Key Post Understanding the risks of residential property investment

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letitroll

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DannyBoyD said:
Yes there are risks, but thats the case with all investments one way or another.
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Other 'investments' are rarely funded with so much leverage/debt.

When you get down to it and take the prototypical BTL Irish landlord (one property & substantially all their 'savings' tied up in it) you get a real and substantial emergence of compounding idiosyncratic risks -

(1) the single property concentration risk
(2) single tenant counterparty credit risk
(3) throw on top the x3 x4 leverage
(4) then add in the regulatory risk
(5) and for good measure the relative lack of liquidity & transaction buy/sell costs compared to alternatives (bond ETF)

I think property is a ‘good’ investment as part of a diversified portfolio of investments….in Ireland, too often, it is the only thing in the ‘portfolio’ and that’s the mistake.
 
Plus there are just too many things which can go wrong/risks with a PRS. When you have a large number of risks, that massively increases the chance that one of the them at least will occur.

If I invest €300k in AIB shares, the risks are that AIB goes bust and I lose all my money or that it stops paying dividends. I can, however, sell out at anytime.

But that is it and I don't have the risks of criminal prosecution, misbehaving tenants aided by the RTB, more anti-landlord rules and, most importantly, an investment which I can't exit even though the rent and/or the capital value is fallling.
 
The other bit I left out is that thanks to price controls….the Government has made it an asymmetric investment ‘opportunity’ and not in a good way….your upside (rental income) over significant time periods is severely capped by rent controls while your downside - falling rents and/or rising operating expenses - are completely uncapped.

Unlimited downside and capped upside levered 3-4x where the cashflows are underwritten by the income, credit quality & integrity of an individual you’ve never met. Risky? I think it passes the risk test handily.
 
Bronte said:
Can we exclude the Celtic tiger one off accidental landlords.
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Yes. Exclude the ones where the risk destroyed their lives.

And exclude the landlords where the tenants paid no rent for years and wrecked the place.

Only include the property investments which have worked out well.

That will show that property has always and will always be a good investment.
 
Brendan Burgess said:
Yes. Exclude the ones where the risk destroyed their lives.
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Not at all, they were not people who set out to be a landlord.

I never suggested excluding properties destroyed by unpaying tenants. That’s part and parcel of being a landlord. The OP refers to the typical Irish one property landlord. The ones who bought a property to let out.

In relation to non paying tenants, I’d say the vast majority of those are Dublin City council tenants. Said council is spectacular in not chasing up on arrears.
 
Brendan Burgess said:
Yes. Exclude the ones where the risk destroyed their lives.
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The thread refers to property investment. Individuals who became landlords unintentionally and pretty much without choice can hardly be included in this group.

A fine example of 'anti-property investment bent' perhaps?
 
Brendan Burgess said:
That will show that property has always and will always be a good investment.
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Is that the intent of this new thread you created? I thought it was about understanding the risks of property investment. I’ve never stated that property is always a good investment. Nor have I said there is no risk. In fact I cannot think of a single thing that doesn’t have risk. Though the Eircom shares was pretty close.
 
In anything, where a large number of risks are attached to something, there is a good chance that least one of those risks will happen.

If I invest money in shares in a quoted company, I have the following risks:

1. The company's share price declines and I'll lose money.
2. The company becomes insolvent and I lose all my money.
3. The company stops paying dividends.

I've three risks there and three risks only. I can sell out at any time if I don't like the company's direction. Plus the maximum I can lose is the amount I invested and I have an unlimited upside; maybe I've spotted the next Berkshire Hathaway

Take the PRS on the other hand. The risks are, in no particular order,

1. A criminal record
2. A misbehaving tenant who will get a sympathetic ear in the RTB
3. Rent not being paid and again the tenant treated sympathetically by the RTB.
4. More anti-landlord rules
5. The system is designed so that the upside is capped (rent control), but the downside isn't (rents can fall either due to the market or government intervention).
6. Escalating costs as the government imposes higher standards and/or cost inflation
7. Escalating costs and declining rent
8. Difficultly selling an asset which is illiquid anyway
9. Having to sell at a discount because the tenant is in situ
10. Decline in the capital value of the property due to market forces
11. Getting into financial difficulties if the property is mortgaged due to non-payment of rent or a reduced rent. The property may ultimately be repossessed and the owner's credit record is ruined.
12. Inability to sell and exit at all due to the tenant in situ requirement.
13. Having to make a large payment to the tenant to get them to leave.
14. Trouble for a landlord's estate as the spouse or children are left trying to unwind a property portfolio.

There are just so many things which can go wrong with a PRS investment these days, that there is a good chance that one of them will. For the ordinary investor, it is best avoided.
 
Bronte said:
In relation to non paying tenants, I’d say the vast majority of those are Dublin City council tenants. Said council is spectacular in not chasing up on arrears.
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If you look at the RTB's most recent annual report (2024), the top dispute issue is a combination of rent arrears and overholding.

llgon said:
The thread refers to property investment. Individuals who became landlords unintentionally and pretty much without choice can hardly be included in this group.
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I would think they can. They also illustrate what can go wrong with property investment.
 
Greenbook said:
I would think they can. They also illustrate what can go wrong with property investment.
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Excellent post #9. Well summed up.

But I disagree with your opinion on accidental landlords. I don't regard buying your own home as property investment. This is key to the point I make.

Accidental landlords, by my understanding were left with little choice but to rent out a former home, as they couldn't afford to sell due to negative equity. Their problems didn't arise because of becoming accidental landlords, this was the only solution in a lot of cases.

Ironically the vast majority benefitted from becoming accidental landlords, especially if they stayed the course. The rise in rents and property values in the past 10-15 years have resulted in great returns for many.

The hyperbole that property investment 'destroyed their lives' was very misleading in my opinion.
 
It's totally anectodal, but i spoke with a pal of mine yesterday hadnt seen in a while and we started talking about rents in the context of paying it for kids in college. Turns out he still has a house he bought in in early 2000s. The house is worth less than he paid for it and rented out for very little to HAP tentant, seems he bought in an area of limerick where desirability has disimproved, anyway just another example of thlwhat can go wrong (albeit he was definitely unlucky with purchase).
 
Cameo said:
The house is worth less than he paid for it and rented out for very little to HAP tentant, seems he bought in an area of limerick where desirability has disimproved, anyway just another example of thlwhat can go wrong (albeit he was definitely unlucky with purchase).
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This is an excellent point. We are somewhat immune to the issues with rent control and the constantly changing rules because rents have massively increased as have house prices.

Try living with all the anti-landlord rules, the pro-tenant RTB, the restrictions etc. in a market where rents are falling (and the RTB makes sure tenants get the immediate benefit of a fall) and sale prices are falling as well. And both of those things will happen at some point.
 
llgon said:
The thread refers to property investment. Individuals who became landlords unintentionally and pretty much without choice can hardly be included in this group.
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Hi ligon

If someone owns a property which they let out, they are property investors.

They may have been accidental landlords because they could not sell it but so what? They are still property investors.

This thread is about the risk of property investment.

The key to any sensible investment strategy is to diversify to reduce risk. A property investor with 10 properties has diversified the risk of a bad tenant. They are unlikely to need to sell their investment urgently and be prevented from doing so.

But someone who has just one property is taking a very big risk. Someone pointed out that a big property investor has to start somewhere which is a valid point. If you have a plan to build a portfolio of 10 properties over the next ten years, then you may well accept the concentration risk at the start of owning just one property, in the knowledge that it will reduce as you accumulate more properties.

But very few people can build up to owning 10 properties over the medium term.
 
Brendan Burgess said:
A property investor with 10 properties has diversified the risk of a bad tenant. They are unlikely to need to sell their investment urgently and be prevented from doing so.
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But an individual with most of their net worth in Irish residential property (e.g. their home and one rental property or ten) isn't diversified from an asset allocation point of view. And where leverage is involved this further increases exposure and risks.

Edit: on reflection maybe this point is moot if the thread is specifically about the risks of property investment separate from any risks inherent in a lack of diversification in one's overall net worth portfolio?
 
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I am not arguing that owning 10 properties is risk-free.

I am arguing that someone who owns 10 properties has reduced the risk.

You are correct in saying that they are exposed to just one asset class and I would avoid that myself. But that is better than owning just one property.

By the way, if someone has a portfolio of shares worth €1m and a family home worth €1m and they invest €400k in a property, that is absolutely fine. Yes, it's risky in and of itself. But they can tolerate the risk and may well judge that the reward is worth the risk and the work.
 
Brendan Burgess said:
By the way, if someone has a portfolio of shares worth €1m and a family home worth €1m and they invest €400k in a property, that is absolutely fine. Yes, it's risky in and of itself. But they can tolerate the risk and may well judge that the reward is worth the risk and the work.
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Yes, that's more or less the point that I've been making. A key problem at I see it is when someone has most or all of their net worth in property (possibly also on a leveraged basis). They could ameliorate the situation by diversifying their asset allocation. But even one property that is part of a diversified portfolio is still risky especially in the current and evolving regulatory environment.
 
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