Key Post How risky is property investment?

Brendan Burgess

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Many people who borrow to invest in property underestimate the risk involved. Before you invest, you should ask yourself the following questions:

How will I be fixed if interest rates rise from 5% to 7%?
How will I be fixed if interest rates rise from 5% to 10%?
How will I be fixed if there is a crash in the rental market and my rental income drops?
How will I be fixed if I can't find a tenant and the property is vacant for 3 months?
How will I be fixed if the Government messes about with the tax situation?
How will I be fixed if property prices fall in the short or medium term?

While these outcomes are unlikely, investors must be able to cope with them if they do happen.

If you borrow heavily to invest in property, then there is a very good chance that the rental income will not cover the mortgage repayments and other costs. So it is very important that you can make up the difference from your salary or other income. You should only borrow to invest in property if your other income is fairly secure i.e. you are not in any real danger of losing your job.

If you already have a big mortgage on your home, you would be foolish to borrow 100% of the price of an investment property. If interest rates rise, you will have great difficulty in meeting your repayments. The potential return is just not worth the risk involved.

On the other hand, if you have paid off the mortgage on your home, borrowing 100% to invest in property is probably a good idea. If interest rates rise, your rental income may not cover your mortgage repayments, but you can make up the difference from your other income. Likewise, if you have difficulty renting your property, you won't be forced to sell.

A short term fall in property prices is not a problem for the long term property investor. However, if you are losing money on the investment and you are forced to sell, then a fall in house prices would be a serious problem.

SOME OTHER ISSUES TO CONSIDER BEFORE INVESTING IN PROPERTY

If you already have a home, you have a significant exposure to the property market. Buying another property increases this exposure. Investing in shares diversifies your investments.

If you are not borrowing to invest, you are better off investing in shares than property. The killer advantage of property is that you get a tax write-off for the mortgage interest, which you don't get if you borrow to invest in shares.
 
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Hi Brendan,

I'm suprised your not guiding new property investors towards fixed interest rates on their property investment mortgages.

I think now, more than ever before, anyone thinking of a property investment needs to think about location, location, location!

I'm not a fan of the stock market at present. Having been one of the few to make a good turn on the Eircom floatation, I've no interest in loosing it.

While I'm not dabling in the stock market directly, there are a number of good investment funds on offer from several of the banks / building societies, all offering capital guarantees - might be worth thinking about if you don't fancy a property investment
 
Hello all,

Some interesting points.

Having been burnt badly on tech shares a few years back, I’d be loath to get back into the stock market at present. I’ve seen in the press over the past few days that shares across the globe may crash to a six year low (www.observer.co.uk/busine...03,00.html ), so it might be wise to stay away for the time being.

The advantage of shares of course is their liquidity, and low transaction costs in getting in and out, certainly compared to property.

Many people have done well on property over the past few years, and certainly the leveraging element does help as well. However, pundits in the UK are predicting a price fall in the short term, leaving investors exposed to the nightmare of negative equity. The situation in Ireland is, of course, very different, but it does highlight the fact that buying in property is not the one-way bet that some seem to think it is. If the Eurozone slides into recession, which is a possibility, then Irish property values could go southwards.

Investing in either of the above media carries a risk in these uncertain times, and certainly would be something that I wouldn’t rush into until the global economic picture becomes clearer and more settled.

Just my tuppence worth,

Noel

PS Good point on the fixed rates though Garrett. A 3 yr fix now carries a premium of under 0.5% above most SVRs. If you believe the hype that interest rates are on the way up, then this could be the right time to fix.
 
How risky is property investment

The fact that you can more easily borrow to invest in property is the exact factor which increases the risk. People accept that borrowing is risky, but they don't intuitively accept the degree to which borrowing greatly increases your investment risk.

To put it in simple mathematical terms:

a) €100,000 property financed by €50k debt and €50k savings

b) Property value declines by 10%. All of this loss comes out of your savings = 20% loss. So, 50% borrowing doubles your risk.

c) If you had borrowed 90%, a 10% decline in value would be multiplied by 10 - i.e. wiping out your savings. So 90% borrowing multiples your risk by 10.

The above is obvious, but still tends to be overlooked. Yes, when values rise, leverage increases the return on your investment. But when values fall, leverage bites you in the backside. Never forget, BORROWING MULTIPLIES RISK.
 
Re: Key Post: How risky is property investment?

What will it cost to eject a bad tenant?
What else is planned for the general location?
What happens if the neighbour from hell moves next door?
What is the momentum in your local housing market and in your economy?
How often do you have to refit or redecorate?

Your first property investment is your riskiest, and you should learn some lessons from it. These will help you get better at making the next one. Also it is lot of egg in one basket at the outset and there is some additional diversification with the second one, even though it is the same asset class.

Realistically it helps to do a little spreadsheet and be very realistic about inflows and outflows, making sure to capture assumptions about the vacant periods, maintenance, tax, legal costs etc.

There is a terrible tendency to rely on hope alone to make the numbers stack up.
 
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Re: Key Post: How risky is property investment?

in my experience if you can get the finance,and sleep at night,go for it.nothing is without risk.i have no regrets,and am now looking at investment abroad.
 
Re: Key Post: How risky is property investment?

"What will it cost to eject a bad tenant?" - in the worst case senario multiply your monthly rent by atleast 24. To refer a non-vacating tenant to the PRTB costs €25. Where the tenants decide to be difficult they can go through mediation and tribunal procedures - this can take 6 to 12 months. If they refuse to abide by the PRTB decision it has to go to the circuit court, which can take another 12 months or so.
You can insure the loss of rent see www.rentassured.ie but this only covers the first 12 months although the vast majority of cases the tenants will be gone within 12 months - see www.prtb.ie
 
I just noticed this Key post.
It doesnt apply at all anymore.
Property investment is not what it was in back when this key post was created.
It is a totally different beast altogether nowadays and the fact that this thread is a key post is totally misleading.
 

Really, so what is the ‘this time it different’ magic this time around then?
 
And this week they are going to make you a criminal if you want to charge market rent on your investment.

It just gets worse and worse. Glad I'm out.
 
Hi Paxman

I wrote it in 2002, when a lot of people assumed property investment was a one way bet.

The basic principle is the same - returns on property and prices can go up and down.

I would agree with you, that it's become a lot less attractive due to the rent controls and tenants rights - but the principles are the same.

Brendan
 
I think the OP applies just as much today as it did 16 years ago. I am sure I read it then but I ignored advice and went into a rental investment. Most of Brendan's caveats and a few more came to pass and I am now happy to be exiting a disastrous investment. Ironically, the purchaser of my rental will probably do ok out of it! Now, I just have to wait for BoI shares to recover to about €30 per share! Slim
 

- started off at over 12% mortgage interest
- paying less than 3% on one property currently
- saw interest rates go massively down
- saw interest rates go back up again
- had vacant periods
- had tenant do massive damage
- Government never stopped messing with the tax situation, remember Bacon anyone, that destroyed everything for a while, property tanked, and you couldn't get mortgage interest relief if you purchased, swifly reversed by the government
- have seen property go through the roof in the Celtic Tiger, sold on the way up to a builder that went bust (around 2002)
- saw property tank again after the Celtic Tiger
- and it's back up again to near Celtic Tiger levels
- saw the rental market crash, rents went really low, and there were some periods when it was difficult to let, the opposite is the case now
- a couple of years ago they reduced interest write off to 75%, then they decided for some landlords in 2019 we can claim the other 25% from circa 2016 to 2019 in one go
- then what did they do, the government, the upped it to 100% anyway
- worst thing is the rental controls, it's means I'm going to sell a property and make a family of 6 move out and I don't want to
- then I'm going to buy a different property, renovate it and get market rent

Only had shares once, Eircom. Will never invest again in shares and I made money on Eircom (small amount and I had to buy them in my siblings names and pay them some of the gains). Way too risky for me though. Compared to property. Wouldn't have the nerve for that.
 
Back in 2002 an investor would have been doing very well to achieve a gross yield of 4% on an apartment in Dublin city centre.

At the moment, gross yields of close to 8% are achievable for similar properties. That's a massive difference.

Government interference notwithstanding, it seems to me that residential rental property is a far more attractive option now than it was in 2002.

Rental properties are certainly not without risk but that IMO that risk is now generously rewarded.
 

Harder to leverage up nowadays, just as well as with tenants rights having increased substantially, were you to find yourself with a rogue tenant, mortgage repayments would become a problem very quickly and for a long time.
 
Well real borrowing costs have certainly increased and that’s part of reason why we’re seeing higher yields.

I believe a lot of residential property investors these days are buying for cash.
 
If investor buys for cash

What is there to offset on rental income?

Let's say 20k rental income
2k repairs exists
18k net profit

What is the annual tax liability on rental income?
 
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