Why Property Investing is Terrible For The Average Taxpayer
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What is the main topic discussed in this episode?
Hello and welcome to the Ask About Wealth podcast.
Why is property investment considered terrible for the average taxpayer?
Today I want to discuss with you why I believe that property investment in Ireland is a horrible idea for most Irish taxpayers. Let me illustrate what I mean by telling you a story. I was recently talking to a person on a consult and I was in the early stages of our conversation where I was gathering information about the stuff he had already. And he was telling me about his home and he told me about investments and pensions and other things. And almost as an afterthought. At the end of this section, he says, oh, yeah, yeah, yeah. And I have a property down the town. It's making me 8% a year. I'm happy out. We won't even mention it. And I went, no, no, we will mention it. I said, well, how much did you invest in this property?
300 grand. So if you're getting an 8% a year return, you're making 24,000 a year in rental income. He said, I am. I said, okay, that isn't your return. That's your income.
What real return can be expected from an 8% rental yield?
Oh, yeah. So I said, what kind of insurance do you pay? 500 quid a year. What kind of letting fees do you pay? 2,900 odd a year, including VAT. So I said, your real return, therefore, isn't 24,000 a year. It's 20,550 a year. And then I said, what about LPT? And what about taxation? Because 52% of this rental income, exposed rental income, was disappearing in tax. So that plus LPT brought €20,550 down to €10,003.20. So you're not making 8% a year, Mr. Investor. You're not making €24,000 a year in rental income. You're making €10,000 a year in rental income. And I said, I haven't finished. What was inflation in the last 12 months? Inflation was 2%. That means that the loss, the buying power loss of this investment was 6 grand.
2% of 300 grand is 6 grand. We take the 6 grand away from the 10 grand and we're left with €4,003.20. That's the real return. The point I want to make is whether it's property or anything else for that matter, the only return that any investor should ever be interested in is the real return. the return you're getting on your capital at work, less tax, less costs. In this case, the real return on this property was 1.33% a year. Now, this gentleman didn't really take this arithmetic very well. He was getting a bit stroppy with me. And I said to him, don't be shooting the messenger. Just do the arithmetic. And when he calmed down a little bit, he did say, well, my God, if I'm only getting 1.33% a year, I could probably get that same return with taking far less risk, I beg your pardon, and without the hassle factor.
Because if you don't own a property down the town, nobody's ringing you at midnight, going, the washing machine doesn't work. or the window fell out of the back door, you've got a hassle factor. The other thing I made reference to was telling him that my numbers assumed that he would get 12 months rental income every single year. But that isn't guaranteed either. What happens when one tenant leaves? What happens when there's a two-month void between the old tenant leaving and the new tenant arriving? What happens if one tenant leaves and has wrecked the place so that refurbishment costs have to be ploughed back in? All of these costs need to be taken into account when looking at real return. The real return, as I've said, is the only return you should be interested in.
Now, the fellow who sold him this property had told him that, buy this property and I'll get you an 8% a year return. And let's be fair to the fellow who sold him the property, that wasn't a word of a lie. He was getting a gross return of 8%, but his net real return, by my example, 1.33% a year.
How do taxes and costs affect rental income calculations?
So, property investment for the average Irish taxpayer, based on these numbers, is horrible investment. I'm not saying it doesn't give a return, but I am saying it doesn't give a return commensurate with the risk you're being asked to take. Now, you might say to me, ah, yeah, Paul, but you're not taking into account the capital appreciation. You're not taking into account that the 300 grand property in my example might be worth 315 grand in one year's time.
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Chapters
5 chapters
1
What is the main topic discussed in this episode?
0:02–0:05
2
Why is property investment considered terrible for the average taxpayer?
0:05–1:06
3
What real return can be expected from an 8% rental yield?
1:06–4:35
4
How do taxes and costs affect rental income calculations?
4:35–10:54
5
What is the significance of inflation on real investment returns?
10:54–14:34