Financial factors that influence the type of property one should buy

Hi,

I am considering buying a property simply because I currently have a large chunk of cash and it seems it may be safer and more productive in property than in a bank so this has lead me to ponder the question; Are there any general rules-of-thumb which one should follow to gain the most financial benefit when buying a property ? I am currently single and I may die that way or I may have many offspring in the future but there is no way of knowing so I want to look at this from a purely financial perspective. So, is there a generally accepted wisdom ? Should you stretch yourself to buy the most expensive property you can get a mortgage for or should you aim to have as small a mortgage as possible eg. use your cash to buy 90% of a one bed apartment or 33% of a 3 bed house ? Or indeed if your cash pile was large enough to buy something without a mortgage is this neccessarily inherently preferable than getting a mortgage ?

I'm thinking of factors such as:
- First-time buyer's grant
- Mortgage interest relief
- Tax relief on rental income (if I buy a 3 bed I would rent out rooms)

I realise some or indeed all of the above may no longer exist but this is the sort of factors I am interested in. Also, given such a broad question I accept that there may be no universally applicable rules-of-thumb but at a minimum I would like to know that I have considered all the relevant factors. So, can anyone suggest a list ? Are there any rules-of-thumb which apply to such a broad question ?

Thanks,

Mochac

Your primary objective should be to buy a home. Somewhere you enjoy living in. Somewhere convenient to work. Somewhere convenient for your social life.

It is a mistake to choose a home because you think it's a good investment. For example, if you felt that property in a neighbouring town was better value than property in the town in which you want to live, that would not be a good reason to choose the investment property.

Having said all that, buying a home is generally a good long-term investment for a number of reasons - the interest paid on the mortgage is usually less than the cost of renting; and any gains are free of Capital Gains Tax.

In the past, people stretched themselves as much as possible, because trading up was extremely expensive with stamp duty of up to 9%. Now, there is no need to do this, as stamp duty is only 1%.

You can rent a room tax free if the rent is less than €10,000. If you get €11,000 rent you pay tax on the whole amount. So you probably should not stretch yourself to buy a big property so that you can get a lot of rent. Renting one room should be enough.

If you can afford a house which meets your needs with a comfortable mortgage, then that should be your objective. I would regard twice your salary as a comfortable mortgage, but three times is probably ok as long as you plan to pay it down to a comfortable level quite quickly. Let's say you are earning €50k and you have saved €100k. Then you could take out a mortgage of €150k and buy a house for €250k. If the house you want is more expensive, you could stretch yourself to 4 times your salary, but it's risky. Interest rates may rise or your income may fall. However, if you have a lump of cash, that insulates you to some extent.

Are you buying to live in, buying to rent out, or a combination of both?

I would stay away from one beds. But they are ok in Dublin if you're looking for an investment only.

I consider two bed apartments in Ireland too small for any useful purpose

A three bed is far better in a house of course. The rent a room scheme with 10K tax free is a great incentive, but you have to live there. Living with someone is not always ideal though.

Mochac said:

I am currently single and I may die that way or I may have many offspring in the future but there is no way of knowing so I want to look at this from a purely financial perspective.

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Well, the general rule of thumb is that a moderately risky portfolio should hold no more than about 7% of it's value in property at a max... Irish investors however happily ignore this rule and the results are to be seen all around the country!

Your primary objective should be to buy a home. Somewhere you enjoy living in. Somewhere convenient to work. Somewhere convenient for your social life.

One of my main points is that this does not in fact apply to me, I would be buying in Dublin and, based on my current circumstances, anywhere south of the Liffey or indeed a bit north of it would be fine. So within that area I could easily find anything from a one bed appartment to a detatched house. Given this and given that buying a house is the single largest purchase of your life it makes sense for me to base it solely on financial factors and what I am particularly keen to avoid is making a decision that would have serious negative effects should my situation change in future, eg I buy a one bed appartment now to be mortgage free and in a couple of years time am looking for a family home near good schools but have alreay 'wasted' my first-time-buyer's grant (or some equivalent tax-break or grant) on a one-bed. Now maybe there is no such factor so buying a one bed bachelor-pad in the city centre now would leave me at no disadvantage if it turned out in two years time that I need a home for a wife and 3 kids, but it could potentially be a very expensive mistake to make.

Are you buying to live in, buying to rent out, or a combination of both?

I am buying primarily because I currently have a large lump of cash sitting in bank accounts and I suppose I am of the age where most people would already have bought property. So I am asking the question, does it make more financial sense to buy something small for just me and have a very small mortgage or buy something bigger and rent out rooms to help pay the mortgage. There may be no clear answer and if not I'm looking for suggestions of relevant financial factors. So far I have:

- Rent-a-room scheme suggested above
- Mortgage intrest relief. Google indicates it doesn't exist anymore, so no longer relevant
- First time buyer's grant. Google indicates it is anchient history, so no longer relevant
- Anything else ??

Thanks,

Mochac

Jim2007 said:

Well, the general rule of thumb is that a moderately risky portfolio should hold no more than about 7% of it's value in property at a max... Irish investors however happily ignore this rule and the results are to be seen all around the country!

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But it's on the up Jim, 14% nationwide and 25% in Dublin !

Mochac said:

but have alreday 'wasted' my first-time-buyer's grant (or some equivalent tax-break or grant) on a one-bed.

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Let's get it clear on the FTB grant (which I don't think still exists), it's a con, an illusion, it was always built into the purchase price. It should not be a factor in relation to buying in any case.

You're wiffly wobbling all over the place. How about you give us your age, salary, location, assets etc and what you want financially for a better idea of what it is you really should be investing in.

If you are considering buying a property, the first thing you should do is seek mortgage approval.
I infer from your original post that your cash amount alone is not enough to cover the purchase of a property.
For all you know you may not even be eligible for a mortgage (a lump sum may help you buys property but it is littke help in getting a mortgage).
If you are not eligible at least you can draw a line thru' property investment and turn you attention elsewhere, e.g. shares or bonds.

Bronte said:

But it's on the up Jim, 14% nationwide and 25% in Dublin !

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So is it 14% on what it was in 2007? Has the negative equity been erased? Make a list of all the people the people you know who have achieved annual returns of around 6 to 8 percent over the last 10 years....

Like I said before Irish investors regularly ignore all the basic rules of investing and then express complete surprise at the outcome or better still blame others for their own mistakes. As I have pointed out before had investors been following the generally accepted practices when managing there investments they would not have been burned no matter what the banks, the central bank or the government.

Jim2007 said:

So is it 14% on what it was in 2007? Has the negative equity been erased?

As I have pointed out before had investors been following the generally accepted practices when managing there investments they would not have been burned no matter what the banks, the central bank or the government.

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Well it's on the way down now Jim, since yesterday ! The NE was being erased in many cases, so those that sold this year were the lucky ones. I have a sibling in Dublin who watched the bubble for the last year, said you'd have to be on the ground to see it rise. Landlady sold the house in the last couple of months and made a tidy profit. Accommodation is now really hard to source and very very expensive. Has to stay in a B&B for the week and return home at the weekend, expensive, despite being on a decent salary.

I think investers will be back as rents will only go up as supply is chronic and getting worse.

And worst thing of all I've heard, there was a suggestion last week to reduce unit sizes, for renters, renters not being human beings or families in need of decent apartment sizes apparently. This after they did away with bedsits when there was already a massive shortgage of accommodation.

Have we learnt nothing.

Bronte said:

Have we learnt nothing.

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I took this comment I took from Bloomberg:

With property prices in Dublin rising by 25 percent year-on-year in August, although they were still 41 percent below their pre-crisis peak, the central bank said it was appropriate to bring in limits on new lending at high loan-to-value (LTV) or loan-to-income (LTI) ratios.

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Which basically means Irish property investors still have a long way to go before they recover their position! Hell even investing in a European wide property ETF would have delivered around 60%, not to even think about well equities have done. The bottom line is that even when Irish investors recover, they still have not accounted for the lost returns over the period.

To get back on-topic...

It would appear you're buying somewhere to live in yourself.

You've also said you have no specific future plans that may affect what type of home you want to live in.

In that case, IMHO...

1. Buy the most inexpensive property that you're happy to live in for an indefinitely long period.

2. Put as much cash into buying it as you feel comfortable tying up, so keeping your mortgage as low as possible.

My reasons for suggesting this strategy, and possible situations where it might not apply, are as follows...

1. If you spend any more, you're effectively paying for something you don't need (an extra room, a smarter area, nearer to town etc). It's not wise to view your own home as an investment. Landlords do, of course, but the return they get is not solely in capital appreciation but also rent. You can only do this in your own home by taking in a lodger. I'm not sure of the financial pros and cons of that, but I suspect most people do it out of perceived necessity rather than choice, because ideally they wouldn't want to share the security and privacy of their own home with (usually) a stranger. But if you're the gregarious type who would appreciate some company around the place, perhaps this might be worth considering.

2. If you sit on a big wad of cash rather than using it to keep your mortgage low, you will almost definitely lose out, because deposit rates are not only generally less than mortgage rates but the interest is taxable. However, you could stick the cash into other investments and hope that the (net) return from these does outweigh the interest on the extra money you've had to borrow on the mortgage to (effectively) fund them. I say "hope" because a higher return is generally accompanied by higher risk, especially in the short term. In the long term, though, the most tax-efficient way of doing this would be to pay it into a pension scheme, which might be worth considering anyway unless you're confident you're already making adequate provision in that respect, though of course that will tie up the money till you retire. It is possible (subject to certain limits and restrictions) to make significant one-off contributions into some kinds of pension schemes. And I suppose you could then increase your regular pension contributions and dip into your remaining cash to fund any resulting shortfall in your take-home pay, though I'm not sure of the maths of that - you'll get the tax benefit from the pension contributions, but you'll also lose out on deposit interest, as I've described above.