A home, a buy to let, a commercial property and oil shares....

[Sarenco]

who said anything about borrowing money to buy shares ? , i didnt even know it was possible to do so

As Brendan says above, continuing to hold equities while you have (in this case, high interest) personal debts is exactly the same thing financially as buying stocks on margin.

Your oil stock may currently be priced to reflect a trailing yield of 8% but there is obviously there’s no telling what the future holds for the company. If oil prices remain depressed for an extended period, management may be forced to cut dividends into the future. There is also always the risk of another environmental disaster - look at what happened to BP's dividends in 2010/11.

Even if none of these risks materialise, you will still have to pay income tax at your marginal rate on any dividend payments received. In contrast, paying off your high interest loans is risk free and tax free.

 

[galway_blow_in]

The net interest rate on the commercial property is 3%. So maybe the net return will exceed that. But you have plenty of property already, so you are over concentrated in it. If you pay off the loan on the commercial property, you will save 3%. If you pay off the loan on the Jeep you will save 6.75%.

Brendan

the yield on the commercial property is slightly above 8.5% , cost me 140 k all in , rent is 12 k per anum

 

[Sarenco]

the yield on the commercial property is slightly above 8.5% , cost me 140 k all in , rent is 12 k per anum

When you take all expenses and taxes into account, I doubt your net, after tax rate of return will exceed your effective financing rate to any material extent - certainly not to an extent that adequately compensates you for the risks involved.

A gross yield of 8.5% is likely to translate to a net yield of around 6-7% when you take all expenses into account and you apparently pay tax at a marginal rate of 50% on any net profits.

 

[Bronte]

who said anything about borrowing money to buy shares ? , i didnt even know it was possible to do so

I did it the one time I bought shares. Eircom. Made money on it too. The banks were throwing out the money for it.

Your figures are all over the shop on this thread. Can you not do the money makeover, ie start again. Sometimes I do it for posters who are desparate but you're not !. And list each loan with it's costs, borrowings, income and taxes please.

 

[galway_blow_in]

I did it the one time I bought shares. Eircom. Made money on it too. The banks were throwing out the money for it.

Your figures are all over the shop on this thread. Can you not do the money makeover, ie start again. Sometimes I do it for posters who are desparate but you're not !. And list each loan with it's costs, borrowings, income and taxes please.

nice to finally meet someone who made money on eircom shares

 

[galway_blow_in]

When you take all expenses and taxes into account, I doubt your net, after tax rate of return will exceed your effective financing rate to any material extent - certainly not to an extent that adequately compensates you for the risks involved.

A gross yield of 8.5% is likely to translate to a net yield of around 6-7% when you take all expenses into account and you apparently pay tax at a marginal rate of 50% on any net profits.

interest on commercial loans is 100% tax deductible

 

[Sarenco]

interest on commercial loans is 100% tax deductible

Yes, it means your effective financing rate is slightly less than 3%. Will your rate of return on the property (after expenses and taxes but excluding any capital appreciation/depreciation) materially exceed 3%?

 

[thedaddyman]

• The shares are the first thing that jump out at me, how many people lost their "pensions" in shares in Anglo, BOI, AIB etc and they were deemed to be "blue chip". You've invested a year's salary in an industry that is notioriously volatile and impacted by factors outside of your control (war, ISIS etc etc). Given the collapse in oil prices in recent months I'd be seriously thinking about selling those shares.
• Secondly you mention you have a car loan finishing in 2018- and then what? At some stage within a few years you will be replacing it. And why do you need a 4WD anyway?
• The only costs you seem to have included for your comercial investments are the loan repayments. What about costs such as insurance and property charges. Income is not profit.
• Does your commercial tenant have a break clause?. How would you be fixed if he went into receivership?
• Are you going to have to reinvest any money back into your commercial property?
• I don't understand how 25k of your income is tax free. Have Revenue confirmed that and since it's Christmas, could you share your secret with the rest of us?
• Do you need to look at how your investments are structured. For example, is your commercial property ring-fenced so if something happened there, any creditor cannot come after your apartment as well.

Credit for having this level of assets given your income and for stepping back and looking at the big picture. Plenty of people who had similar investments in the boom time probably wish they had done the same

 

[galway_blow_in]

• The shares are the first thing that jump out at me, how many people lost their "pensions" in shares in Anglo, BOI, AIB etc and they were deemed to be "blue chip". You've invested a year's salary in an industry that is notioriously volatile and impacted by factors outside of your control (war, ISIS etc etc). Given the collapse in oil prices in recent months I'd be seriously thinking about selling those shares.
• Secondly you mention you have a car loan finishing in 2018- and then what? At some stage within a few years you will be replacing it. And why do you need a 4WD anyway?
• The only costs you seem to have included for your comercial investments are the loan repayments. What about costs such as insurance and property charges. Income is not profit.
• Does your commercial tenant have a break clause?. How would you be fixed if he went into receivership?
• Are you going to have to reinvest any money back into your commercial property?
• I don't understand how 25k of your income is tax free. Have Revenue confirmed that and since it's Christmas, could you share your secret with the rest of us?
• Do you need to look at how your investments are structured. For example, is your commercial property ring-fenced so if something happened there, any creditor cannot come after your apartment as well.

Credit for having this level of assets given your income and for stepping back and looking at the big picture. Plenty of people who had similar investments in the boom time probably wish they had done the same

ive listed the costs associated with my residential property , i.e , property tax , insurance etc , as for the commercial property , no property tax and the tenants pays all costs like insurance

 

[galway_blow_in]

i invested savings in glanbia , kerry and bank of ireland this past number of years , the dairy companies especially , made me a lot of money , my brother is a dairy farmer so i know that sector pretty well , returns on dairy companies have been as strong as ryanair etc since 2010

 

[galway_blow_in]

Yes, it means your effective financing rate is slightly less than 3%. Will your rate of return on the property (after expenses and taxes but excluding any capital appreciation/depreciation) materially exceed 3%?

by some distance , yes

 

[Sarenco]

Really? I understood the gross yield on the property is 8.5% and your marginal tax rate is 50%.

I assume you will have costs associated with managing and maintaining the property but even if you had absolutely no such costs your effective rate of return is only 1.25% above your effective financing rate. Hardly "some distance" in view of the very considerable risks involved.

 

[galway_blow_in]

Really? I understood the gross yield on the property is 8.5% and your marginal tax rate is 50%.

I assume you will have costs associated with managing and maintaining the property but even if you had absolutely no such costs your effective rate of return is only 1.25% above your effective financing rate. Hardly "some distance" in view of the very considerable risks involved.

tax is paid on every form of income , you dont build income tax into the workings out of a yield on property , anymore than you do on savings rates , if a bank is paying 3% on savings ( i know none are right now ) and the dirt is 33% , you dont claim to be getting 2% on savings

with commercial property leases , the tenants covers all expenses , insurance , maintenance etc

8.5% would be viewed as a very strong yield on a property , few businesses have more than a 10% return each year , well not average business up and down the country

 

[Brendan Burgess]

tax is paid on every form of income , you dont build income tax into the workings out of a yield on property , anymore than you do on savings rates , if a bank is paying 3% on savings ( i know none are right now ) and the dirt is 33% , you dont claim to be getting 2% on savings

Actually, anyone doing a proper analysis would consider the net yield and not the gross yield.

For example, you would not compare the gross deposit rate on a savings account with the gross rate on Savings Certs, as the Savings Certs are tax-free.

And if you were not taxed at the top rate, then the net yield would be higher.

 

[Sarenco]

...you dont build income tax into the workings out of a yield on property...

Agreed - I didn't mean to suggest otherwise.

For clarity, this is what I mean by the following terms:-

The gross yield on a property is simply the gross annual rent that a property can generate, expressed as a % of the purchase price for that property, plus acquisition costs (or the estimated realisable value of the property, where appropriate).

The net yield on a property takes account of all costs and expenses, actual and imputed, relating to the management and maintenance of a rental property. It is the capitalisation rate for the property - in effect, the equivalent of a firm's E/P ratio.

Even if a property is self-managed, a landlord should still account for his time in calculating the net yield on a property in order to arrive at a figure that can be usefully compared with the return on truly passive investments, such as bank deposits and publicly traded securities.

With a long lease, a tenant will typically be responsible for repairing, maintaining and insuring a commercial property but a landlord should still include a provision in his calculations for future expenditure on items such as the property's roof, windows, floors, etc that become dilapidated over time as these will not typically be the tenant's responsibility.

Finally, there's the effective (or after-tax) annual rate of return, which takes account of the taxman's share of the net income on an investment. If you have a marginal tax rate of 50%, then your effective rate of return is obviously half your net yield. In contrast, the effective rate of return on repaying a loan is simply the annual interest rate that would otherwise be charged on that loan.

A gross yield of 8.5% on third generation, prime office space in Dublin's CBD would certainly be considered a very strong yield. For retail or industrial property in a provincial town, that kind of gross yield would be considerably less impressive, given the increased risks inherent in such an investment.

To be honest, I think a (properly calculated) net yield in excess of 6% on any property is pretty attractive in the current environment. But not if it's being finance at 5%+....