...only if property prices continue to rise sharply ad infinitumRepeatedly remortgage to reinvest - using the 5% rate of inflation above and the LTVs involved then the portfolio would be worth that amount.
...only if property prices continue to rise sharply ad infinitum
What's about borrower repayment capacity?
Why are you bringing in the notion of LTV to answer my question about repayment capacity?
But he's NOT subsidizing his repayments, the rent is only subsidizing the interest. He has to make ALL the repayments himself AND still cough up an extra E170 (at the moment) to cover the cost of interest on the mortgage.
This still takes no account of other costs, of which anyone involved in property knows well can be high, especially over the long term. Insurance, maintenance charges, tenancy voids, furniture, kitchen appliances, beds, roof getting blown off in a storm. You don't encounter these costs every year, and some you may never encounter, but over the long term (which the positive argument is based upon) and with enough properties these costs will be encountered.
PRTB registration, accountants fees, new carpets, broken window needs to be fixed, central heating breaks down, advertising, new wallpaper, new welcome mat.
This capital investment is terrible!
The person is on an interest only mortgage therefore the renters are paying nothing off his mortgage.
It's good to see the only expenses incurred in property are the interest charges. I might as well be talking to the wall.
Ok - see the figures below - you don't have to go through all the figures as it may wreck your head - just look at the bottom line.
Also - note the LTV isn't all that hight in the example below.
The main point I am trying to illustrate here is that due to the ability of being able to release equity in property and reinvest further it therefore is far more rewarding than any leveraged pension investment.
Firstly - a few assumptions.
Lets say currently the OP has a mortgage of €300k on a €400k property - current LTV 75%.
Lets also assume growth of exactly 5% per year for the 20 years.
Lets also say the OP remortgages and reinvests every 4 years - which isn't all that frequent and remortgages 4 times over teh 20 year period - year 4,8,12,16.
Lets also assume the bank will want to give max LTV of 80%.
And most importantly - my whole point is that over the long term prices will rise - there is no great risk.
I say it is low risk / high return - and not hig risk/high return as you state.
SO -
On year 4
Property worth c. €485k - they could release c. €90k.
Can now purchase another property worth,say,€400k.
They now have an asset base worth €885k - with a mortgage of €700k. Current LTV 79%
On year 8
Properties worth c. €1.075 million - they could release a further €160k - this could buy another property worth c. €600k.
They now have an asset base worth c. €1.675 milion with an outsatnding mortgage of c. €1.3mil. Current LTV 77.5%
On year 12
Property worth €2.035 million - they could release a further €330k - this could comfortably buy property worth €1 mill.
THey now have an asset base of €3.035 mill. with an outstanding mortgage of €2.3 million. Current LTV 75%.
On year 16
Properties worth €4.6 million - they could release a further €650k - could comfortably buy €2mill.
Now have an asset base of €6.6mill - outstanding mortgage of €4.3 mill. Current LTV 65%
On Year 20
Properties worth over €8 mil. Outsatnding mortgage of €4.3 mil.
Pretty much €4 mill profit on an annualised rate of appreciation of just 5% and remortgaging only 4 times during that 20 year period with a 50% LTV.
With a 50% LTV this would produce a very healthy cashflow as well.
Had someone decided to be more aggressive with the gearing then profits could even have been far greater.
And also keep in mind yuo will still have assets worth €8 mill appreciating at a rate of 5% per year.
Presumably this borrowing could not be done with equities - not least because presumably dividends wouldn't nearly pay the interest on the borrowings.
So - here's my question - am I correct in saying somthing similar could not be done with geared equities?
The reason being that the interest would have to be paid on the loans as dividends presumably would not go towards paying the interest.
Also - are you not more exposed to margin calls with equities ?
Timing this cycle is very difficult but betting the bulk of your pension on the belief that you can is naive. If this was the only way People saved for their pension then every now and then we could have generations that would have little or no pension.
I agree completely. I dont believe anyone should invest in property or anything else for that matter for the long term until they and their spouse have already maxed out their pension anyway.
Very few people in Ireland max out their pension entitlements before investing in property
The fees & charges associated with pension contributions and the lack of clarity in terms of how much they cost you, having to purchase an annuity when you retire and confusion about what happens in the event of death are some of the reasons why some people prefer investing in property - an investment that they understand & can manage themselves.