Is Property Investment in Ireland a Good Idea?

Imagine you were given the choice between owning a big house on a decent-sized piece of land in a ‘good’ location.

Or you could put €1 million into your pension.

Which would you choose?

If you said, “I’ll take the big house”, you’re probably not alone. We’re obsessed with property in Ireland.

But is real estate investment the best way to invest your hard-earned capital?

Today, we’ll examine why people invest in property and why it might not be the most effective way to shore up your financial future.

Why the Obsession with Buying Property in the Irish Property Market?

Property investment has been a cornerstone of wealth accumulation for several decades in Ireland.

Influenced by political turmoil, economic change, and societal norms, owning property is not just seen as an investment but a significant part of the Irish identity.

Land ownership in Ireland has always been synonymous with wealth and social status.

Under British rule, most of the Irish population were tenants, farming lands they did not own. At the time, this was one of the primary sources of economic and social strife, which reached a crisis point during the Great Famine.

Post-famine, the fight for land reform took on a significant political dimension. Various Land Acts in the late 19th and early 20th centuries began the process of redistributing land from absentee landlords to tenant farmers, which was largely completed by the mid-20th century.

Owning land became a symbol of freedom and autonomy, and therefore, it became deeply ingrained in the national psyche.

Culturally, property ownership in Ireland is more than just an economic decision. It’s a rite of passage and a tangible link to independence and self-determination.

For many Irish people, owning property is seen as establishing a legacy and providing security for future generations.

More recently, property investment in Ireland evolved with the country’s economic expansion, especially during the Celtic Tiger years in the late 1990s and early 2000s.

This period saw unprecedented economic growth, and property prices soared. Residential and commercial properties became a popular investment for the wealthy and average citizens looking to grow their wealth.

The tangible nature of property and the historical context made it an attractive and seemingly secure investment. The Irish property market has seen significant changes over the years, influenced by economic cycles and government policies.

The 2008 financial crisis, however, brought a stark reality check. Property prices plummeted, leaving many investors in negative equity and challenging the previously unshakeable faith in property as a safe investment.

Despite this, the market has recovered, and property remains a large feature in many people’s investment strategies in Ireland.

Despite the risks highlighted by economic crises, property continues to hold a revered place in the portfolios of Irish investors, driven by both economic reasoning and deep-seated cultural values.

The emotional and historical significance of land and property ownership in Ireland ensures that it remains an essential part of many investors’ investment strategies. Land and property ownership are seen not only as a means of wealth accumulation but also as a symbol of security and continuity.

Why Do You Want to Invest at All?

First things first, despite what you might be led to believe online through social media and DIY advertising platforms, investing isn’t for everyone.

Before you even consider investing, you should get the financial planning basics right first:

• Pay off all consumer debt like credit cards, personal loans and store financing.
• Grow your pension fund by contributing the maximum allowable amount to receive yearly tax relief.
• Pay off your mortgage.

Unless you are taking an incredibly high risk with your investments—higher than we would ever advise—you will not be making returns that will achieve better financial outcomes than following these steps first.

It should go without saying that you should never borrow to invest in a property or otherwise.

Once you are debt-free and are maxing out your pension contributions, we encourage you to consider your unique objectives, risk tolerance, and financial goals to help you develop an appropriate investment strategy.

Investing is a key part of wealth management and is used by individuals to achieve the following objectives:

• Building wealth: Traditional savings accounts offer limited growth potential due to low interest rates and exit taxes, which don’t even keep pace with inflation. Investments, particularly in equities, provide the opportunity for significantly higher returns.
• Capital appreciation: Increased property value over time can lead to significant gains for investors.
• Inflation protection: Inflation erodes the purchasing power of money over time. By investing in assets like equities that outpace inflation, individuals can protect their savings and ensure that the value of money grows rather than diminishes. This is particularly relevant recently as inflation has been high, directly impacting the cost of living.
• Retirement planning: Planning for retirement is a critical reason for investing. With the future of state pensions uncertain and the cost of living rising, relying solely on state pension provisions is risky. Investing in a pension, availing of tax relief and adopting the right investment strategy can help individuals build a substantial nest egg, ensuring financial independence and security when they finish working.
• Legacy & estate planning: Investments are generally part of an individual or family’s estate plan to provide financial help with housing, education costs or general inheritance to the next generations.
• Generating passive income: Certain investments can generate passive income, reducing dependence on traditional employment. Dividend-paying equities and rental properties are popular investments that offer regular income streams. This passive income can supplement or even replace salary income in some instances. We will look at property investing as an income stream in more detail later.

When is Purchasing a Second Property a Good Idea?

Buying a second property for personal use when you have available funds can be a great idea in certain circumstances. Owning a rental property can provide a steady income stream and potential capital gains, but it also comes with its own challenges.

To Benefit Your Children

If you have a personal need for a second property beyond a five-year period, it can be more financially beneficial to buy rather than rent.

The case that we see most often is to benefit children.

You might have two children who will move to a city for third-level education and stay there while they start their careers.

As you’ll likely cover their rent and living expenses while they are studying, investing in a property to house your children could be something to consider.

Given the current state of Irish house prices, this investment could also lead to significant capital appreciation over time.

We also have several clients with children who are likely to remain dependent or somewhat dependent on their parents for support into adulthood.

Investing in a property next door or adding a property to your land gives the children independence and security and provides peace of mind for parents.

It’s important to be aware that your children will still be liable to pay inheritance tax on this property upon your death. The dwelling house relief does not apply to this situation.

Life Goal 

Some individuals wish to purchase an additional property to use as a holiday home or second residence. If the primary purpose is personal use rather than seeking investment returns, then the risks and concerns are much less.

It’s still important to run the numbers here, even if the property is primarily for personal use.

There will still be the inheritance tax implications.

People often use holiday homes far less than they anticipate, and the exercise could end up costing you more each year than a four-week stay at a five-star hotel.

Investing in Irish property for personal use can also offer long-term benefits, including potential capital appreciation and rental income.

Large Investment Portfolios

Property investments can be placed in a large, extensive and diversified portfolio.

Individuals or families with great wealth can afford to take more risk if their overall portfolio is balanced.

Liquidity and inheritance tax implications are also generally less of an issue. Effective property management is crucial in maintaining and maximising the value of a large property portfolio.

We encourage clients to invest in property but typically prefer property funds/REITs to achieve this outcome.

Investing in Property as a Career

The risks and rewards for those who treat property investment as a full-time job can differ from those who prefer a passive investment. 

While this career path is not without risk, which we’ll look at later, some people will decide that they want to make a career out of being a landlord. 

Suppose you’ve considered all angles and decided to go for this option. In that case, the risks can be mitigated by diversifying your property portfolio as best as possible within your means and geographical area.

As this would be a full-time job, you would have more time to manage the property, the tenants, and your accounts, so there would be savings from not having to outsource these tasks. 

Utility Value 

You might decide to strategically purchase an adjacent property to your family home for privacy or future expansion.

As discussed above, you may wish to build beside your home for children, or an extension to house a dependent child would be an option to avail yourself of the dwelling house relief.

Why property as an investment asset?

We meet dozens of people who hold properties within their investment portfolios.

Indeed, investment properties have served many investors extremely well in the past. However, past performance should not be used as an investment criterion.

Here are some of the reasons people cite for choosing a property investment:

• Security and stability: Despite past volatility, residential property in Ireland is still perceived as a more stable and secure investment than the more erratic stock market.
• Bricks and mortar: A house, office, or block of flats is a tangible asset that provides psychological comfort to investors. A physical asset you can see and touch often feels more reassuring to people than abstract financial instruments like stocks or bonds. There’s a widespread belief that while market values may fluctuate, physical property will always retain intrinsic value.
• Income generation: Rental properties provide a steady income stream, particularly appealing in a country with strong tenant demand and a growing population.
• Tax advantages: There are several tax incentives for property investment in Ireland, including deductions for mortgage interest and various property expenses. The Irish property market has shown resilience and potential for growth, making it an attractive option for many investors.
• Legacy & Succession: For many Irish families, the property is a legacy asset passed down through generations, contributing to its perceived necessity in an investment portfolio.

But are these reasonings sound?

From our experience, there are other things to consider when considering investing in property.

There may well be more appealing investment opportunities in the Irish market that carry significantly less risk or effort and reward investors with higher returns.

What’s the downside to property investment and rental income?

With decades of collective experience at Everlake, we’ve observed several reasons why property might not be the best investment choice for everyone.

Here, we aim to unpack these reasons and encourage investors to consider a more diversified approach to managing their wealth.

Diversification & risk management

A diversified portfolio reduces investment risk by spreading funds across various asset classes, geographical regions, currencies, and industries.

By not putting all their ‘eggs in one basket,’ investors can mitigate potential losses in any one area.

Along with maintaining a long-term (10+ year) perspective, this strategy is crucial for maintaining financial stability and achieving long-term growth, despite market volatility.

While property values tend to increase over time, the property market is not immune to volatility. Economic downturns, changes in local industry health, and shifts in demographic trends can drastically affect property values.

According to the CSO, most landlords only own one or two properties, with the majority owning only one.

Property investments are geographically concentrated, exposing them to local economic risks and limiting diversification benefits.

There’s no denying that the Dublin rental market is buoyed by many multinational companies headquartered in the city.

The precarious state of the tech sector in 2023 and the political changes on the horizon have made landlords nervous. In recent years, there have been more landlords exiting the market, and we’ve seen an increase in clients deciding to invest in funds instead.

The impact of the 2008 global financial crisis on Ireland’s property market provides a stark example of how a recession can affect property values.

Fluctuations in Irish house prices can significantly impact the returns on property investments. Property prices in Ireland fell dramatically, by more than 50% in some areas, from their peak in 2007 to their lowest point in 2012.

The recovery took years, with prices only beginning to rise significantly around 2013 as the economy slowly improved.

We previously learned the lesson of the vulnerability of the Irish economy and housing market.

Ireland is a small, open economy that’s greatly impacted by decisions made in the UK and USA.

Investing a considerable amount of your family’s wealth in a property in a country as small as ours carries a great deal of risk.

Liquidity

Liquidity refers to how quickly and easily an asset can be converted into cash without significantly affecting its value.

One of the primary drawbacks of property investment is its lack of liquidity.

Unlike stocks or bonds, which can be sold relatively quickly in the financial markets and partially encashed, property transactions can take months or even years to complete, and the asset must be sold in its entirety.

This can be particularly problematic in times of financial distress when quick access to funds is necessary.

Taxation

The big winner when we talk about rental income is Revenue.

According to the CSO, 43.7% of landlords in Ireland’s primary source of income was employee income, with rental income supplementary to this. This means that their income tax, USC, and PRSI combine to a total of 52% in taxes due on their rental income.

There are no tax efficiencies available to landlords.

Unlike employment income, you cannot pay into a pension using rental income and benefit from related tax savings. This is especially true when people use limited companies as a vehicle to buy residential properties.

The above statistic suggests that the majority of Irish landlords are investing to profit from the growth of their assets, not to live off the rental income. However, the profits from the sale of an investment property are subject to Capital Gains Tax (CGT) at 33%.

Property investment should never be chosen over pension planning; the tax incentives aren’t there. The growth of assets within a pension is also not subject to CGT, DIRT or Exit Tax.

Passive income

According to the CSO, in 2021, residential rental income was the primary source of income for 20.3% of landlords.

While security cannot be guaranteed in any career or job, there are significant risks to relying solely on rental income as your sole income. For instance, periods that the property is vacant, issues with tenants paying rent on time and again, and the potential for a downturn similar to 2008 when the rental market also suffered.

Rent controls can cap income from property lettings, meaning that your income is not keeping pace in times of high inflation.

Legacy & succession

Many wealthy individuals in Ireland wish to pass properties on to the next generation during their lifetime or when they pass away.

We often find that gifting assets or funds to children is more beneficial when they are younger, around the age of 30, when they are setting up their permanent home, getting married, or starting a business.

One tax benefit that can be taken advantage of here is the ability to use the CGT/CAT offset if your beneficiaries have already used their inheritance tax exemptions.

As inheritance tax thresholds have reduced over the years and are likely to be reduced again, it may be better to consider gifting sooner rather than later.

Consider whether gifting property to three children in their 60s is as worthwhile as gifting smaller amounts of cash to them when they are in their 30s.

While the amounts may be less, the process is more straightforward and possibly of greater benefit to the recipients.

Opportunity Costs

Investing heavily in properties can lead to missed opportunities in other potentially more lucrative markets.

For instance, the global nature of stocks and bonds offers exposure to a broader range of economic activities and geographic areas, potentially leading to higher or similar returns without the same level of risk.

Ethical Investments

Ethical investments align with personal values and can contribute to societal good. However, property investment can raise ethical concerns for the investor and the wider community and economy, such as housing shortages and affordability issues.

Cost Efficiency

Beyond the purchase price, property ownership involves significant ongoing maintenance costs, property taxes, insurance, and potentially management fees if the property is rented out.

These expenses can erode the net returns on the investment, making it less attractive compared to other investment options with lower entry and maintenance costs.

Property experts estimate expenses of one month’s rent per annum to cover fees and one month per annum to cover periods of vacancy.

These costs must be seriously considered in your calculations as they can significantly affect returns.

Complexity & Time Commitment

Property investments often require a significant amount of time and expertise.

Landlords must manage tenants, maintain properties, comply with legal regulations, and handle unexpected repairs.

This level of involvement can be burdensome for those who prefer a more passive investment approach.

Tenants have many rights in Ireland, and evicting a problem tenant who doesn’t pay the rent requires a lot of time and effort. Being a landlord is a job!

Needs to meet investors’ goals

We meet scores of people identifying purchasing an investment property as a high priority on their financial planning list.

However, very often, when we spend time with clients, we discuss their goals and objectives and truly analyse WHY they want to invest.

We find that there are far more straightforward investments that will create better returns in the long run, with less effort and risk on their behalf.

Performance

While we’ve acknowledged that past performance is never the right criterion for judging an investment, it is interesting to examine how property has performed as an investment in the past.

Last month, The Economist featured an article on global property values.

Property, the ‘indestructible asset’, is up almost 175% since 2006.

However, when you compare that to the MSCI ACWI, a stock index designed to track broad global equity-market performance, the market is up 350% in the same period.

If you could travel back in time and invest your money, you would put your long-term investment funds into stocks!

Why Investing in a Fund is a More Effective Way to Save for Your Future

When advising our clients, we recommend a balanced and diversified portfolio.

Investing in a fund or a handful of funds has the following advantages over property investments: Unlike direct real estate investment, funds offer greater diversification and professional management.

Diversification

Investment across various assets, including equities and bonds, geographical locations, currencies, industries and company size.

Less Risk

Diversified funds reduce the risk of significant loss compared to property investment, which can be affected by market volatility and physical damage.

Property is subject to regulation outside your control – e.g. rent control and property tax.

We recommend using a discretionary fund manager for the majority of our clients.

This means that your investments are monitored and rebalanced according to your risk capacity and tolerance without you having to monitor or adjust your investment yourself constantly.

Taxes on Property

Property investments are subject to various taxes, including capital gains tax, property tax, and rental income tax.

While investment funds are also subject to tax, there is much more flexibility regarding the types of investments made and more opportunities for tax efficiencies.

As already discussed, investing within a pension should always be the first choice if available due to the generous tax reliefs available.

Categories of People Who Own Property & What They Can Do

Inherited Property

Property inheritances are liable to capital acquisitions tax at 33% (after exemptions).

Some people may wish to hold onto a property for sentimental reasons.

However, in many cases, this isn’t an option. The property often needs to be sold to generate funds to pay the tax due or to split the inheritance among two or more children.

As we’ve already outlined above, often an inheritance can be more beneficial to children earlier in life, rather than when the parents pass away. While this can often be a difficult conversation to have in families, we can assist with intergenerational financial planning discussions.

Considering Investing in Property as an Investment

We’ve looked at the pros and cons above, but as with any big financial planning decision, the best option is always to discuss it with your financial advisor.

Seeking professional guidance can help you consider your unique circumstances and how much risk and work you want to take on with your investments.

Maintaining First Property

We often meet people who have climbed up the property ladder, but they’re also still holding onto the first rung.

They bought a smaller ‘starter home’ or apartment and then moved on to their larger family home where they currently live.

But they held onto the other property as an investment and are now unsure what to do with it.

Of course, the answer depends on the specific circumstances, but there are a few things we generally consider in this case.

Owning a rental property can provide a steady income stream but also comes with challenges and responsibilities.

• Does it cost you more money each month? If mortgage payments are not covered by the monthly/annual rent (after taxes and expenses), then you need to consider if you can afford these. Would this money be better paying into a pension and availing of the tax relief?
• Do you have a plan for its use? If you have two or three children who want to go to university in Dublin and have a city centre property, you’ll probably save yourself money by holding onto the property and letting them stay there. If you also live in Dublin, however, you should consider the financial benefits of this. While it’s nice to give them the independence of living alone if it costs a lot to hold onto the property, the funds might benefit you (and them) better if directed elsewhere.
• Do you need a cash lump sum? You might have an investment property but also need a new car or an extension on your house to hold your growing family. We often see people getting into debt by borrowing for this expense while they have a property that could be sold, and the funds are used to cover the expense easily. The knock-on effect is that they can’t afford to pension plan as much because they are trying to repay the debt they’ve taken on.

Conclusion

While property can be part of a diversified investment portfolio, investors must be aware of its limitations and risks.

For the vast majority of people looking to build or maintain their wealth, it is advisable to consider a broader array of investment opportunities that offer greater liquidity, lower costs, and better diversification.

Investing in property is a serious decision with long-term implications. While Irish property can offer significant returns, it is important to consider all the risks and potential outcomes.

When investing in a property, especially in a small economy like Ireland, you must consider all the risks and potential outcomes.