Irish Properties worth €1m... Time to diversify?

T

ThirstyLizard

Registered User
Messages
30
Hi all,

We currently have two rental properties and have been considering selling one of them to diversify our investments. Our tenant has just informed us that they will be ending the tenancy, so now could be an opportune time...

Interested to get other's thoughts on this.



Personal details

Age: Late 30's
Spouse’s/Partner's age: Late 30's

Number and age of children: 2 kids both under 4yo


Income and expenditure
Annual gross income from employment or profession: €14k
Income from rental properties: €54k
Annual gross income of spouse: 0

Monthly take-home pay: ~€3.8

Type of employment: self-employed

In general are you:
(a) spending almost everything we earn


Summary of Assets and Liabilities
Family home worth €450-50k with no mortgage
Cash of €170k
Defined Contribution pension fund: €10k
Company shares : 0
Buy to Let Property x2 worth €600k (€300k each) with no mortgages.

Other borrowings – car loans/personal loans etc - No other borrowings

Do you pay off your full credit card balance each month? No credit cards.

Buy to let properties
Value: €600k
Rental income per year: €54k
Rough annual expenses other than mortgage interest: €2k
Lender: None
Interest rate: n/a

Other savings and investments:

Do you have a pension scheme? No

Do you own any investment or other property? As above.

Other information which might be relevant

Life insurance: None


What specific question do you have or what issues are of concern to you?

We are wondering if it would be wise to sell one of our investment properties and reinvest the funds (€300k) into other investments e.g. Diversified stock market funds.

We currently rely on the income of both properties, however we have the opportunity to increase our self employed earnings to replace this income. Albeit, we won't have as much 'free time' which we very much cherish in our current stage of life with young kids.

We've always been somewhat scared of putting large sums into the stock market, but realise we are highly exposed to the Irish property market.

Trying to weigh up our options.

Any advice or help to steer us down the right track is much appreciated.
 
Why sell a good investment?

You have 170k in cash: why not start with putting some of that into stock market see how that goes for you?

Selling property sounds like a slippery slope
You might be tempted to go on holidays, buy a car etc etc
 
You say gross income 14k, monthly take home pay 3.8k - is this correct?
 
ThirstyLizard said:
Cash of €170k
Defined Contribution pension fund: €10k
Company shares : 0
Buy to Let Property x2 worth €600k (€300k each) with no mortgages.
Click to expand...

At present you have €1m in property and €170k in cash.

Even if you have a very positive view of Irish property, stuff can go wrong. It can fall in value. You can get a bad tenant. A new government could restrict rents even further.

So, I think you should diversify into equities.

Given your low income outside rent, you are very vulnerable to your tenant not paying the rent. That is another reason for having liquid assets such as shares.

So, sell one property and invest the proceeds and the €170k cash in a diverse portfolio of shares.

Your dividend income, rent and self-employed income might not be enough to cover your expenses. However, you can always sell some shares when you need cash.

I think you should also plan to increase your earnings - whether that is to continue as self-employed or to get a PAYE job. You should then maximise your pension contributions.



Brendan
 
Are you distributing your income among both of you equally?

If one spouse has all the income, you have €45,800 at 20%
If the other spouse has at least €27,800 of income in their own name, you get €73,600 at 20%

Brendan
 
Brendan Burgess said:
Are you distributing your income among both of you equally?

If one spouse has all the income, you have €45,800 at 20%
If the other spouse has at least €27,800 of income in their own name, you get €73,600 at 20%

Brendan
Click to expand...
Yes, all income is split 50/50 and we are separately assessed.
 
how would you go about deciding what stocks to purchase. I think holding for the longterm and not going into an ETF (41% tax every 8 years) is a good strategy especially if you are thinking of leaving the shares in your Estate. However what 10? stocks would you purchase?
 
Apologies to all the normally excellent posters I am about to insult.

The OP has received hopeless advice here, among the worst I have seen on AAM.

No one has asked the first question. How much Capital Gains Tax would be payable on the sale of each investment property. Without knowing that no meaningful comment can be made.
 
Hi cremeegg

Interesting point and for a fuller understanding of his situation, we should have got all the facts. It had occurred to me to ask what the prices were to decide which was the most tax efficient to sell. But I thought it more important to establish whether he should sell or not.

And I think it's pretty clear that he should do so.

But this is a case where the tax tail should not wag the sound financial planning dog.

Let's say that he bought both properties for €200k and so if he sells one, he has a CGT bill of €33k.

It is still right to sell one property. The diversification is more important than paying €33k CGT now, rather than paying it at some stage in the future.

Brendan
 
cremeegg said:
Apologies to all the normally excellent posters I am about to insult.

The OP has received hopeless advice here, among the worst I have seen on AAM.

No one has asked the first question. How much Capital Gains Tax would be payable on the sale of each investment property. Without knowing that no meaningful comment can be made.
Click to expand...

Good point.

CGT bill would be around €12k for either property.

Unfortunately it's not higher! haha
 
hubble said:
how would you go about deciding what stocks to purchase. I think holding for the longterm and not going into an ETF (41% tax every 8 years) is a good strategy especially if you are thinking of leaving the shares in your Estate. However what 10? stocks would you purchase?
Click to expand...
I feel like I'd have trouble pulling the trigger on any equity investments tbh, whether that was an ETF, investment trust, individual stocks or combination of same.

We are pretty risk averse by nature and having seen the markets pull back over the past few months is scary.
 
BTL property realisable value €580k after CGT and fees.

Return €54k. That is 9.3% before tax.

While there are no guarantees in life, that return is very secure. When Irish property prices were falling 50% rents declined 20% approx.

There is also the possibility of capital appreciation, that is in addition to the 9.3% rental return.

While I think trying to predict the future (or anything else :)) is a fool's game, inflation needs to be considered. As a real asset housing is unaffected by inflation. (That is not the same as saying inflationary times do not affect house prices).

Diversifying away from an asset yielding 9.3% to an asset yielding 1.69% (S&P dividend yield at present) needs a fairly strong justification imho.
 
Brendan Burgess said:
Given your low income outside rent, you are very vulnerable to your tenant not paying the rent. That is another reason for having liquid assets such as shares.

So, sell one property and invest the proceeds and the €170k cash in a diverse portfolio of shares.
Click to expand...

I would say that selling one property would leave the OP much more vulnerable if they had a tenant not paying rent. With all their rental income gone they would have to eat into their capital pretty rapidly.

With two properties they are highly unlikely to have both with non-paying tenants.
 
cremeegg said:
Return €54k. That is 9.3% before tax.

While there are no guarantees in life, that return is very secure.
Click to expand...
Higher yield usually means higher risk.

9% yield is more likely to be apartments outside of Dublin or rural houses. Your tenants are more likely to be delinquent and voids between rentals higher.


cremeegg said:
Diversifying away from an asset yielding 9.3% to an asset yielding 1.69% (S&P dividend yield at present) needs a fairly strong justification imho.
Click to expand...
It's not at all an apples-to-apples comparison. The value of your house will not increase due to share buybacks the way an equity portfolio will!


I'm reluctant to give advice that's too specific here, but having >80% of your wealth in one pretty specific asset class is probably not great long term.
 
llgon said:
I would say that selling one property would leave the OP much more vulnerable if they had a tenant not paying rent. With all their rental income gone they would have to eat into their capital pretty rapidly.

With two properties they are highly unlikely to have both with non-paying tenants.
Click to expand...

Hi Ligon

If you have €300k each in two properties and no other assets, you are very vulnerable to a catastrophic outcome. Both tenants stop paying and you have no income. While you are a bit right in saying that two defaulting tenants is less likely than one, there probably is a correlation. When the next economic crisis hits, a lot of well meaning tenants will default.

On the other hand, if you have €300k in one property and €300k in a portfolio of 10 equities, then you will have dividend income from 10 companies. Some may pass their dividend, but your likely to get some income.

But the most important point is that equities are liquid. You can always sell some of your shares. If you have two properties and you need cash, you can't sell €10,000 worth of one property. You must sell the entire property and it may take you months to do so.

llgon said:
they would have to eat into their capital pretty rapidly.
Click to expand...

This is a common misconception to discriminate between income and capital.

Which would you prefer
A) A company which pays no dividends but whose share price grows at 10% a year
or
B) A company which pays 5% a year dividend, but whose share price does not grow?

You should prefer A) and feel quite happy to sell some of the shares when you need "income".

Brendan
 
Brendan Burgess said:
This is a common misconception to discriminate between income and capital.

Which would you prefer
A) A company which pays no dividends but whose share price grows at 10% a year
or
B) A company which pays 5% a year dividend, but whose share price does not grow?

You should prefer A) and feel quite happy to sell some of the shares when you need "income".
Click to expand...
You' ve misinterpreted my post if you think I am under that misconception.

That hypothetical scenario is true and I could be happy out if growth of the share price matches or exceeds my income needs.

However in this real case I would expect share price growth to fall far short for the OP's income needs if they had no rental income to rely on. There are options C) keep two properties(their current situation), D) keep one property.

I agree that the risks are high but so are the rewards and the rental properties are allowing the OP have the lifestyle they want. On recent performance investment in equities would not cover it and they would most likely be seeing a reduction in their capital.

In either case, increasing employment or self-employed earnings would be the best option to reduce risk, as you have alluded to.
 
You must log in or register to reply here.
Back
Top