The ‘clean’ and ‘dirty’ way to invest in property
Property within an overall portfolio with other types of asset class (equities, bonds, commodities etc.) can often be a good fit because it will typically have a decent yield above 5% and the value usually rises over time as long as you didn’t pay too much for it.
I say that Irish Property usually ‘misbehaves’ for 2 or 3 years out of every decade when prices will fall and liquidity often becomes an issue where it is difficult to sell in these times of depressed prices. In fact, the price usually tends to disappear so if there are few transactions & buyers it can be difficult to know exactly what your property is worth.
For the most part however, property can be a good asset to hold once it doesn’t become the only asset you hold. So, in simple terms they are the pros and cons of owning property. I usually describe the two basic ways to invest in property to our clients and, while I’m not making a judgement on which way is best as it will depend on the client, it is important for people to know the facts.
The Dirty Way
I describe the ‘dirty way’ to own property as physically holding the title deeds to the bricks & mortar themselves, i.e. you go and pick out a house, apartment or commercial unit, put down your deposit and purchase it.
This can be done with or without leverage (bank borrowings) or inside or outside a pension vehicle. Once anybody is in receipt of any income from the rental of land or property, in Ireland or abroad, they are legally required to file an annual tax return. Let’s say you purchase the property for €200,000 and you’re getting gross rent of €1,000 per month for it. That’s €12,000 per annum and is effectively a 6% gross yield, before costs.
Let’s say the property actually costs you €2,000 per year to maintain (repairs, property tax etc.) which reduces your gross yield to 5%. Not a bad yield at all on the face of it, considering your money sitting on deposit was getting you close to zero interest. Now, if you were lucky enough to have had €200,000 in your pension to buy that property with, then that 5% yield is not taxed and your pension captures all that yield.
However, if you purchased that property with some of your savings and a bank loan outside of your pension, then your yield will effectively be halved to 2.5% after income tax. This rental income gets added to your salary for tax purposes and is taxed in much the same manner.
Landlords do have other obligations to satisfy such as registry of the tenancy with the Private Residential Tenancies Board (PRTB), payment of the Local Property Tax, landlords are also obliged to obtain and make available a Building Energy Rating (BER) certificate for their property.
There is also the hassle of replacing boilers, unreliable tenants and if you ever want to raise some cash from your bricks & mortar investment then you can’t exactly sell off a bedroom – you either own the whole building/unit or you don’t.
The Clean Way
If, as an investor, you have no interest whatsoever in repairing broken boilers, taking calls from your tenants’ neighbours complaining of the noise or simply incurring the various costs of owning a property in your own name then there is a much simpler way to have property exposure as an investment.
Property funds or REIT’s (Real Estate Investment Trusts) are tradable funds which own a basket of properties managed by professional fund managers and would typically have a yield of around 5%. These funds can be 100% invested in Irish property or else diversified across Europe or globally to have a broader mix.
They give the same exposure for the investor with a decent yield without all the costs above and when you decide you want to sell then this can easily be done within a day’s notice, in full or partially.
The ‘clean way’ is a much simpler way to invest unless of course you happen to be a professional landlord and have a keen interest in either getting the tool belt on yourself, or employing a company to do this for you.