, they can pay most emergency bills by credit card and avoid interest.

Because they have a share portfolio, they can cash them at any time and get cash in a few days.

Brendan
 
You don't need a rainy day deposit at all.

Brendan

Franky, I think that is crazy advice.

What happens when (not if) we have the next financial crisis? The OP and his OH could both lose their jobs and would need to access cash simply to meet their lifestyle costs.

No bank is going to advance them credit in those circumstances. Sure, they could liquidate their share portfolio but share prices would inevitably plummet in a financial crises - US stocks lost 90% of their value in the two years following the 1929 crash and over 50% of their value in the recent 2008/2009 crash. Having to liquidate a share portfolio at the worst possible time would permanently lock in these types of losses.

It is screamingly obvious to me that the OP should maintain a healthy emergency fund (equivalent to 6 months of average household expenses at an absolute minimum) and use any excess funds to pay down the mortgage on their PDH. A guaranteed, commission and tax-free return equivalent to the interest rate on their mortgage (which I assume is around 4%) is a superb return.

Borrowing at a rate of 4% plus to part finance a rental property that might produce a net yield of around 4% (6% gross yield less 33% costs) obviously makes no sense whatsoever, and that's before you take into account the fact that 25% of interest payments are non-deductible for income tax purposes.

Would a share portfolio produce a compound annual return, after tax and commissions, of 4% per annum over, say, the next two decades? It is obviously possible but I think is highly unlikely given current stock valuations and the OP would be subjecting his family to a significantly higher level of risk.

Keep it simple - plan prudently for emergencies, pay down expensive debt and save for retirement in tax deferred pension accounts.
 
Last edited:
Back
Top