Investment property - when and how do you buy a second home?
Michael Dowling believes that property is a sound long-term investment. Just make sure you choose the best mortgage lender.
WITH interest rates having remained low and stable since we joined the eurozone, property has proved to be an excellent investment alternative for all those who wanted to get a better return than having funds on deposit, avoid the volatile nature of the stock market and to get real capital appreciation.
According to the ERSI - Permanent TSB index, house prices grew by 13.7% in 2003 following on from a 13.3% increase in 2002.
For most investors, the purchase of a second property represents a long-term investment as either an alternative or complement to their pension. In some cases people buy to have a property available for one of the children.
In a recent EBS/Gunne Estate Agents survey, 92% of respondents said property was their preferred investment, a ringing endorsement of property as the real investment that people understand and were comfortable acquiring.
In the Hooke & MacDonald, Irish Property Market Review 2004, it was noted that one in nine households in Ireland and one in five in Dublin city centre are privately rented.
Will property remain a viable investment
There is no doubt that double-digit increases in values are not sustainable but I believe property is a sound long-term investment.
Let us look at an example: Property price 2004 - ?250,000, mortgage @ 90% - ?225,000, assume 2% growth in value and after 10 years the property will increase to ?304,725. Mortgage balance outstanding at end of 10 years, assuming 25-year term @ 3.5% will be ?165,360. A good, safe return by any standard and assuming a very modest increase in capital value.
How do you purchase a second property?
We are all aware that the competition among lenders to attract investor business is very intense. However, be aware as quite a number of lenders will "load" the interest rate charged by 0.5%, so always seek independent advice to get the best rate available.
All lenders will give you a mortgage term of up to 25 years and 80/85% of the purchase price is available. Again, a small number of lenders will, on a stand-alone basis, lend 90% of the purchase price.
You can borrow 100% of the purchase price and costs, ie Stamp Duty and solicitors fees but you will have to offer a second property as additional security.
If the second property is your family home, never allow the bank cross-charge the property against the investment loan. Take equity from your family home and borrow 85%/90% of the purchase price of the investment property as a "stand alone" mortgage.
Remember, never take a variable rate option when you have a "tracker" rate available. The "tracker" mortgage guarantees for the full duration of the loan, what margin above the ECB (European Central Bank) base rate will be charged by your bank. Fundamentally, it offers the flexibility to make part capital payments without penalty which you cannot do with a fixed rate loan.
Property will remain in any investor's portfolio and will continue to be the preferred choice of the ordinary, middle ground investor looking for a solid return.
*Michael Dowling is managing director, Sullivan Dowling Mortgage and Financial Advisers and president of IMAF (Independent Mortgage Advisers Federation)
Always remember the following
* Rents have reduced by 5% over the last 12 months, seek a market rent not one that repays your mortgage.
* Do not assume that you will find a tenant immediately.
* It costs between ?10,000/?15,000 to kit out a two-bed apartment or three-bedroom house - make sure you have the funds to cover this expense.
* Do not assume that all tenants pay or pay on time.
* I always ask prospective investors the following question: Can you afford to pay the mortgage for three months as well as all other bills you have, including your mortgage payments on your family home if the tenant does not pay or you cannot get a tenant?
* The new Residential Tenancies Bill provides welcome additional rights to tenants and all landlords should be aware of its provisions.
* Always maintain your property in good order. With the greater supply of new apartments, tenants will naturally deviate to a new property.