Key Post Understanding the risks of residential property investment

[llgon]

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

Yes. Exclude the ones where the risk destroyed their lives.

OK. Initially, they have a home that is no longer suitable for their needs. It's deep in negative equity. They have to leave. Their lives are destroyed (your words) but they're not property investors.

They move elsewhere and let their former home, as they can't afford to sell. You say they are now property investors? Maybe. But that the decision to become landlords has destroyed their lives? I don't think so.

 

[Cameo]

I'm surprised that this is the case anywhere in Ireland

Me too, very surprised even as the vast majority of stuff would be worth more or that time horizon. In fact it's potentially worse in that the house would probably only appeal to investors and the low rent would put a cap on that (im assuming in it's in RPZ).

However, i know of some rather expensive houses that sold at the height of the boom that would still sell for a lot less today, in the 40% or more less range. Said houses would be in a very desirable part of Dublin close to where i live, o would be very familiar with the area and what houses sold for over the years. In fairness the prices achieved in 2006 were bonkers even by then.

One example, sold for 3.5m in 2006 and would stuggle to get even half that now (in the same condition).

 

[Brendan Burgess]

But that the decision to become landlords has destroyed their lives? I don't think so.

Obviously not all accidental landlords or property investors had their lives destroyed. But a very significant number did. They lost their investments and, on some occasions, their homes.

This is something that people who advocate property investment don't appreciate. Most of the time, more than 90% of the time, it works out well. But the outcome can be catastrophic.

 

[Shakespeare]

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.

I disagree with this point tbh, yes an accidental landlord who hung on through the negative equity years also likely (certainly in my case) got stung with 2 year rent reviews, then capped increases, (following a period of hoping you'd actually be able to rent out your property) and yes, after 20-25 yrs of ownership, that property is worth 50% more than what was paid for it but up until 2 years ago, was costing cash from us each month (I appreciate a mortgage was being paid off but just pointing out it was no gravy train as some would have you believe - our rent never got to market (currently EUr800-1000 per month below the market!)
So yes, capital value is up 50%, renovation work and CGT required means a net return after 25yrs of approx 30% - if that was your stock market passive return you'd be spitting feathers but somehow, the narrative of great returns just because you finally got your money back after 25 years of active investment, is not quite accurate for many either.

 

[llgon]

Fair enough Shakespeare, but you're possibly underestimating your return since you became a landlord. Presumably some of the rent received has been used to pay off the capital value of the mortgage. Any idea how much? And what has been the increase in property value when measured from the point that you let it?

Whatever the answers I don't think they would justify Brendan's hyperbole that the decision to let out your former home destroyed your life.

 

[Brendan Burgess]

Yes. Exclude the ones where the risk destroyed their lives.

I don't think they would justify Brendan's hyperbole that the decision to let out your former home destroyed your life.

Ligon, I don't think you understood my point?

In some cases investing in property destroyed people's lives. This was not a reference to Shakespeare or any particular case. Just those cases where lives were destroyed.

It was in response to Bronte's wishing to exclude accidental landlords when assessing the downsides.

 

[Bronte]

This is something that people who advocate property investment don't appreciate. Most of the time, more than 90% of the time, it works out well. But the outcome can be catastrophic.

So it’s a good investment 90% of the time? Am I misunderstanding that post?

 

[Greenbook]

So it’s a good investment 90% of the time? Am I misunderstanding that post?

Look at it this way. The new rules have massively increased the risks. There are a huge number of things which can go wrong with a PRS investment these days.

So I hold an investment property for 10 years. For 9 of those years, everything will be fine. But in one of those years, one of the 15 (at least) risks will hit home and that will be a disaster.

The more risks there are with anything, and the risks are legion now in the PRS, the more chance there is that at least one of them will hit you at some point. 90% of the time I'm fine, 10% of the time I'm not and I'm sunk.

 

[llgon]

Ligon, I don't think you understood my point?

In some cases investing in property destroyed people's lives. This was not a reference to Shakespeare or any particular case. Just those cases where lives were destroyed.

It was in response to Bronte's wishing to exclude accidental landlords when assessing the downsides.

Accidental landlords got into difficulty through buying their own homes, not property investment. Bronte was perfectly correct in wishing to exclude them in this thread and your reaction to her was ridiculous.

I'd suggest starting a new thread on the risks of buying your own home if you want to discuss the downsides faced by accidental landlords.

 

[The Horseman]

What posters are missing is that property investors choose to invest in property. Accidental landlords are exactly that accidental and they were forced to remain due to circumstances.

Ironically this is now happening to intentional landlords now.

 

[Brendan Burgess]

Accidental landlords got into difficulty through buying their own homes, not property investment. Bronte was perfectly correct in wishing to exclude them in this thread and your reaction to her was ridiculous.

Ah, I see your point and Bronte's point now.

The accidental landlords I have come across have been people who traded up planning to sell their home and then could not do so, so kept them as an investment. Accidental or not, they are investors.

But if someone bought a home in Dublin then moved to Cork for work and rented in Cork but owned only one home, does the risk of property investment apply to them. It could be argued either way. I think that most of them were actually ok. If they moved and got a job, then they kept up their repayments on their investment/home. So I am not really including them in people whose lives were ruined.

But that still leaves people who owned a home and had built up equity.
They believed the hype that property was risk-free.
They used the equity in their home to buy an investment property and lost both.

But if you want to exclude the people who rented their own home from consideration, that is fine with me. It does not affect the overall conclusion that investing in property is risky and potential investors should understand that.

 

[cremeegg]

Understanding the risks of property Investment.

Residential property Investment is partly an investment, comparable to investing in shares, and partly a business, comparable to running a restaurant. It has some of the characteristics of each.

The return to an investment in property comes through rent which is taxed at 52% and capital appreciation which is taxed at 33%.

It is not a liquid investment, selling a property is not like selling shares, and you cannot sell a part of a property. (I would consider this a feature rather than a risk.)

The biggest risk in property investment is overpaying for the property. No other risk comes close, either in how grave the consequences are or how likely it is to happen.

Not understanding the difference between cashflow and profit is an issue for a surprising number of people.

The regulatory risk is real, and worse it is growing, yet if I were to set up a restaurant I don't think I would be obsessing about the risk of a HSE inspection. I would understand the risks involved and how to manage them. (I know nothing about running a restaurant thats why I stick to property).

Property is a long term investment, say 30 years, if no rent for 2 years is going to be 'devastating' then you shouldn't invest.

Leverage magnifies both the risks and the potential returns.

The above talk of accidential landlords is like a sunk cost, that was then and that was them.

A previous post refers to 'the prototypical Irish landlord'. For anyone considering investing in property, this has no relevance, there is just the property you buy, the price you pay, the rent you achieve, and the issues that may arise.

 

[Bronte]

I know nothing about running a restaurant thats why I stick to property).

Of this I have family experience of the trade, food, bar and bed. Including HSE inspections. I consider running a restaurant to be very risky. Too many fail. I think that different people are suited to different things. And better with different risks. So Burgess with his knowledge investing in shares is less risky than someone who is better suited to property investment. Perhaps that is a different way of viewing risk, or of handling it.

 

[polecon]

The biggest risk in property investment is overpaying for the property. No other risk comes close, either in how grave the consequences are or how likely it is to happen.

If you buy a house now, rent it out, but find that you subsequently want to sell it, you will be buying at owner-occupier price but likely trying to sell at cash-only investor price because you've a sitting tenant.

You overpaid.

 

[Brendan Burgess]

The biggest risk in property investment is overpaying for the property. No other risk comes close, either in how grave the consequences are or how likely it is to happen.

There are two such risks. Which are you referring to?

1) You buy a property now at a fair price and the property prices generally fall 50%. So you got the timing wrong.
2) Given today's market a property is worth €400k at today's prices, but you pay €440k for it.

 

[galway]

The biggest risk in property investment is overpaying for the property. No other risk comes close, either in how grave the consequences are or how likely it is to happen.

Correct
Up to around 2022/23 plenty of value to be got if one wanted to become a landlord long term very little around at present,

I suspect we will see a drop off in landlords entering the market because of the risk of overpaying for property at present,
In other words they fear over paying for property more than the new rules and regulation at present,

Some landlords on this site found a tree they are barking up the wrong tree is how I see it at present,

 

[Greenbook]

There are two such risks. Which are you referring to?

I think @cremeegg is talking about the baked in risk with PRS investment now:

1. You buy for €400k which is owner occupier market value because you are competing with owner occupiers to buy

2. You sell though with your tenant in situ, you won't get the owner occupier sale price as no owner occupiers will be bidding. You can only sell to the much smaller pool of cash landlords, so you'll be selling for 15% to 50% less depending on the quality of your tenant and the location.

Add to this the risk that @Brendan Burgess lists, that you've overpaid and/or property prices fall generally. That is a disaster investment wise

 

[Greenbook]

The regulatory risk is real, and worse it is growing, yet if I were to set up a restaurant I don't think I would be obsessing about the risk of a HSE inspection. I would understand the risks involved and how to manage them. (I know nothing about running a restaurant thats why I stick to property).

I know nothing about restaurants either, but I'd assume the HSE is looking for sensible things like making sure you are not going to poison customers due to poor hygiene practices.

It is not as we have here - an ever increasing mass of very technical rules about notice periods, what goes in various forms, when and how those forms are filed etc. etc. The average person even trying their best can easily slip up on one of these and have an illegal eviction plus criminal liability on their hands.

 

[Bronte]

I suspect we will see a drop off in landlords entering the market because of the risk of overpaying for property at present,
In other words they fear over paying for property more than the new rules and regulation at present,

Having done the sums it makes no sense to me to buy and renovate, which is the model I favor. As you rightly point out the cost of buying is too high, but there is another cost, the renovation costs are massive as well. And I mean massive.

We do know that landlords have been selling up, including me. One property I sold to a landlord who eventually will renovate it in his own time, it's only suitable for rental as it's a subdivided property. It could be converted back into a single home, but the cost of renovation would not justify that for people, they don't have the money, the time or the expertise - in any case no bank would give them the renovation costs. They are entitled to the grant, but cannot get that either as you need to spend money you don't have first.

Right now I do not see landlord property to purchase that gives a high enough yield, so whatever was being sold must be gone or nearly gone. The rest of the landlords are staying in the business and going to Market Rent where possible. We discussed many times on here leaving property vacant for 2 years. But now you just need your tenants to voluntarily leave.

 

[letitroll]

(1) the single property concentration risk

you are exposed to the building/apt itself (ever heard of pyrite, structural issues?)
you are exposed to the locality - I cant tell you how many areas I've seen slip from neutral to undesirable over x no. of years
you are exposed to the neighbours who move in next door causing negative externalities for your property
or the 'facilities' that may get dropped into your locale (drug clinic for example)
you are very likely in some locations taking the risk that big employer XYZ remains a going concern....think Leixlip/Intel but on much more micro-market basis

(2) single tenant counterparty credit risk

your are tying YOUR finances to the finances of another household

you are placing your asset (& as discussed substantially all your net worth for the prototypical btl landlord in Ireland) into the care of an individual who may not have the integrity/decency you expect and you have very imperfect ways to do due diligence on that person.

(3) throw on top the x3 x4 leverage

every positive but also negative to the value of the property is magnified by the leverage inherent in the deal...relatively small movements in property values can have outsized effects on the equity component of your ownership....this works wonderfully for sure when prices are appreciating and disastrously when going the other direction.

The reality of property investing on a pure cashflow basis is that its a relatively low return activity....net yields especially with the tax drag in Ireland are in the low single digits....the returns are only made acceptable in my eyes by the leverage used.......any activity, in my book, that requires 3-4x turns of leverage to deliver an acceptable return is fundamentally not a 'good' business as measured by businesses available in the stock market that deliver much higher returns on equity and use very little if any debt to do so.

(4) then add in the regulatory risk

Need we say more? The centre right parties in Ireland introduced price controls...ensuring your upside is capped and your downside is unlimited...imagine what the real left would do if they ever got into power?

Your inherently leveraged to FF/FG remaining in power over the lifetime of your investment such that things, already bad, don't disimprove any further. Again IMO - the regulatory upside is capped here, the party of the right introduced and maintained through a reform cycle price controls.....and so the regulatory upside is with a high probability capped here and the regulatory downside is well uncapped. I don't like the setup here.

(5) and for good measure the relative lack of liquidity & transaction buy/sell costs compared to alternatives (bond ETF)

Stamp duty

Real estate agent fees

Daft listing fees

4-6 month turn around times

Solicitor fees

I dunno 2-4% of the value of the property gets eaten when selling (~€300k property)

For the buyer you're probably looking at 2% getting eaten in fees.

Round Trip on a property is probably 4-6% total value incinerated in fees (that is not a low transaction fee).