I have a problem, and its kind of a big deal to me. You see, I have a vested interest in the property market in the respect that I am a mortgage broker, so if clients ask me ‘should I buy now’ and I tell them ‘no’ – which is what I have been doing in some cases for quite a while – then in turn it affects my livelihood.

estate agents are pulling a perpetual aceThe bigger issue is that other folks with a vested interest don’t seem to be doing the same, at every turn they interpret events as a ‘buying opportunity’, so the market is going up? Go buy, there is capital appreciation to be had. Its falling? Go buy, there is value out there. It seems every card dealt to the market is an Ace.

When is not a time to buy? Well… that’s the purpose of today’s post, I will do my best to spell it out for a two segments of the Irish property market namely: investors, first time buyers.

Investors: I will start by saying the same thing I say to people if they have a consultation with me ‘what is your idea of an investment? What do you think it should do?’ I am often surprised by the answers I get to this question, because more often than not the person only has a vague idea of what they want or what they want an investment to do. So then I’ll probe a little, ‘do you think an investment should grow over time?’ that one gets a universal ‘yes’, so I follow with something like ‘what if it didn’t grow but provided an ongoing income would you buy it?’ and that also gets a ‘yes’ so I then point out the inherent contradiction in the last two answers. I only do this to pave the way for viewing any investment which is to take an objective approach and to have an investment rationale.

When it comes to property there are two schools of thought, those that preach capital appreciation and those that preach cash flow, there are hybrids to this but by and large people tend to fall on one side of the fence or the other. I was and always will be a cash flow advocate, I practice this in my own investments and encourage other people to do the same because if you are getting hard cash, no matter how little it is, then you are being paid a premium for your risk. Capital appreciation in property as far as I’m concerned means that you are placing your eggs in the greater economic basket and hoping that the wider economy will do the job for you and at the same time there is the genuine reality that you may have to support your investment, which means you are the one paying a premium for your risk which is an inverse double whammy.

So applying this to the property market the summary is as follows. Work out your cost of acquisition, this will be the price of the property, stamp duty, fit out costs, repair work, legal fees etc. and then look at the potential income from the property and knock about 15% off the annual income to make an allowance for vacancies (and that 15% is not at all conservative, I’m thinking of moving it to 20%) and subtract the ongoing costs, membership of the PRTB (private residential tenancies board), management fees, upkeep, lease costs (if you don’t organize the tenant yourself) and then compare that to the cost. The ‘cost’ can be simplified or complex, on the simple side you need to compare the income v.s. the cost of servicing the debt. Assuming you don’t have the cash to buy outright then you will have a mortgage and at the moment you can expect to be paying about 5% interest, if you go for an interest only loan which will help maximise any potential cash income then it will cost about €1,458 per month for a loan of c. €350k. over 25 years and now compare that to what you might get in terms of rent. According to the model thus far you would need to be commanding a rent of c. €1,670 per month (to allow for vacancies etc) or more to make it an attractive proposition.

On the complex view you would look at the return you would get if you put your own equity portion into a fixed rate deposit account, or some other vehicle like fixed rate bonds etc. That is a more realistic comparison but it doesn’t take into account the capital appreciation element that may exist (I say ‘may’ because property is not guaranteed to go up in value over time every time) and the effect of the leverage on that potential upswing. The end result should be something along the lines of Rent of X amount minus the Costs of Y amount equal Z, and under the premise I choose to follow that number should be a positive figure, if it isn’t then don’t go for the transaction. Its really that simple. Sometimes it doesn’t always work out, I bought a property last year which I had initially purchased off the plans in 2005 and I am currently subsidizing it. I did my calculations based on interest rates of 4% which is where I felt rates would rest, however that has turned out to be wrong and the rates are over 5%, because of this I am losing out by the equivalent margin. However, the model I used is not flawed, my calculations were. In retrospect I should have factored in a higher interest rate change and going forward that will be the case, in the future I will use 5% + as a base, 5% tends to be the interest rate in healthy markets, although currently the credit market looks precarious!

So, for investors my advice is look at cash returns, if you are not getting positive cash flow then don’t buy that property, go do the ground work until you find a property that does fit this proposition and you will have bought well irrespective of what the market does. If you have a cash flow and your property falls in value at least you are still making money from it, if you have no cash flow and the same thing happens then you are not making money and you are facing the equity loss as well. Cash is King, its really that simple. The nice thing is that for the first time in a long time you can look for a bargain as a buyer and you are not faced with ‘take it or leave it’ propositions. Asking price at the moment is exactly that, its what is being ‘asked’, there is no biblical connotation attached that you shall therefore ‘receive’. So if you happen upon a property that could be a cash cow at the right price then offer that ‘right price’ and don’t waiver. Just as much money can be made in a down market as an up market it just takes a bit more smarts.

Next we will look at first time buyers, for a start, if you are renting then don’t instantly run out with an aim of purchasing, right now renting is a safe ground, moving to the market as it suits you is the prudent approach. It may be a perfect time to buy if you find the right deal but doing so only on the basis of reduced prices is flawed. For a first time buyer it is important to look at your situation, how much rent are you paying? Buying is not always the best route for every renter, it is a good long term proposition but there are other things such as location that are not priced into buying.

So if you are a city rat by nature a house for any price out in Meath may not be to your liking, and if you work in the city then there is the factor of time spent on transportation as well as the price of that transport. A good deal out in the commuter belt doesn’t have the cost of a car, insurance, and fuel (which is at record highs in costs). Depending on where you may (potentially) buy this could cancel out any monetary gains made. Take this example, Joe rents for €1200 in the city with his partner Anne, they don’t own a car and don’t need to because both of them work in the city centre, they decide to buy a house in Navan for €250,000 which is considered a good price for that area, the mortgage per month is €1,261 after tax relief its €1,053 (this doesn’t factor in house insurance or mortgage protection).

That seems like a decent idea because eventually they will own the property outright, however, because of their location they decide to drive to the city to work as the option of taking a new job locally either don’t exist or the career path opportunities/wages are not commensurate. So now you have a car to pay for, insure, maintain and keep fuelled. The car is a depreciating asset so you’ll never get more back than you put in, lets factor in the maths. Car €12,000 this will buy a good car that will make that drive every day reliably, you could buy a 12 year old Rover with 150,000 miles on the clock (in fact if anybody is interested I’ll personally sell you one) and in that case you’ll become intimately familiar with roadsides along the route as you’ll have plenty of time to memorise every nook and cranny as you await the AA truck for hours on end every second day.

A 5 year car loan on 12k will be about €250 per month, then insurance will likely be another €120 per month (first time getting insured), tax on the car if its a 1.4 litre will be c €30 about €60 per week in petrol, and then of course there is the 2.5 hours a day of commuting time, double that because there are two of them. This equates to an extra €660 per month before you look at the time of 25 hours a week in cumulative commuting, if you took a job at a chipper for a tenner an hour that would be a collective €250 per month, or if you did a class you’d likely be in a position to get a raise or move to a better paying job based on the greater skill levels all that extra education would give you. In any case the commute time is subjective but that doesn’t mean it’s not a factor that can, and indeed should, be measured monetarily.

So for first time buyers it’s a little vague perhaps, if you want to have your own place then an extra premium may be justified, but from a purely economic perspective it may make better sense to stay renting for a while. The best choice if you are going to buy is to go out and (much the same as the advice for the property investor) make offers that suit you rather than what suits the seller. There is an opportunity to get a property at a good price, and I think that if you plan to stay in an area long term then the current market risk can be balanced out but only, absolutely only if you buy at the right price.

The resounding message of today’s post is that buying is not a crime, buying without doing your homework and getting a property at the right price is a crime and you will end up paying for it.