Average salary, borrow to buy a commercial property?

[Sarenco]

your dividend income doesnt fall just because the capital value of the stock - portfolio slips

True but why should that be of any comfort to you?

Let's say you have a €100 portfolio that pays you €3 in dividends. During the course of the year the capital value of your portfolio increases by 50%. So, at the end of the year your portfolio is worth €153. That's a total return of 53%.

If your portfolio value instead falls by 50% - but the dividend income is still €3 - your portfolio is worth €53 at the end of the year. That's a total return of -47%.

Dividends are not magic and a stock that consistently pays high dividends is not necessarily better than a stock that pays no dividends at all. I think you are confusing income with value.

Companies with low growth prospects (utilities, tobacco, consumer staples) often pay higher dividends than companies with higher growth prospects (technology stocks, etc.). Which stock would you have preferred to own over the last decade - Johnson & Johnson or Apple?

 

[galway_blow_in]

True but why should that be of any comfort to you?

Let's say you have a €100 portfolio that pays you €3 in dividends. During the course of the year the capital value of your portfolio increases by 50%. So, at the end of the year your portfolio is worth €153. That's a total return of 53%.

If your portfolio value instead falls by 50% - but the dividend income is still €3 - your portfolio is worth €53 at the end of the year. That's a total return of -47%.

Dividends are not magic and a stock that consistently pays high dividends is not necessarily better than a stock that pays no dividends at all. I think you are confusing income with value.

Companies with low growth prospects (utilities, tobacco, consumer staples) often pay higher dividends than companies with higher growth prospects (technology stocks, etc.). Which stock would you have preferred to own over the last decade - Johnson & Johnson or Apple?

even your capital value increases by 50% in one year , what use is it unless you take profits , over many years , your timing will be off now and again and you will be as well just holding , the point of dividends is you are paid to hold

 

[galway_blow_in]

So just pay enough pension to use up the bit you are paying higher rate on.



It's hard to explain, but this is not a valid comparison. If your lender puts up the interest rate to 10%, you will get a much higher interest deduction on your mortgage. By your reasoning, then you should not pay down your mortgage!

So it's actually the opposite. If you are on a cheap tracker, you should not pay down the mortgage, despite the fact that the tax deduction on the interest is so small.

Brendan

rate im paying is 5.45% variable with ulster bank , best i could get for this kind of investment and considerably better than bank of ireland

you are right in saying if ( when ) interest rates rise , this will lessen the attractiveness of the investment return

 

[Sarenco]

rate im paying is 5.45% variable with ulster bank

Wow! Why are you carrying debt at that rate when you have cash at hand earning essentially nothing?

In my opinion, you should pay that off ASAP.

What impact do you think a sharp uptick in interest rates would have on property prices?

 

[Sarenco]

even your capital value increases by 50% in one year , what use is it unless you take profits , over many years , your timing will be off now and again and you will be as well just holding , the point of dividends is you are paid to hold

If you draw €3 from a €153 portfolio you will end up with €150.

If you draw €3 from a €53 portfolio you will end up with €50.

Leaving the tax treatment aside, it really doesn't matter whether you take the €3 as a dividend or by redeeming capital.

 

[galway_blow_in]

If you draw €3 from a €153 portfolio you will end up with €150.

If you draw €3 from a €53 portfolio you will end up with €50.

Leaving the tax treatment aside, it really doesn't matter whether you take the €3 as a dividend or by redeeming capital.

your way involves selling stock in order to provide an income , thus reducing ones original asset holding , mine involves retaining the same asset holding and taking the cash dividend payment per annum

their is a difference

 

[galway_blow_in]

Wow! Why are you carrying debt at that rate when you have cash at hand earning essentially nothing?

In my opinion, you should pay that off ASAP.

What impact do you think a sharp uptick in interest rates would have on property prices?

well the yield on the property is almost 10% so a 5.45% doesnt appear that onerous and the interest rate can be fully written off against tax , unlike with a loan on a residential property , its 70% deductible i believe , there is such a thing as using debt to grow ones wealth , if you pay off everything , you have less cash left to pick up other assets , beit equities or property

spending the money on a tax deductible pension is probably more sensible however , i will look into it very soon

 

[moneymakeover]

What age are you Galway blow in?
And how long do you plan to pay off the 200k?

If you can do it in 10 years then I don't see a problem with the property investment

 

[Sarenco]

your way involves selling stock in order to provide an income , thus reducing ones original asset holding , mine involves retaining the same asset holding and taking the cash dividend payment per annum

their is a difference

There really isn't - it's nothing more than mental accounting.

Contrast an accumulating equity fund with a distributing equity fund.

An accumulating fund reinvests all income received by the fund on its underlying holdings automatically, so if you want to draw down cash you have to redeem units.

A distributing fund distributes all income received on its underlying holdings automatically so if you want to reinvest distributed cash you have to subscribe for additional units.

It's the same thing!

 

[Sarenco]

the interest rate can be fully written off against tax

Needlessly incurring an expense so you can make a tax deduction is a classic case of allowing a tax "tail" to wag an investment "dog".

In any event, you have a low marginal tax rate which obviously reduces the value of the deduction.

I think you're nuts to needlessly carry debt at that rate. Paying it off is a no brainer - you won't find a better use for your capital on a risk adjusted basis.

And it's not a case of "either or" - you can comfortably pay off the debt and contribute to a pension.

 

[Gerard123]

On the topic of the original post, it's very high risk. One tenant a pharmacy. Sector is risky, challenges to health budgets, big decrease in the profitability of that sector in the last 10 years and not anywhere as attractive as it was once. What info do you have on the tenant, who, financial background, etc. Lots of questions. Is there an alternative use? Not a sensible investment IMO based on facts you set out.

 

[Andy836]

Why am I the only person who thinks this is an interesting, in the positive way, deal?

Pharmacies will always be with us. Particularly as Irish people get older and fatter and need more medication which the government will continue to dole out so long as people can call liveline and complain.
Assumption about this property - Pharmacies are normally located in busy, high foot traffic locations. So I am assuming this property is too and will therefor have some alternative use value thereby limiting downside risk.

$34k rent less $8k in interest is $26k to Galway which is a Pre-Tax ROE of 12%.
Not bad for a simple investment in an asset which isn't going to disappear overnight.

Questions for future Capital Appreciation:
- Is the pharmacy a brand new business or is it an pre-existing well established business which has just renewed their lease?
- Have you seen accounts/projections?
- If its a new business how much will they invest in fit out .i.e. are they putting meaningful money into it?
- If its a new business do you think a 9% gross yield is appropriate for a brand new retail business?
- What's an appropriate yield for an established pharmacy [7%/8%] as that's what you'll exit at?

Best of luck with it.

 

[galway_blow_in]

What age are you Galway blow in?
And how long do you plan to pay off the 200k?

If you can do it in 10 years then I don't see a problem with the property investment

thirty nine , i think you might be confusing the two different properties , i currently have a 50 k mortgage on a commercial property i bought eighteen months ago , its a ten year loan at 5.45%

the property i was reffering to in my opening post would require a 150 k loan which i would need fifteen years to pay off , i recently sold a property in limerick for 161 k NET , bought same property for 123k all in including legal fees and stamp duty in october 2015 , also collected rent of around 8 k on the same property from december 2015 to january 2017

 

[galway_blow_in]

Needlessly incurring an expense so you can make a tax deduction is a classic case of allowing a tax "tail" to wag an investment "dog".

In any event, you have a low marginal tax rate which obviously reduces the value of the deduction.

I think you're nuts to needlessly carry debt at that rate. Paying it off is a no brainer - you won't find a better use for your capital on a risk adjusted basis.

And it's not a case of "either or" - you can comfortably pay off the debt and contribute to a pension.

i do not mean to sound important or to compare myself to gold standard companies in anyway but how come countless large companies with a lot of cash on the balance sheet , still use debt to expand ?

do you view debt as inherently bad ?

 

[Brendan Burgess]

i will look into whether i can write off a pension contribution of 540 per month against tax to the same degree i can with the interest on this mortgage

I am genuinely concerned that your thinking is very muddled on this. If it's this muddled, then you probably should not be doing complex, risky property investments. As Sarenco has pointed out...

Needlessly incurring an expense so you can make a tax deduction is a classic case of allowing a tax "tail" to wag an investment "dog".

 

[galway_blow_in]

On the topic of the original post, it's very high risk. One tenant a pharmacy. Sector is risky, challenges to health budgets, big decrease in the profitability of that sector in the last 10 years and not anywhere as attractive as it was once. What info do you have on the tenant, who, financial background, etc. Lots of questions. Is there an alternative use? Not a sensible investment IMO based on facts you set out.

ive discovered the property is a bank sale and a cash buyer appears to be close to securing it , i agree its high risk

i also know of a commercial property in dublin which has a charity ( fairly large one ) as a tenant , 15 k per annum rent , place can be bought for 198 k including vat , stamp duty and legal costs , thats a yield in excess of 7.5% , commercial property is far less hassle than residential , its not in a tenants interest to neglect the place , the lease on this property has three years left , i could buy this outright with my own money , im not saying i will , have not even called about it , i have a friend in the estate agent business who informed me about it

 

[Sarenco]

do you view debt as inherently bad ?

No.

But I do think it's crazy to try and justify carrying expensive debt when you are in a position to pay it off on the grounds that it is deductible for tax purposes.

 

[galway_blow_in]

I am genuinely concerned that your thinking is very muddled on this. If it's this muddled, then you probably should not be doing complex, risky property investments. As Sarenco has pointed out...

i will seek advice on the matter brendan from someone who is well versed on the subject ,i accept my writing style is a little sloppy so perhaps the message does come across as muddled , i am not opposed to paying off the mortgage , im just throwing different viewpoints out to see what people think , i am not wedded to buying another property , i may just put what i can in an equity fund having paid off the mortgage on the commercial property , i do not intend to invest in residential property for letting out again , its not worth the potential problems with tenants , i had no real trouble with mine but the property was a little far away so i sold it

 

[galway_blow_in]

No.

But I do think it's crazy to try and justify carrying expensive debt when you are in a position to pay it off on the grounds that it is deductible for tax purposes.

No.

But I do think it's crazy to try and justify carrying expensive debt when you are in a position to pay it off on the grounds that it is deductible for tax purposes.

that the interest is tax deductible is not my overarching reason for not having paid off the mortgage before now , my reason ( up to now anyway ) was that by using debt i had cash in reserves to aquire other assets , the rental income from the property i own is a grand per month , the mortgage repayments are 540 per month

 

[galway_blow_in]

No.

But I do think it's crazy to try and justify carrying expensive debt when you are in a position to pay it off on the grounds that it is deductible for tax purposes.

if debt is comfortably covered , rather than use what cash is available to clear it , is it not a relatively modest ambition to further grow ones asset holdings through some sort of leverage ?