For a while now I have been very focused on real estate as my ticket to financial independence in the foreseeable future. I had become convinced that within a reasonable space of time I could replace my job-based income with rental income from 2-3 properties.
In addition to many hours of searching through Ireland’s main real estate websites (www.daft.ie and www.myhome.ie), I have visited a number of properties over the past number of months. I decided to focus my search on the cities of Dublin and Limerick. Limerick has the benefit of being significantly cheaper than Dublin, and also seems to have a thriving rental market. I felt that by acquiring a couple of less expensive properties in Limerick rather than possibly one more expensive one in Dublin, I would be diversifying to some degree, and also taking on debt more incrementally, thereby allowing myself scope to learn as I go, without the pressure of all of my investment being tied up in one more expensive property. I have now done a couple of day trips to Limerick where on each occasion I viewed a number of properties. I was particularly impressed with what I saw on my most recent trip, so I sat down to crunch the numbers in earnest, and what I found has left me extremely disappointed and wondering where to go next.
First of all, what did I find? Well, an apartment costing € 90 k and with annual rental potential of € 12 k after expenses and taxes has a cash flow potential of… € 256. I have included my workings for anyone who (like me) has to see this to believe it. From a gross yield of 13%, (and an even more impressive gross return on 37% on my own initial investment of € 32 k to a net of 0.79%! This breaks down as follows:
From an income of € 12,000 I would have expenses of € 8,826. Of these expenses, only € 6,389 are deductible for tax purposes. (Mortgage principal and local property tax are not tax deductible expenses. Life insurance/ mortgage protection I was unsure of and for this reason I have considered it to be non-deductible). So € 12,000 – € 6,389 in deductible expenses leaves profit of € 5,612 which is taxable at 52% (40% income tax, 8% USC and 4% PRSI). € 5,612 * .52 = € 2,918. So, gross income of € 12,000 – expenses € 8,826 – taxes € 2,918 = € 256. I have included a full breakdown below for anyone who is interested in delving further into this.
The major expenses are the mortgage (€ 4,334), the compulsory property management fee to the company that manages the apartment development (€ 2,000), followed by an additional 8% of rental income (€ 960) to that same company to manage the letting, which is optional but worth consideration since I live a 3 hour bus journey away, and so am not immediately on hand! My calculations are based on me doing my own taxes. If I were to hire an accountant, or indeed if any one unanticipated thing were to happen, it would easily put me into negative cash flow territory. This is based on a € 32,400 investment of my own funds. One thing to consider to increase cash flow is to 1) buy a house which eliminates the property management fee and 2) manage it myself. These 2 actions would increase cash flow by almost € 3,000 annually in this case. It is worth noting though that it is not often that houses become available for € 90 K!
So, continuing for now with the rational analysis, what type of cash flow could I expect from a € 32,400 investment elsewhere? Well, again I refer to Mrs Money Hacker’s overview of available investment options in Ireland. I see that according to this analysis, the 2 highest-yielding investments are Peer to peer lending followed by our old friend the stock market.
Low and behold, € 32 k pumped into P2P based on expected gross returns of 12% and net returns of 5.8% would produce positive cash flow of € 1,866. For anyone who is more comfortable with investing in the stock market instead, the same € 32 K would generate € 1,230 after a year (assuming returns of 7.9% gross/ 3.8% net). I say may of course, because we don’t know and there is no guarantee!
Emotionally, I suppose it is like realising that someone you were once in love with is not going to be in your life in the way that you had once hoped for! It is immense, and assimilating this is a process which begins with a feeling of utter devastation, followed hopefully at some stage by shock, anger, rejection and ultimately acceptance. I appreciate that this is rather a dramatic comparison, but the devastation is real. I had been happily pottering in and out to my job every day, comfortable in the knowledge that I had some kind of a plan which appeared to be viable, on a high level at least. This belief carried me forward and kept me positive, all on the understanding that I was working towards a greater goal which would make work optional for me in the not too distant future. Even my lunch breaks seem that bit emptier now that I am no longer spending them making inquiries with sales agents and property management companies! Where do I go from here?
Eventually, as with the end of any great love, we have to pull ourselves out of our slump. All in all, I enjoyed the research despite the fact that the findings were not what I had hoped for or expected. The numbers don’t lie, so, in line with my research findings I need to funnel any funds available for investment as follows 1) maximise pension contributions 2) some combination of p2p & stock market/ ETF depending on my risk appetite. Another thing that has emerged for me from this process is that I need to focus on the income side of the equation from existing sources i.e. job…
To the extent that I have focused on income over the past few years it has been on the non-job based income sources. Personal finance blogs often emphasise the virtue of focusing on growing your income from your career. Indeed the ability to grow and develop income-earning capacity is considered by some to be our biggest asset. So why have I not focused on it more over the past few years?
With good reason. My first preference would have been to give myself the security of feeling I could replace it with other income sources. For the past few years I have chosen to maintain my existing job as opposed to moving for a bigger job with more money. I have chosen my mental and physical wellbeing by choosing the security of the known over taking risks by leveraging up. This attitude suited me when I had the feeling that my great “high level 2 and a half house” plan would kick in in the foreseeable future to replace the need for a job. Now things have changed and I need to rethink this.
Why have I been so bearish in my career these past few years though? I went through a redundancy in 2012. This was during the time that the press here was painting a doomsday scenario for all things financial services. I had started my Masters, and wanted to continue and for this reason chose not to emigrate again. Against this backdrop I took the first job I was offered because I felt I had to. This turned out to be a very negative experience. While I eventually got out of the job the impact of the experience was long-lasting in terms its effects on my self-confidence. As a result I did what I could to protect myself and was very careful about what jobs I went for in future. I think this explains my bearishness!
Anyway, if I am not going to be quitting the workforce anytime soon I suppose the next logical step is to start looking at increasing my job-based income, starting with no longer ignoring recruiters who contact me on LinkedIn. The good news that I have to report is the fact my home extension will be completed this year, and the rental income from renting out a part of my new and expanded home will cover my mortgage when complete. This means that I can consider taking on a bit more risk in my career, including risk of failure (at a more senior role), or risk of not always having work, (i.e. contracting).
A decent friend in times of loss and heartbreak will always encourage us to focus on the positives. Gradually, as the week end progressed I began to pull myself out of my slump, and I started weighing up the positives.
All is not lost. Great progress has been made. The extension, once complete, will allow me to earn rent free income to cover my mortgage. This is approximately 50% of my expenses. The impact should see my savings rate soar. The findings of my exploration into property investing is that I will be better off putting the additional income into p2p, the stock market, or a combination of both, as opposed to attempting to acquire an additional rental property at the moment.
The second finding is that I now feel that it is time to look at the income side of the equation in terms of my job-based income. I foresee that this will begin with small steps like logging on to LinkedIn occasionally, and responding to recruiters who reach out to me. Maybe even considering some volunteer-type activity that might give me the edge at some point.
For anyone who may be wondering, I absolutely remain committed to the pursuit of financial independence. So, life goes on with its’ ups and downs and occasional disappointments! Stay positive people – this in itself is an asset!
The calculation backing up the numbers (for anyone who needs to see it to believe it)!
|borrowed amount||€ 63,000|
|house purchase price||€ 90,000|
|downpayment (30%)||€ 27,000|
|stamp duty (1%)||€ 900|
|legal fees (1%)||€ 900|
|furniture + renovation||€ 3,000|
|initial investment||€ 32,400|
|rental income (monthly)||€ 1,000|
|rental income (annual||€ 12,000|
|mortgage interest (3.95%)||€ 207|
|mortgage principle||€ 154|
|total mortgage||€ 361|
|total annual mortgage||€ 4,335|
|Life/mortgage protection insurance||€ 192|
|management fees||€ 2,000|
|property manager||€ 960|
|Total expenses||€ 8,826|
|increase in equity||€ 1,846|
|Total annual equity||€ 5,020|
|100% mortgage interest||€ 2,489|
|mortgage insurance||€ 350|
|management fees||€ 2,000|
|property manager||€ 960|
|Total profit for tax purposes||€ 5,612|
|tax at 52%||€ 2,918|
|Annual earnings on paper||€ 2,694|
|% for initial investment||€ 0|
|annual take home excl capital||€ 256|
|annual yield excluding capital||0.79%|