Key Post: Case study - investing while self building

Cape 23 asked

my wife and myself are returning to Ireland after spending a number of years overseas.
I own a site in Galway which I am planning to build on.

At the moment We have around 125E in cash and are wondering what is best thing to do. Pour it all into the building of the house or split it on the house and an apartment which I would like to buy in Galway city. We would live in apartment for the time our house is being built and then rent out.

My Wife will be starting back at her job which will pay (hopefully) around 500E a week, I have to find a job...

To note: we also plan to start a family next year.

So with the time it takes to put up a house (self build I am hoping to do) 1 year I should think, BTW only have OO planning at moment.

What is the best option I should take? to grow funds long term..

Appreciate any advice on the matter


Mr Blank replied:

> We would live in apartment for the time our house is being built and then rent out.

One thing to note in this situation is that if you buy a property as an owner occupier and pay preferential owner occupier rates of stamp duty on the purchase (possibly 0%) and subsequently rent the property out (e.g. when you move to another principal private residence) within five years of purchase then a clawback of SD will apply:

www.oasis.gov.ie/housing/..._duty.html

cape23

Thanks, I knew that one...

any ideas on the investment side?


Mr Blank:

If you mean whether or not such an investment would be advisable then there is no easy answer. You need to do a cost benefit analysis using some realistic/conservative figures for everything involved (including tax issues) and then assess the viability of the plan in the context of you own personal circumstances and goals. Sorry if that sounds vague but there is no catch all answer in these cases. If in doubt get independent, professional advice.

Re: Case study - investing while self building

Hi Cape

The attraction of investing in property is the tax relief you get on interest payments. If you choose to invest in property, then you should try to get a 100% interest only mortgage.

It would be very bad planning to end up with an investment property with no mortgage, while you have a mortgage on your home, as the tax relief on the home mortgage is worth very little.

If you choose to invest in an apartment, then you should borrow as much as possible. You will need 8% of the cost as a deposit, so that will still leave you with a big chunk of your lump sum to invest while you are building.

The default option is to put it in Northern Rock deposit at 2.6% gross.

The alternative to consider is to invest it in an equity fund. You have to balance the benefit of it rising over the year against the risk of it falling.

Let's deal with the falling first. There is probably a 40% chance of it falling in value. Let's say it falls in value by 30%. You won't like this, but can you handle it? I reckon it just means that you will have to get a larger mortgage. An extra 30k or 40k mortgage isn't that much these days. If the equity fund falls by 30%, it won't stop you building the house.

There is around a 60% chance that it will rise over the coming year. So the probability of a rise and the potential size of the rise are higher than the falls. So, I think the tradeoff between risk and reward is worthwhile.

It's not an all or nothing decision. If you are uncomfortable, you could put half your lump sum in the fund.

If you choose this option, you should go for a fund with no initial costs - either Quinn Life or a fund through a discount broker.

Now let's revisit the idea of investing in an apartment. The advantage to you is that you will have your own place to live for the year while you are self building. How sure are you to get employment at the right salary level? The possible downsides are quite serious. It might take you longer to get the job you want and the salary might be lower than your expectations. This might happen at a time when you have a mortgage which you are having difficulty making the repayments on. This might panic you into taking a job which you would otherwise pass up in favour of waiting.


My gut feel is - rent an apartment for the year. Put your cash in an equity fund. Build your dream home. Get a job. And when all that is sorted, review the decision to invest in an apartment. You will have a valuable home which you will be able to remortgage to buy the investment property.

Brendan

Re: Case study - investing while self building

Thanks Brendan,

You have given me some good advice, Knowing Galway, I probably won't get the job of my choice or the salary...

I think you may be right about renting for a year to see where we stand. I think maybe if people are coming home from being overseas for a while they need to test the waters for awhile to get the feel of whats happening in the country again.

I appreciate the advice

Cape..\

Re: Case study - investing while self building

Hi Brendan,

> The attraction of investing in property is the tax relief you
get on interest payments. If you choose to invest in
property, then you should try to get a 100% interest only
mortgage.

What exactly is this type of Mortgage?

Also which do you think might be better, put my lump sum
in a savings scheme such as Northern rock & get a
mortgage on the house I'm building
or
just pay as I go (ie: get no mortgage, or a very small one)

I think from your post you might be advocating this one.?

Thanks Cape.

Re: Case study - investing while self building

Hi Brendan

I am just wondering where the 60/40 percent chance of win/lose on equity funds comes from. Is this a generally known rule? I am not qualified in investments or finance so I don't know if it is.

I have a background in maths/statistics and have never come across this percentage split when dealing with market probabilities, even as a general rule of thumb. I realise that you say 'probably' and 'around', but why 60/40?

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