15% of farmers borrow for foreign property investment

In the Irish Examiner marquee there was plenty of advice from Eddie Hobbs for the farmers who Paddy Horgan said were borrowing 20% for land purchase and 15% for foreign property investment.

“Mathematically, farming doesn’t make sense. The 1 to 1.5% return on assets in farming is nonsense, you’d stay only for capital gains in land value,” was the money man’s sobering advice to his listeners.

But he acknowledged that deeper forces are at work, and farmers in the audience know themselves that they are not in agriculture for money alone.

Not many farmers are likely to have enough cash to speculate in the property market, that is, invest purely for capital gains.

“You need to be filthy rich for that”, said Hobbs.

For those investing directly, putting their name on some bricks and mortar or land, he said rent yield is the vital factor.

This is the rent divided by the cost of buying, for example, €10,000 divided by €200,000, which is 5%.

The trick is, said Hobbs, for the rent to pay the mortgage with some space. So the target should be a rent yield of 2% more than the cost of borrowing. If you borrow at 3.5%, you need rent yield of 5 to 6%.

At lower rent yields, you must invest more of your own cash. The rent yield in Ireland is 3% and falling, you have to subsidise the deal, and that’s why Irish people are buying overseas, Hobbs told the 500 who attended at the Irish Examiner marquee.

Borrowing at 3.5% in Ireland and getting a rent yield of 6% overseas could be the way to go, he advised.

“But validate your information when buying overseas”, he warned.

Irish agents often jack up to a Paddy Price, he warned, “just like we rip off the Yanks”.

The solution is to go to two or three other real estate people wherever you are property shopping overseas, to cross check what’s on offer.

Ask how much per square metre; also find out about tax on rent, gains tax, community taxes and other costs which might be very different from the property scene in Ireland.

He said Cape Verde is an attractive property purchase location, where you can get a two or three bed villa on the beach for €100 to €120,000, even if you have to fly via Lisbon in Portugal to visit your purchase.

There isn’t yet a double tax agreement with Ireland; so tax you pay in one country may not be taken into account in the other.

Look for stable countries with good economic growth and 5 to 6% rent yield - such as Latvia or Lithuania, would-be investors were advised.

The Hobbs overseas property shopping guide includes the old town area of Vilnius, the capital of Lithuania, because development is restricted there; the UK, where 5 to 7% rent yields mean good value; and French lease backs, offering guaranteed returns to less adventurous investors, but you won’t benefit if rent rates go up, and capital gains are unlikely.

There are two other ways to invest in property, said Eddie Hobbs.

Syndicated deals enable ordinary investors put in €20 or €30,000 into a fund. Typically, €10m may be raised from 1,000 investors, the fund borrows another €20m to buy a building with good rent yields, but investors have no exposure to the debt. The big Irish stockbroking firms offer this investment route.

Or the property investor can buy shares in property companies, or invest in a share index like EPRA, for a diverse mix of property assets.

Long term, meaning 20 years plus, property outperforms inflation, said Eddie Hobbs.