He is not by any means overborrowed. So the risk is small. But the risk is still increased by borrowing.
If the borrower is able to cashflow the borrowing then there is no risk that he will be forced to sell at a loss.
If any of the following go wrong, then borrowing will make the losses worse:
[*]
[*]A sustained fall in value of the property
An increase in interest rates
A fall in rent
A bad tenant who refuses to pay rent
Case 2) Borrows €300k to buy a property for €400k.
This is very risky. A bad tenant or difficulty letting the property and he will not be able to service the loan and may be forced to sell. Could easily lose his entire €100k equity and more.
My point is that if the borrower is able to service the loan, there are no other substantial risks. In particular the idea that a fall in capital values will be magnified due to borrowing, which is relevant to other types of borrowing to invest, is not relevant.
I think the issue boils down to this for me, having had this debate with BB and Creamegg for years. Creamegg and me know and invest in property. BB is an expert in shares. I wouldn't have a clue and hate shares. But I love and understand property. I literally do not see the risks that Burgess sees in property. While I do not see the benefits of shares that he sees. I in fact think they are a risk, a risk I'm not prepared for.
Does anyone else see it this way? Maybe it's not rational. But I think it's fair to say that the three of us have made money in the business/money making we are in.
Are you arguing that losing a tenant is a risk, but is not connected to the borrowing?
If I borrow €100k to invest in more equities, I won't be forced to sell either because I can afford the repayments. But it increases my risk.
I think the issue boils down to this for me, having had this debate with BB and Creamegg for years. Creamegg and me know and invest in property. BB is an expert in shares. I wouldn't have a clue and hate shares.
Paying off that loan gave you an effective, guaranteed, after tax, net return of almost 4.5%! On a risk adjusted basis, that is a stunning return in the current environment - it's no brainer territory.i paid off a 50 k loan with an interest rate of 5.54% in july
Paying off that loan gave you an effective, guaranteed, after tax, net return of almost 4.5%! On a risk adjusted basis, that is a stunning return in the current environment - it's no brainer territory.
Investing in a single commercial unit in a provincial town is self-evidently riskier than (co-)investing in a Multi-tenanted retail centre in a large urban centre. You would expect to be compensated for takng that additional risk by way of a higher initial yield.
Leverage carries it's own risks that are separate and distinct from the risks associated with any underlying investment.
There's no doubt that we all have a different need, ability and willingness to take investment risk if that's your point. Our risk tolerance depends on a variety of factors, including our net worth, age, desire to leave a legacy, etc.
The gross yield on the property won't change because you paid off the mortgage. You won't get a 10% gross yield on a property without taking on material risk - regardless of any leverage.
Incidentally, there's nothing wrong with taking investment risk - as long as you understand the potential downside.
That's true. I've two experiences with shares. I bought the Eircom shares back in the day and sold once I got them. My mother bought about 20 K IEP share ares in four comapnies and lost everthing. At least if a house loses it's value you still have the house and it will give you a return. If shares tank you have nothing. My aunt had her savings invested in BofI. She lost something like 100K. Now she's in a nursing home.We are not too old to learn.
im just trying to illustrate to the OP how people have different attitudes to risk , some are more orthodox than others in how they approach risk
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