Borrow to invest or not?

S

spiderfhear

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Hi, wondering if anyone can give me advice on the following. I bought a small cottage 10 years ago and it generates €400 a month from rent. I dont intend to sell it but i wondered if i can borrow against it to invest.

I have no debts on the property but want it to work better for me as i intend to build a house in a few years. Do i have any options?
(already have invested in shares, property fund and a secure fund)

Any advice appreciated:)
 
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Some lenders allow but can be reluctant to allow borrowing to invest against your pdh but against your rip it should be fine. That said it depends on your financial circumstances including annual salary and ability to make the repayments without depending on rental income to do so.
 
spiderfhear said:
Hi, wondering if anyone can give me advice on the following. I bought a small cottage 10 years ago and it generates €400 a month from rent. I dont intend to sell it but i wondered if i can borrow against it to invest.

I have no debts on the property but want it to work better for me as i intend to build a house in a few years. Do i have any options?
(already have invested in shares, property fund and a secure fund)

Any advice appreciated:)
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Why not just invest the €400 a month? Am I missing something? Why do people always feel the need to borrow?
 
room305 said:
Why not just invest the €400 a month? Am I missing something? Why do people always feel the need to borrow?
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Eh yes!

you often need a lump sum to invest!

You could develop a site for say 100k, borrowed against the property and its income, how far will you get with 400/month!
 
There are several geared funds available which might be a better bet. If you borrow to invest in shares, for example, you will still pay tax at your highest rate on the dividend income. There's also recourse to you in respect of the loan - if the investment return doesn't pay the interest, the bank comes after you.

A geared fund can pay bank lending out of gross dividend income, the lending is non-recourse and you pay only exit tax on profit. A geared fund may also borrow at lower rates than you personally, due to size.

Liam D. Ferguson
www.ferga.com
 
LDFerguson said:
There are several geared funds available which might be a better bet.
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I don't disagree with your analysis, but it is predicated on the assumption the OP already has the free cash to invest without borrowing against the rented property.

Depending on the OP's appetite for risk, borrowing against the property to invest might make sense.

It should, however, be borne in mind if invested in, say, an equity fund, since such borrowings would not be for the acquisition or refurbishment of the property, the interest costs could not be set off against rental income for tax purposes. From a tax efficiency point of view, the best bet might be to get a 100% loan to buy another rental property, cross secured on the first one. That way the new rental income could service some or all of the interest bill, and unlike the dividend income from equities, wouldn't be liable to tax, unless it exceeded the interest bill.

Of course, one would have to take a positive view of the direction of property prices for all this to make sense. I leave that for others to judge . . .
 
smarthinking said:
Can you explain (in idiot proof language) what a geared fund is and who does them?
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Gearing just means borrowing to invest. Usually you put up some money and somebody matches or multiplies that and you invest the lot. Obviously the money borrowed has to be repaid in the future along with some form of interest. Hopefully the investment will perform to allow you to do this and to earn a profit for yourself. It's a little like buying a house. You put up the deposit and a financial institution puts up the remainder in the form of a mortgage. In that case you usually repay the mortgage interest and capital over the mortgage term. But an interest only or endowment mortgage would be similar to the general investment gearing where the capital is only repaid at the end of the mortgage term. Gearing can allow you to invest in bigger things than you might be able to do out of your own cash. However the big risk is that things don't perform as well as expected so that you lose not only your own money but also somebody else's and thus end up out of pocket and in debt.
 
Can you explain (in idiot proof language) what a geared fund is and who does them?
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Following on from ClubMan's explanation, there are geared funds available from several companies including New Ireland and Irish Life whereby the fund borrows to invest, rather than you borrowing to do so. In other words, you invest €10,000, the fund borrows another €10,000 and you've effectively bought €20,000 worth of the relevant fund.

Returns on the investment are first used to pay the loan interest and because this is done within a life assurance company gross roll-up fund, the interest can be offset against the gross investment return, rather than an after-tax investment return which gives it something of an advantage over an individual who borrows to invest.

Borrowing to invest in anything (whether it be an individual borrowing or a fund) can multiply the potential gain on an investment but it can also multiply the potential loss if things go down, so it's really only suitable for an experienced investor who's not betting the farm on such an investment.
 
I don't disagree with your analysis, but it is predicated on the assumption the OP already has the free cash to invest without borrowing against the rented property.
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True. I would hold an opinion, which is admittedly open to debate, that if one doesn't have money to invest, borrowing to invest can be an overly high risk proposition. However, as the original poster has an unencumbered asset it could equally be argued that he does have equity to invest and is simply looking for a method of utilising it without liquidating it by selling the cottage.
 
LDFerguson said:
Following on from ClubMan's explanation, there are geared funds available from several companies including New Ireland and Irish Life whereby the fund borrows to invest, rather than you borrowing to do so. In other words, you invest €10,000, the fund borrows another €10,000 and you've effectively bought €20,000 worth of the relevant fund.
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There is another advantage of gearing an investment in this way, as opposed to borrowing the money personally to invest. That is, the borrowings in the fund would not be counted if you were seeking a further loan for whatever reason, say to buy a car or build an extension, etc.

If one borrowed money personally to invest, that would limit the amount of money one could potentially borrow for other purposes.
 
Thanks guys, interesting stuff.
I never knew till now what a geared fund was? I should explain that the rental income from the property just about pays for the rent im paying in an apartment so essentally they are cancelling each other out. The value has obiviously gone up in 10years and as im not selling i was hoping to use the increase in equity.
I understand the risks with shares (eaglestar matrix fund) and im happy with the spread i already have. As many investors will agree, investing in what you know is preferable so i intend to do just that. For me thats Energy or specifically renewable energy, does anyone have advice on investing in this area?
 
spiderfhear said:
For me thats Energy or specifically renewable energy, does anyone have advice on investing in this area?
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Yeah, it's high risk and very bubbly. A lot of the business plans of these companies make little sense except where government subsidisation is involved. This is often forthcoming but it doesn't make for a compelling business plan.

Tread carefully.
 
spiderfhear said:
Thanks guys, interesting stuff.
I should explain that the rental income from the property just about pays for the rent im paying in an apartment so essentally they are cancelling each other out. The value has obiviously gone up in 10years and as im not selling i was hoping to use the increase in equity.
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If that had been your home then you would have had no capital gains tax on it. Why rent elsewhere unless the cottage is far away from where you want to live ?
 
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