Lump Sum to PayOff/Sell/Invest?

locknbarrel

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17
Age: 40
Spouse’s/Partner's age: 38

Annual gross income from employment or profession: 66,000
Annual gross income of spouse: 53,000

Monthly take-home pay: 4,500 - 6,000 depending whether I'm on leave.

Type of employment: Both Public Sector

In general are you:
(a) spending more than you earn, or
(b) saving?
Usually saving €1000 /m although I have taken unpaid maternity leave and similar options recently at which point we break even.

Rough estimate of value of home: 310,000
Amount outstanding on your mortgage: 0
What interest rate are you paying? N/A

Other borrowings – car loans/personal loans etc: None

Do you pay off your full credit card balance each month? Yes
If not, what is the balance on your credit card?

Savings and investments:
€130,000 savings
€10,000 in broad index ETFs
€20,000 in shares


Do you have a pension scheme? Yes - Both Public Sector

Do you own any investment or other property?
Property 1:
Value: €130,000
Mortgage: None
Interest Rate: N/A
Monthly Rent: €700

Property 2:
Value: €105000
Mortgage: €132,000 (20 years left)
Interest Rate: 0.6%
Monthly Rent: €660

Property 3:
Value: €190,000
Mortgage: €180,000 (20 years left)
Interest Rate: 0.9%
Monthly Rent: €800

Property 4:
40% share in property - Difficult to overpay or to sell.
Value of our share: €120,000
Mortgage of our share: €133,000 (10 years left)
Interest Rate: 4% variable
Monthly Rent of our share: €2000

Ages of children: 3 and 1.5 years

Life insurance: None except for life assurance associated with property 2.


What specific question do you have or what issues are of concern to you?
  • We never intended to get into property - it's something that just happened; but having a little more experience of it now, the renting and managing of the property is not something that bothers us.
  • Overall I can see the amount going in vs. out annually and the paying down of debt of aggregate of all the properties works favorably, but I'm not sure is that because some properties are doing well and other properties are performing poorly and that the averaging is covering this up. I feel there is a lot of risk being so exposed to property and would be open to sell some property because of this.
  • Because of valuations of when the properties were bought/received, if I were to sell CGT wouldn't kick in until property prices were to go up by 40%. Therefore I feel they may represent a better investment for us because of this as opposed to a normal investor that would buy now. Is this a reasoned argument?
  • We have a lump some of cash that we are unsure of what to do with it. Setting it off against the properties may not make much sense as the trackers are low. I can't set it off against property 4 because it's only a part share in that.
  • Is life assurance important for us with two kids? We have no siblings to ask about this so we're unsure whether it's important. We have no wills either which I'm concerned about.
  • Over the next few years I would like to take some leave/career break (possibly 2 years) to spend with the children when they're young. I would like to have some sort of financial buffer for this goal. Perhaps €40,000?
 
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A competent solicitor will sort out the wills for you very quickly once you know what you want to leave and to whom. One thing to consider, especially if you have no siblings, is preferred guardian arrangements in the event of something happening both of you. It does happen sad to say. Frankly, if I were you, I'd be making an appointment next week, JFDI as they say :)

Re Life assurance, I'm not convinced you need it, especially given that you already have around €1m in assets. One thing to check is whether or not you have any death in service benefits at work.

Also do have any thing coming up in the next few years that require an investment, a change in car, home improvements, extension etc and/or do any of the rented properties need to have money spent on them in the foreseeable future.
 
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The rent figure you give for Property 4 doesn't look right, so I am guessing that it should be 40% of €24k

"Overall I can see the amount going in vs. out annually and the paying down of debt of aggregate of all the properties works favorably, but I'm not sure is that because some properties are doing well and other properties are performing poorly and that the averaging is covering this up."

You should assess all the investments separately.

I don't see how you can say that any of your investments is doing poorly. You are presumably comparing the repayments with the rent received. However, you should be looking at the interest paid as most of your repayments are actually capital.

"I feel [the properties] may represent a better investment for us because of this as opposed to a normal investor that would buy now. Is this a reasoned argument?

No. If you sell a property at a loss, you can use the loss against future gains on other assets.

Property 2 and 3 are very good investments because of the cheap trackers, and so you should keep them.

You should have a chat with your joint investors in Property 4 and see if you can exit it. There is no reason why you can't pay off your share of the mortgage, if they don't want to sell the property. They will simply owe the mortgage and meet the repayments. Their situation won't change. However, you should make sure to put it all down in writing.

You are too heavily exposed to property. You should sell Property 1 and invest the proceeds directly in shares. This would have a number of advantages
  • The long term return on shares is likely to be higher than on property
  • Even if it's not, you are getting good diversification
  • It would be a liquid investment. If you need money for anything, you can sell part of your shares. With a property, you have to sell the whole lot.
  • Because it's a liquid investment, you won't need a big rainy day fund. You can convert shares to cash very quickly.
  • If you make a capital gain on directly held shares, you can set any losses you have made on the sale of property against those gains. (This would not apply if you bought unit linked funds, and ETFs are too complicated to be sure about the treatment.)
You should invest all your savings directly in the stockmarket. You won't need a separate rainy day fund as you can cash those savings whenever you need to.
 

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The rent figure you give for Property 4 doesn't look right, so I am guessing that it should be 40% of €24k
Thank you for both your replies. They have made me feel more at ease in some ways but they've shone a different light on other things and I've been mulling your suggestions over since. The rent on Property 4 is not a mistake and is as stated. It's a legacy investment although the return may drop over the coming years.

Just to be clear on you opinion - putting all savings directly in shares. Should some proportion be kept in cash in your opinion? Say 25%. Or do you really mean most/all of savings?
 
I really don't see any point in having cash. Over the longer term, you can expect shares to outperform cash.

If you have shares, you can convert them to cash easily if an unexpected expense arises.

There are risks in all investments - you can comfortably handle the risks involved in holding shares.

Brendan
 
I really don't see any point in having cash.

I think it's fair to say that this is a controversial position.

I strongly disagree that it appropriate to hold shares in place of a stable value cash reserve to deal with unexpected emergencies for the reasons set out in this thread:-

http://www.askaboutmoney.com/threads/how-much-rainy-day-savings-do-i-require.193039/

It is particularly important for anybody with a property rental business to maintain an adequate stable value cash reserve to deal with emergencies. If stocks tumble 20%+ in value (which they do on a regular basis), you don't want to be in the position of having to crystallise losses by selling shares simply to replace a boiler. The fact that equities will inevitably recover their value over the long term is largely academic in that scenario.

I also think you could make a good argument for retaining Property 1 over Property 3 - it is producing a higher gross yield and locknbarrel's exposure to possible future interest rate increases would obviously be reduced by paying off the outstanding mortgage. It also looks as though maximising income, rather than building further capital, will be important to locknbarrel in the near term.

The position on Property 4 is a bit peculiar. Paying down the mortgage would seem to be the obvious home for locknbarrel's savings but presumably there is good a reason why this would be difficult. Are you jointly and severally liable with your co-owners for the mortgage?

My understanding is that most public sector jobs come with very attractive critical illness and death in service benefits. I would establish what are these benefits before taking out expensive insurances.

I'm not a fan of investing in individual stocks. Personally, i think that investment trusts give the best balance between achieving an appropriate degree of diversification and (relative) tax simplicity. Something like Foreign & Colonial Investment Trust plc is a good core holding - well diversified on a sectoral/global basis, relatively cheap, hands off investment vehicle that is taxed in the same way as individual stocks (income tax on dividends, CGT on capital gains).

Finally, you should definitely put wills and enduring powers of attorney in place. You should really address that as a matter of some urgency.

Hope that helps.
 
I think it's fair to say that this is a controversial position.

The majority view is that you should hold cash, but being in a majority does not make it correct.

It is particularly important for anybody with a property rental business to maintain an adequate stable value cash reserve to deal with emergencies. If stocks tumble 20%+ in value (which they do on a regular basis), you don't want to be in the position of having to crystallise losses by selling shares simply to replace a boiler.

I just can't agree with this although I know that again it's the majority view.

You will not have to sell off your entire holding if you need to replace a boiler.

In fact, it's likely that your income will be enough to pay for the vast majority of unexpected expense. Your bank will give you an overdraft as well.

Sarenco - you think he should hold cash? Fair enough. How much actual cash would you recommend in this case?

Brendan
 
The majority view is that you should hold cash, but being in a majority does not make it correct.

Equally, the fact that it's the conventional view doesn't make it incorrect!

In fact, it's likely that your income will be enough to pay for the vast majority of unexpected expense. Your bank will give you an overdraft as well.

The purpose of maintaining a cash reserve is to address those unanticipated expenses that fall outside the vast majority of circumstances that might arise. It's like a form of self-insurance.

The fact that an entire portfolio of stocks may not have to be liquidated to meet an unexpected expense doesn't mean that an investor can avoid crystallising losses on those shares that are liquidated.

Maintaining a stock portfolio while carrying an overdraft is really the same thing financially as taking a (relatively expensive) leveraged bet on the short term direction of the stock market. It might work out fine - or it might be a disaster. Why take the risk?

Sarenco - you think he should hold cash? Fair enough. How much actual cash would you recommend in this case?

It's difficult to be specific without knowing the age and state of repair of the rental properties and whether there is an OMC involved with its own sinking fund.

As a very rough rule of thumb, I would suggest maintaining a cash reserve equal to around three months of gross anticipated rental income per property.

Beyond that, given the fact that it's a dual income household and both are public sector workers, I would have thought that maintaining a reserve equal to three months of their average expenditure would be reasonable.

So, maybe something like €25k in total.
 
Maintaining a stock portfolio while carrying an overdraft is really the same thing financially as taking a (relatively expensive) leveraged bet on the short term direction of the stock market.

It's not the same thing at all.

If they need to spend €5k on a boiler and they have no cash, they can run up an overdraft of €5k. They save €1k a month, so they will pay it off quickly. They can probably defer other bills or use their credit card, so they would not be engaging in any form of long-term expensive borrowing.

In practice, if they invest their €130k in the stockmarket, they will start building up their savings again, so they will probably have some or all of the money if an unexpected bill hits.

But we are 90% in agreement. They have €130k in savings and I say that they should invest it all in the stockmarket. I think that you are saying that they should invest €105k and keep €25k in cash.
 
I also think you could make a good argument for retaining Property 1 over Property 3 - it is producing a higher gross yield and locknbarrel's exposure to possible future interest rate increases would obviously be reduced by paying off the outstanding mortgage.

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I think that they should be assessed separately on their merits. It might be right to sell both of them. It might be right to keep both of them.

Property 3 is much more profitable, because of the high mortgage and very low interest rate.

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There is an interest rate exposure, but it's inconsequential given their borrowing as a proportion of their overall assets.

€870 is probably too much property to have, so I would sell one. And as Property 1 is the least profitable, it's first in the list.

Brendan
 
The position on Property 4 is a bit peculiar. Paying down the mortgage would seem to be the obvious home for locknbarrel's savings but presumably there is good a reason why this would be difficult. Are you jointly and severally liable with your co-owners for the mortgage?
Yes we are jointly liable. Again it was an unusual circumstance that was unavoidable with very unaccomadating bank. It's a commercial property. Relations are fine with the other party involved with the mortgage. But it has caused difficulties with our own situation regarding looking for other loans/consolidating. Basically banks look at the entire loan for this property being on our books...which is technically true....and therefore they immediately say they can't proceed any further.

It's difficult to be specific without knowing the age and state of repair of the rental properties and whether there is an OMC involved with its own sinking fund.
I directly manage all the properties myself. Properties are in good order but are houses rather than apartments and therefore have extra maintenance.

We had thought seriously about selling property 1 before, but weren't sure what to do with the money so it is still being considered. Putting 130k savings + 130k proceeds from sale of property 1 into the stock market/funds seems like a lot, but compared to property exposure, it would balance the risk.
 
There is a huge difference between the deliberate borrowing €100k long term to buy equities

and

the small chance of a temporary overdraft of €5k to replace a boiler while still holding equities.

Brendan
 
Yes we are jointly liable.

It might still make sense to pay down your portion of the mortgage before investing elsewhere as you will technically still be liable for your co-owner's portion of the mortgage in any event. The interest is fully deductible for tax purposes as it's a commercial property so the effective rate isn't really that awful but I still think I would pay that loan down first.

Properties are in good order but are houses rather than apartments and therefore have extra maintenance.

In that case, you might want to think about retaining a slightly higher cash reserve. Maybe ~€40k as you originally suggested.
 
Yes, you suggested it here:

Huh? Where did I suggest that borrowing €100k long term is the same carrying an overdraft of €5k?

I said maintaining a stock portfolio while carrying an overdraft is really the same thing as taking a leveraged bet on the short term direction of the stock market. Why wouldn't you simply sell shares rather than maintain an overdraft to meet an expense? The only reason you wouldn't is because you expect shares to increase in value over the period you maintain the overdraft. That's a bet on the short term direction of the stock market.
 
I said that there was no need for cash, and that if you had an unexpected need for cash you could use an overdraft.
You compared this with borrowing to invest which is clearly not the same as borrowing long term
Big savers like the OP would clear the overdraft quickly.

That is how I manage my cash position. I have an overdraft facility. I use it from time to time. If dividends or other income don't clear it, I sell shares.

Brendan
 
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