Posted by Jill Kerby on January 28 2014 @ 09:00
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?