Jill Kerby

PART ONE: THE TALE OF TWO AMATEUR LANDLORDS

Being an amateur in some things can be very rewarding:  there would be no community theatre or choirs without amateur actors and singers. This country wouldn’t enjoy our wonderful native games of hurling and Gaelic football – if it weren’t for our amateur sportsmen and all the other GAA volunteers.  

Being an amateur in the money or financial sector, however, is another matter. It is seldom satisfactory unless you are either very well informed or very lucky. Just ask anyone who once boasted about being a ‘day trader’.

Mostly though, being an amateur where there is monetary gain or loss at stake risks a state of play that I describe as “more trouble than it’s worth.” It is why division of labour happens and why most of us avoid doing our own plumbing or electrical repairs.

One money-based activity, wildly popular in this country – especially up to 2008 – was amateur landlordism. 

So here’s a tale of two halves: about a year ago, an old friend of mine in Canada, an information technology professional for 30 years, but with an either or question to answer – do I put my two kids through college or keep contributing to my pension fund - decided to become an amateur landlord.

She bought a large, renovated Edwardian era house in inner city Toronto in three rental units with the proceeds of the sale or her family home that she bought at a low point in the market about 10 years ago. She got a terrific price for it nearly three years ago, put the cash in the bank and rented another nearby place for herself and her two kids.

The Toronto market has kept surging, so her timing wasn’t perfect (she should have bought right away) but because of her huge downpayment, her new mortgage is relatively modest and she has reliable, sitting tenants. (She bought the property from her own landlords, a young professional couple who took years slowly renovating the old Edwardian house.)

Even with high municipal rates, insurance and taxes, she is making a modest profit. The investment property is worth at least 10% more this year, and the area is popular with young professionals so she’s unlikely to short tenants. In another year she intends to move into one of the units herself and while she will lose that income, she won’t be paying rent anymore.

So, my financially conservative friend has a positive rental yield and she knows it would take a very serious property crash (the last one in Toronto was 23 years ago) to put her into negative equity.

Also because this investment is part of her retirement plan, and assuming her professional income holds up, she hopes to start accelerating her remaining mortgage payments the closer she reaches pension age so to minimise her debt. (Canadian personal retirement accounts do not allow for any tax-free lump sum payments at retirement.)

Compared to the typical Irish amateur landlord scenario, the above experience, at least so far, looks pretty sound.

Here, I have several friends and acquaintances who also bought buy-to-let properties at a high point in a hot property market to beef up poor to nil private pensions. But that is about all they have in common with my Canadian friend. Instead,

-       They borrowed large sums, relative to the then inflated values of their family homes, with 100% finance and repayment terms that brought them into retirement. They didn’t always secure tracker mortgage rates.

-       Surging capital values convinced them it was OK to subsidise their tenants and meet mortgage (and other costs) out of their own private income.

-       They mostly bought new-builds, usually apartments or houses in rural locations, sometimes off the plans.

-       They seldom bought in old, established neighbourhoods with reliable sitting tenants (though the local authorities now supply many tenants.)

-       They didn’t always factor in maintenance or insurance costs, let alone rates, lower tax relief, property taxes or water charges. Many now pay management agency fees.

The rest you know:  up to half of all buy-to-lets are ‘non-performing’ with arrears or restructured mortgages. The have never made a profit. Retirement plans are being postponed.

So why the Tale of Two Amateur Landlords now?

Because last week the CSO added its authority to all the other price reports:  last year national house prices rose by 6.4% (apartments by 15%) and in Dublin by 15.3%.

Also, many more older people, eager to find somewhere for their DIRT ravaged cash, are getting very interested in the Budget 2014 extension of the capital gains tax exemption on investment properties purchased before the end of this year and held for at least seven years. 

Déjà vu, anyone?

CAPTURE THE RAIN AND CONSERVE MAINS WATER:  THE BEST WAY TO BEAT BIG WATER BILLS

It is going to be a long, long time before the projected set-up costs for Irish Water - €180 million so far and not including the €500 million cost of meter installation – are ever recouped and the new state monopoly starts making a profit.

With wages, pensions and bonuses for its 500 staff set at its parent company Bord Gais’ rates where the average income is €70,000 per employee, consumers should assume from the outset that the cost of water in this country is only going to move upward, just like gas and electricity prices.

We have no idea how much we are going to be charged from next October for our water usage, though a figure of €350 per year per average household is now being universally touted as the bill we should expect.

Even if this is an accurate projection, no one knows that the free allocation will be (if any) or even what the flat charge will be for the majority of households that will still not be metered by next October or even the automatic standing charge that every household will be billed.  Irish Water say we will know these rates by next summer.

But this shouldn’t stop anyone from working out a home water conservation plan right now. By intentionally using less water from today, by actively seeking out leaks (Irish Water may or may not subsidise or refund repair costs and will announce those details eventually) before billing starts and by adopting better water use habits, you should be able to keep ahead of the inevitable rising costs.

There are myriad practical ways to use less water – see the list below – and some are easier to put into practice than others (just ask any parent trying to cut their electricity bill what the overall success rate has been in trying to get their kids to turn off lights and TV’s, not in use, plug out electronic goods, etc).

But every small effort and gesture to conserve energy or a commodity like water adds up and will help you control the costs that are in your control.

If, like me, you think harnessing free water – rain – might be a good idea, and especially for non-drinking such as for toilets, washing-machines and outdoor garden use, then it might be worth checking out whether it is feasibility or  affordable.

One company that recently came to my attention is Balgriggan-based Waterways Environmental (www.waterwaysenvironmental.com. ) . Set up in 2011, it harvests rainwater in domestic as well as public and commercial buildings that would otherwise disappear down your house gutters and disappear into the ground. Using shallow underground or overground tanks/filters and pumps the rainwater is pumped back into your house and can reduce dependence on mains water by 50%- 100%.  The installation cost, according to director Paul Casey will range from about €1,200 to €2,000 for a typical family home.  Depending on how much water your family uses, the payback will be from around three to seven years.

The accompanying illustration gives you an idea of the numbers of litres of rain water that Waterways Environment say can be recycled. Most of us won’t or can’t afford that much expense to reduce our water bills, but there is still plenty of things that we can all do to keep costs down.  Here are just a few:

 - Use garden rainwater butts for the garden plants and car washing.

 - Use lower use eco-settings for dishwashers and washing machines.

- Set a strict time-limit for showers. Don’t overfill the bath.

- Always use basins in kitchen sinks to catch the running tap.

- Put a brick in the toilet tank to displace some water. Use wastebaskets for used nose tissues.

- Encourage everyone to drink water from (filtered) bottles of tap water you keep in the fridge.

- Only fill kettles to match the number of cups of tea/coffee being drunk. (Chances are left-over ‘stale’ water will be dumped.)

 - Only rinse plastic containers for recycling with kitchen basin or garden butt water.

- Always use plugs in bathroom sinks when handwashing and in kitchen sinks for washing vegetables, etc.

- If you suspect there’s a leak in your pipes, get it checked and fixed. You may have to speak to neighbours about communal underground pipes. Leaks will cause your water bill to soar.

INTEREST RATES ARE THE KEY TO GOOD BORROWING – JUST ASK THE NTMA

There’s been a great deal of talk about interest rates lately.  Last week, for the first time since we exited the three year Troika bailout, we, the Irish people borrowed €3.75 billion from global investors at the great investment banks, hedge funds and pension funds.

Luckily for us, the interest rate was ‘just’ 3.54% over 10 years. But had the NTMA paid 6% - the crisis rate that forced us into the 2010 bailout - the interest bill over 10 years would have amounted to a massive €1.246 billion, instead of just €708.3 million.

Interest rates are so crucial in determining the state of everyone’s personal financial health, that it is worth reminding ourselves, in this first month of the New Year of Recovery, just what can be the real cost of borrowing.

The total repayment cost is so important that you must be clear about how much you will pay over the course of the loan before you sign any agreement or make any credit purchase. 

Housing loans:  Competition may be stiff in the Dublin area for family homes, especially since about half of all sales have been from cash buyers, but mortgage lending is still at near-historic rates as national prices remain quite flat.

The cheapest mortgages are aimed at buyers with the most secure jobs, the biggest down-payments and the best loan-to-value profiles. According to the latest comparison tables from the National Consumer Agency, interest rates for a 25 year, €200,000 variable rate mortgage will range from 4.49% (AIB) and 4.5% (Bank of Ireland) to 4.8% at the Bank of Ireland subsidiary ICS.

The difference in interest repayments between the AIB and ICS mortgages over the 25 years (assuming that variable rate does not change) is a whopping €10,638, that is, €133,159 versus €143,797. By going directly to Bank of Ireland instead of its subsidiary the borrower saves €10,299.

It is worth noting too that holders of tracker mortgages, the only kind in which interest rates must move with ECB rate changes, now cost as little as 2.25%-2.75% for some very lucky borrowers who secured their bank lending rate when they were as low as 2%-2.5%. (Consistent) interest over 25 years on a €200,000 loan at 2.25% would result in a total interest cost of just €60,999.

Personal Loans: Are you thinking about buying a car in 2014? A home improvement loan?  Are you trying to finance a third level student for the next three or five years?  The interest charges for personal loans from the banks typically cost from 11.91% (AIB) to 13.6% (Bank of Ireland). The interest cost difference between a €10,000 loan for three years between those lenders will be €260.45 or €1,838 versus €2,098.

Extending the loan by another two years will rack up the interest difference to €459. But if you want to borrow just €5,000 over five years be aware that the banks will penalise you with even higher rates: 12.7% at AIB and 14.9% at Bank of Ireland.  The total interest differential rises to €300.

Credit Cards:  There is only one sensible way to use a credit card and that is to pay off the balance every month by direct debit (or ditch it and use a debit card which requires that you always have sufficient credit in your bank account to meet the debit charges.)

The most expensive credit cards are AIB and Ulster Bank cards with APRs of 22.7%. The cheapest is AIB’s ‘Click’ Visa card at 13.6%. (All cards charge higher interest and no free credit term for cash withdrawals and charge assorted penalties for missed or late payments, etc.)

If you have a €5,000 balance outstanding on any of these cards and you only pay the 5% minimum balance percentage required, or €250 a month, and you don’t spend another penny, you will pay off the really expensive AIB and Ulster bills in 2 years and two months at a total interest cost of €1,500 and the less expensive ‘Click’ card in one year and 11 months at an interest cost of €750.

Of course, few people use credit cards like personal loans. Instead they make a payment each month, but their spending ebbs and flows. The total interest they pay, even if their intention is to get the balance down can be horrific.

Insurance and Utility bills: Cash flow is as important for individual budgets as it is for business ones, which is why so many of us spread our car and home or health insurance payments over the course of the year and make utility purchases, like the installation of a new gas boiler, that way.

Be aware, says broker Sean O’Connell of The Insurance Shop that paying your insurance premiums monthly instead of annually “will cost as much as 21% APR extra. They’re pretty much all at it,” says O’Connell of the car and home insurers.

As for the health insurers, the APR is closer to 6.7% with a €2,000 bill costing you an extra €73.

R€solutions Part 2:  How to Make Money In 2014…P.S. It won’t be easy

Not losing money is the first rule of good investing, the Sage of Omaha, Warren Buffett once said. His rule number two was, “Don’t forget rule number one.”

Buffett as the CEO of Berkshire Hathaway became rich as Croesus not just because of his innate talent to identify successful companies in which to invest, but because he worked every angle, especially the tax, governance, lending and regulation angles that governments and central banks have created for the likes of him and other big corporations, especially since the early 1970s when the US dollar became the world’s reserve currency.

From the little guy’s perspective it seems so unfair:  today, global multi-national corporations and banks that operate here pay little or no tax on profits. (2.5% in the case of Ireland’s large multi-national sector. Marginal Irish income tax rates are 52%.)

This spectacular profit haul is making rich corporate (and some individual) shareholders richer, along with their battalions of bankers, fund dealers and assorted middlemen. Their executives’ personal fortunes grow larger regardless of market crashes because cheap, short-term credit – for them – was restored far sooner by federal authorities than for the rest of us (who are mostly still waiting.)

New credit bubbles in the bond and equities markets, in fine art and high end property have been building since 2010 because the favoured ones got first dibs on all the newly created money.

Meanwhile little guy has seen his credit line, his financial safety net for the past 20 years dry up as his traditional income failed to keep up with the new cost of living.  Millions of jobs and businesses have been lost, especially in places like massively over-borrowed Ireland, Greece, Portugal, Spain where there is no domestic printing press to spew out endless paper money.

Now that just about every working person in places like Ireland is a credit junkie, it was inevitable that some countries and their ordinary citizens would end up with a much tougher recession-cum-depression than others and huge debts to repay from lower incomes subject to far higher taxes and interest rates.

So how can the little guy, the ordinary Irish worker-soldier-cum-debt-serf actually make money in 2014?

Another pretty smart American once said, “don’t fight City Hall”. This means see where the money is flowing. In most countries it means getting a job directly with government, or at least becoming a player yourself or with a firm in a favoured government/central banking sector that has access to cheap credit, pays little tax on profits and has a global export reach, like foreign high tech, pharma, medical devices, agri-business and financial services multinationals.

This plan works best of course for business owners, entrepreneurs and smart young graduates. For the rest of us, well outside the favoured loop, making money in 2014 will come, for some, the high risk way, stealing it, or gambling for it on the horses, lottery, individual shares, property, or some other ‘can’t lose’ asset.

Or you can try the old-fashioned, mostly longer term way.

These suggestions won’t suit everyone, but they’re guaranteed to make you money in 2014: 

     -    Get a better paying job. (Maybe you can do this in another country).

-       Minimise your tax bill.

-       If you are single, consider marriage/civil partnership with someone with more income and assets than debts.

 -       Live below your means. Understand the difference between ‘needs’ and ‘wants’. Apply this rule to your dependents.

-       Pay off or accelerate your debts. The interest you will save on the additional slivers of capital you will own is now yours again to spend/invest as you like.

 -       If you can’t afford the house you own/rent, trade down. The cost of ownership in Ireland - tax, insurance, energy, water, waste, maintenance - is only going up.

 -       If you have spare rooms in your house consider renting them out up to €10,000 per annum tax-free under the Rent-a-Room Scheme. If you rent, flat-share.

-       If you have surplus income (or sales proceeds) and no expensive debt, find an investment asset (deposits are loss-making) that provides a net reward of at least 2%-3% in excess of any tax, costs and your personal cost of living inflation rate. Long term pension funds and certain properties are a good place to start, but you will need professional, fee-based investment and tax advice. Consider global options.

No financial decisions or investment is ever risk-free. But time is the best friend of even a little pot of money, earning a modest return. It will do even better with low costs and tax liabilities.

I wish there was another way. Only exceptional people – sports stars, great actors, singers, authors, entrepreneurs, investors – earn exceptional amounts in relatively short periods. Rare talent is their excuse.

But hard work is also a factor.  Just like for the rest of us.