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Chapter 1: What is the main topic discussed in this episode?
Hello and welcome to the Ask About Wealth podcast.
Chapter 2: 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.
Chapter 3: 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 ā¬20,550 down to ā¬10,003.20. So you're not making 8% a year, Mr. Investor. You're not making ā¬24,000 a year in rental income. You're making ā¬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 ā¬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.
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Chapter 4: 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. I am not, and I would have to agree with you, but I would have to also say to you that that growth is only relevant the day you sell. That doesn't mean anything from a cash flow point of view.
It's like, you know, me saying your home was worth 300 grand last year and it's worth 400 grand this year. So what? That's only relevant if you're selling the property. So you can't count the growth in capital until you're releasing the growth in capital. So while you can argue with me that it's going up in value, from a real cash flow point of view, my figures are completely accurate.
Are there ways that you can improve that yield? Of course there are. So rather than making all the people out there with property depressed, let me give you a couple of examples of what you can do to remedy some of these problems, to improve the yield. One of the things you can do is perhaps look at renovating this property to be an HMO, which means a house in multiple occupation.
The beauty of doing this is you split the house into different rooms. You lend different rooms to different people, unconnected people who share services like the kitchen or the bathroom or whatever it might be. But that will drive up the rental yield considerably. Maybe that's something to look at. What about buying the property?
Now, you can't do this, unfortunately, if you already own the property. But what you can do is buy the next property inside your pension fund. The figures I gave you earlier, the massive reduction in yield there, while it was contributed to by letting fees and insurance costs and LPT, the biggest cost was the 50% income tax on the rent. Pension funds don't pay income tax.
The second biggest cost maybe might be the capital gains tax when you do sell it down the line. Pension funds don't pay capital gains tax. So there is no doubt if you ran the numbers of owning property A, either personally or through a retirement fund, that the property A will make you wealthier inside the retirement fund. That's a given because of tax. It ain't what you do.
It's the way that you do it. And broadly speaking, buying a property in a pension fund halfs the price of the property because you get tax relief with the money going in and doubles the yield of the property because you pay no tax on the income and you pay no capital gains tax either. What about an interest-only loan? If you have the money to buy a property, that doesn't mean you must use it.
Take an example, half a million quid, and you're thinking of buying a property. One of the alternatives to simply using your half a million quid to buy the property might be to go and borrow the half a million quid. If you do that and you invest the half a million, you're offering the bank a lien on the property worth half a million and on the investment worth the other half a million.
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Chapter 5: What is the significance of inflation on real investment returns?
Letting agents. Letting agents, I looked it up earlier today and I asked, you know, Google, what is the average letting agent fee in Ireland? And it told me somewhere around between seven and a half and 15%. Now, that's a fairly sizable spread, isn't it? If you're paying 15% and you can reduce it to seven and a half, that will increase your yield. So negotiate hard.
Recognize that if you're using a letting agent who's simply renewing a tenant for the last five to 10 years, they're not doing an awful lot of work here. They're not trying to get you new tenants all the time. Go back to them. Talk to them about that. Reduce your costs. What else might you consider doing? Well, you might consider letting to a corporate, not an individual.
Why would you let to a corporate? Generally speaking, their letting terms are shorter, but also generally speaking, they're paying higher amounts. The other benefit, by the way, as a knock-on, is that corporates are outside the various regulatory rules. You don't have to issue a six-year leasehold, for example.
So corporates, if you're near an airport, if you're near a hospital, if you're near Intel, if you're near one of the big tech, one of the big pharma companies, maybe what you should be doing is going to those companies and saying, I have a property to let. The final thing I want to suggest is local authorities. Local authorities will take longer leases.
Local authorities may take full insure and repair leases. That's important to you. A full insure and repair lease means that they must insure the property, which is one of the costs that reduced the yield earlier. it means that they must put the property back into the condition it was the day you let it to them, when their lease is over.
And I've seen leases on those type of properties in recent times for as long as 25 years. High yield, great covenant, little or no risk to your property and a 25-year window of opportunity. I started this podcast with, here's why property investment for their average taxpayer is horrible.
And I stand over that, even though I've shown you or illustrated numbers of different ways to reduce the costs and increase the yields. I stand over it because most people aren't doing the things I've suggested. Very few people, despite my protestations and indeed others I've seen online, are using their retirement fund.
We are told that the Pensions Board is reviewing retirement funds' ability to buy individual properties. And where nobody can be sure what the outcome would be, although many commentators suggest they're going to ban it. If that is so, what I can categorically say is they haven't banned it today. And if you can get in quick enough, you get tax-free income and tax-free capital gain down the line.
Don't fall for the headlines. Do your sums. And if you can't do your sums, get a fully independent and impartial financial planner to do them for you. And if you don't have a fully independent financial planner to do it for you, number one, you're looking at one. So maybe a consult might be something you consider.
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