Progress report on my purchase of 2 interest only investment properties

Brendan said:
Hi nbc

I don't think that anyone is being negative or positive. Your case study is interesting. Very few people have given us such detail so it's nice to subject it to analysis.
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Indeed and thank you nbc for that detail. In fact it's somewhat refreshing (at least on askaboutmoney.com ;) ) to see someone who has done a reasonable amount of homework before taking the plunge.

Don't be afraid of criticism or the nature of the feedback you'll recieve here since;

Clubman said:
One person's negativity is another person's prudence.
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(A great quote I must remember in future! :D ) I must admit I myself would be quite risk adverse due to the leveraged nature of property and buy-to-let in the current market but that is my own feeling and I hope the investment goes well for you.

One other question though, I'm curious how much of your own time you spend on the property (between tenant issues, maint, etc.)
 
NBC
Thanks for posting this in such detail - most people gloss over the details of how much they paid, how much rent they are getting etc. I am normally too polite to ask! Good luck with it.
 
NBC
Am a little concerned......
You are going interest only and most of this thread has been concerned with whether the properties will appreciate in 10 years or not.
With respect I think this is going off the main points of which imho there are 2:
Firstly
You are in a positive cashflow situation with this investment which is a key point. Well done........all things being equal provided you take care of tenants and keep the property well maintained you should have good occupancy and continued profits. Great point re 12 month lease...I do it all the time (go under market on rent so as to reduce vacancy rate). All these factors reduce the risk of the investment... I would say worry about these things (as you are obviously from your postings) more than the media stuff of will it go up or down in value..blah ...blah.....Do not be phased into selling a profitable investment AT ANY TIME by the media stuff!
Secondly
http://www.askaboutmoney.com//showthread.php?t=6217
Brendan in this post details how to run an interest only mortgage in tandem with an equity based investment vehicle. The aim being for the equity investment to outperform the after tax interest rate of 1.9 odd %. I think (maybe I am wrong) that the great risk of interest only is not negative equity...(media...blah...blah!) but rather that the investor does not have the discipline to invest in tandem in the equity based product.
Brendan in NBC case how much should he invest a month in equity product based on the figures provided?
Ideally he should invest this in pension as tax advantage ++?
Would you consider investing in exchange traded funds like vanguard total stock market fund with a discount broker rather than an actively mangaed product with all that goes with it (underperformance over 15 years+ compared to market and higher charges)?
 
Hi Markowitzman,
Many thanks for your comment and interest in my post. In fact I had read brendan's post on int only mortgages quite a while ago and found it very useful. I think everyone who is serious about property investment should read it. Currently my investment is breaking even easily and is in fact makinf a small profit after expenses. Currently I don't have much spare cash floating around to divert into an equity investment. However re reading this article of Brendan's has got me thinking. In 1998 I purchased 2 properties both of which are let. One is valued at E325,000 with mortgage of E78,000(let at E1050 deliberately under market level again). The other is valued at E190,000 with mortgage of E95,000(recent top up for purchase of these 2 int only houses). The mortgages are repayment. Should I change them both immediately to int only and use the extra cash in a more productive fashion?

Also markowitzman I had been thinking of selling the property which has a lot of equity in it in a couple of years time...the boy has done well and its made a few bob and get out while you can(theres always enough for the needy but never enough for the greedy!). I take it this would be a no no in your book?
nbc
 
For what it is worth I would not sell if let and if sell you have cgt to payetc.......rather could do equity release and invest proceeds as you wish avoiding capital gains on sale. Obviously from your figures you could release sizeable funds. I just wonder if you were to invest this in equity funds etc and go interest only on the mortgages you would probably be laughing in 10-15 years (need this term to reduce volatility risk of funds imho).
Alternatively you could reinvest release into further property (commercial/foreign etc etc)
I am not an accountant but would be interested in how one computate the amount needed to fund an equity fund to "cover" the capital value of the property on an ongoing basis. I was thinking in terms of either buying etfs myself or doing a monthly payment in to a low cost fund like quinn life products.
markoman
 
Brendan said:
Hi nbc

I don't think that anyone is being negative or positive. Your case study is interesting. Very few people have given us such detail so it's nice to subject it to analysis.

It's too early to say whether the investment was good or bad. You won't know until you sell the properties. Well, you'll know before that if properties rise considerably and stay up.

I wouldn't worry too much about tax. Paying tax is a good sign - it means you are making profit.

It's good to see your investment doing a little bit better than breaking even. I reckon some investors are losing money and hoping to recover it on capital appreciation. It's always a good idea to have a project making money on its trading account, so to speak.

Your annual rental is 15300
allow 10% for vacancies - say 13500

Interest paid 11,000
Insurance 700
Depreciation/replacement of furniture - 1000
Repairs/Decoration 500
Private Tenants Registration ?
Total costs 13,300

So your profit will depend on how well you manage the property. If your tenants pay on time and you have no vacancies, then you will make a higher profit. If it's vacant for longer than you expected or if interest rates rise, you will lose money.

In the very long term prices of property should rise. In the medium term, they are as likely to fall as they are to rise. I am not making a forecast, just setting out the scenarios.

You have taken a calculated and managable risk. That's what the capitalist system is all about. In the long term, you are about 90% likely to get a return on the effort you put in. In the medium term, I would say it's around 50/50.

Brendan
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Brendan, any professional property investor will tell you that they make their money the day they buy, and not the day they sell. This is true of other investments. Anybody who invests in property and is unsure whether it is a good or bad one is gambling, pure and simple. This is usually because they do not know why they are doing it in the first place and what they want out of it ie a clear strategy. It seems that many people in Ireland are fitting this category. I have had many deals brought to me by property sourcing companies that make no sense for an investor but are selling like hot cakes to people eager to listen to the sales speak on a brochure.

If you have a plan and a strategy, research and know your market and have a clear exit in mind, this is professional investment. Sounds to me like nbc has done this - well done to you.

t
 
Thanks for your comments markowitzman and theo. Much appreciated. I have to say this website is like a mini business school. Whoever had the initial idea stand up and take a bow! So mark you really think I should invest all the capital repayments into some form of equity investment? I have to admit I would be a little bit nervous and as you can see normally I don't mind taking a bit of a gamble. I see your point about doing it over 15 years and this reducing volatility.
Would you simple buy shares in blue chip companies in Ireland/USA(eg buy bank of ireland shares each month with the capital portion of the mortgages) or get a bank to invest tem for you. From what I know(which is very little) they usually charge hefty enough fees for this service. However I don't feel confident enough to make stock market decisions myself.
nbc
 
nbc said:
Would you simple buy shares in blue chip companies in Ireland/USA(eg buy bank of ireland shares each month with the capital portion of the mortgages) or get a bank to invest tem for you. From what I know(which is very little) they usually charge hefty enough fees for this service. However I don't feel confident enough to make stock market decisions myself.
nbc
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If you decide to go the equity route I think Quinn Direct offer a good tracker at low cost which might be a good route.

Roy
 
onekeano said:
If you decide to go the equity route I think Quinn Direct offer a good tracker at low cost which might be a good route
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Just to clarify - this refers to index tracking unit linked funds and not tracker bonds.
 
My posting on interest only mortgages seems to have caused some confusion. There is absolutely no need to cover the capital value of the property, or the amount of the mortgage for that matter.

If you have an investment property, you should aim to have the interest only mortgage for as long as you own the property. You pay off the mortgage only when you sell the property.

If your overall income exceeds your expenditure by €5,000 a year, what you do with this money is up to you.

You may choose to spend it on a holiday.

You may choose to invest it in the stock-market.

You may choose to invest it by paying off your mortgage.

But you should not feel under any obligation to have an amount equal to the capital value of your mortgage.

If the loan to value is very high or if your income is relatively low, you may wish to build up savings and investments to reduce the mortgage interest payments during long periods of vacancies.

We have a natural tendency to want to pay off our borrowings. This makes sense for borrowings for current expenditure or for cars. But it makes no sense for investment property. And in many cases, there is no need to pay off the mortgage on your home.

Brendan
 
nbc
In your case you seem to be very much in property.
By "covering" the capital value of property (or a % thereof) you are achieving two things
1 imho you are giving yourself the chance of outperforming a capital and interest mortgage as per Brendan article
2 also by having an equity fund riding along with the property you are reducing your sector specific risk as you seem over exposed to property. Having the equity fund running in tandem reduces your risk by giving you some diversification which could be a good bet with the way the property bubble is going here! You see if there was a downturn and you were covering part of the capital with equity fund (global etfs for me) your exposure to this downturn is less acute as you have equity fund with different volatility pattern (you hope) to the property market.
For what it is worth a naked interest only in this climate in my opinion is too risky.
Interest rate bias is up undoubtedly and rent returns are soft to poor.
I think 2 things are fuelling the bubble.........german recession (that is slowly improving) and tax wheeze housing which is on the way out.
Oh am starting to ramble!
If one have a chance to leverage one's returns via property whilst getting diversification and reduce risk by having equity fund running in tandem this is my ideal situation to be honest.
Would like to hear other views on this.
 
Cheers onekeano.
Can I ask something. Quinn direct as far as I know is a company belonging to the concrete king sean quinn. What happens to my investments if the company goes bust? I feel that this would be less likely to happen to bank of Ireland or Irish life? Am I correct?
nbc
 
Brendan said:
And in many cases, there is no need to pay off the mortgage on your home.
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Okay, so I'll rise to the bait....

Seems to me there are 3 main reasons for paying off your mortgage:

1) To increase the equity you hold in your home.

Equity is very useful. The more you have the more you'll be able to borrow and the lower the rate you'll have to pay for the privilege.

During a period of house price inflation, the rise in the value of your home will give you increasing equity. But, if we enter a period of zero property inflation (and there is arguably a significant chance of this in the short to medium term given the strength of the market in recent years) new buyers will suffer from high levels of LTV across that period, reducing their financial (and in consequence lifestyle) flexibility. If property values fall, not repaying/not having repaid any of your mortgage will leave you in negative equity and all that such a financial state entails.


2) To reduce exposure to interest rate rises.

Clearly, the more of your initial borrowings have been repaid, the less costly a rate rise becomes for the borrower. If you doubt this have a play around with our old friend http://www.jeacle.ie/mortgage/eu/. Plug in your own mortgage details and see, particularly through the "Annual table", how a rate rise becomes much less of a problem in the later stages of a repayment mortgage but an interest-only mortgage has no such comforting feature.


3) To provide for the inevitable fall in income and likely change in income type you'll suffer on retirement.

Interest-only mortgage servicing is analagous to paying rent. I have nothing against rent paying. Smart renters enjoy hassle-free possession of good properties at reasonable cost and a degree of flexibility which is the envy of mortgage burdened "homeowners".

The problem arises on retirement when your income is likely to fall overnight and, critically, a high proportion of your income may become fixed. Suddenly, owning your home becomes a very attractive proposition. Imagine how you'd feel if rents started rising at rates way above rises in your income and you face the likelihood of being unable to afford to pay the rent to stay in your home in x years.

So, if you are going to decide not to pay off your mortgage early on, make sure you will have the means to pay off the capital sum owed on retirement.


So what are the advantages arising from not paying off the mortgage on your home? Tax relief on mortgage interest? Opportunity cost of repayments? I can see these points but can't see how these outweigh the arguments in favour of repayment for the average non-entrepreunerial type of borrower.
 
ClubMan said:
I have said it before and I will say it again: I was one of those who was too greedy, didn't sell early on and paid the price. This was totally my own fault and nobody else's. There - happy now? ;) .
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Clubman

I was lucky enough to read Moneybags in The Pheonix prior to the flotation. He crunched the numbers and called every hop of the ball in advance for Eircom. Vastly overstaffed in the number of employees per line realtive to other telecom companies. He stated that the offer would be heavily oversubscribed by the small investor, and that the Government would support the price for a period after flotation so that people who wanted a quick exit could do so without losing money. It was their first flotation and they wanted it to be a success. At the time there were talks of other ones following. Finally he advised to borrow as much as you could and then get out quick.

Just after the flotation he recommended buying First Active which I did and lost my shirt on them. There were strong rumours at the time that they were going to be taken over (by Anglo Irish I think). However if I had kept my nerve and not sold out I would have made a very healthy profit. The benefit of hindsight

Since then he has also given some other tips that were also spot on and is not afraid to give a sell recommendation. Also worth reading in the Phenoix is the Diary of the Northside Taoiseach.


Murt
 
Let me make it very clear that I said that in many cases there is no need to pay off the mortgage on your home. Not in all cases.

I have also stressed on many occasions, that a person's first financial goal should be to buy their home and their second financial goal should be to get their mortgage down to a reasonable level. I think that I have suggested a rough rule of thumb of a mortgage of 50% home to value and no more than twice your salary.

At that level, you should see your mortgage as part of your overall financial position. You should not simply see is as taking from the value of your home.

If you have a surplus of income over expenditure, after paying the interest costs, then you face two major decisions.

The first decision is whether to spend the excess or save it. That depends on many factors. A single person with lots of surplus income may choose to save it. A married couple with children may choose to spend it.

If I do choose to save it, I can pay off the mortgage or invest it. Paying off the mortgage is the safest for the most of the reasons already outlined. But many people are taking a very justifiable and calculated risk to invest their excess in buying shares or another property rather than paying off their mortgage. I will stress again, that this should only be done after the mortgage on the home is at a comfortable level.

Many people are making the mistake of remortgaging their homes to buy investment properties without having the comfort of 50% equity and very high salaries. They will come a cropper if interest rates rise, property prices fall and rental incomes fall.

Brendan
 
Excellent post, Brendan.

And yes, I have heard you on the wireless suggesting that the financial priority for many people in Ireland today should be to get their mortgages down to a manageable level.

I certainly share your concern about the rush to remortgage to purchase investment properties in a deeply uncertain market. But suggesting that it is unwise is advice frequently ignored.....now where did I put that Baltimore share certificate?
 
Another very clear example where people should try to switch to an interest only mortgage on their home is where they have capacity to contribute to their pension fund. If someone has a comfortable mortgage, it makes huge sense to borrow to invest in a pension. So conversely, it makes no sense to be making monthly capital repayments on their mortgage.

Brendan
 
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