Key Post Is profitable property possible at the moment?

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cremeegg

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While there are many aspects to consider about property investing, the net rental yield is the key issue.

This is the net profit after tax on your capital invested

The figure can be directly compared with the after tax return on deposits or other investments.

Attached below is a calculation based on buying a 3 bed semi in a good provincial city at the moment.

There is no borrowing included, this is because unless you can borrow at less than the net return, borrowing makes no sense. The table shows a net rental yield of 2.2%, there is no point borrowing at 5% or more to invest at 2%. The partial tax deductibility of the interest changes that but not enough.

Any comments welcome.



Investment 140,000


Rental Income 8,250
Number of months 11
Rental Income per month 750


USC on Gross 7% 578
PRTB 90
Property Insurance 500
Property Tax 225
Advertising 100
Other Expenses 1,000

Total Projected Expenses 2,493

Gross Return after expenses 5,758


42% Tax on Gross 2,418
4% PRSI On Rental Profit 230

Income Tax and PRSI 2,648

Net Return 3,109

Net Return on Investment PA 2.22%



If any one can PM me how to post a table I would be grateful.
 
Post duplicated to allow cremeegg play with tables - brendan

While there are many aspects to consider about property investing, the net rental yield is the key issue.

This is the net profit after tax on your capital invested

The figure can be directly compared with the after tax return on deposits or other investments.

Attached below is a calculation based on buying a 3 bed semi in a good provincial city at the moment.

There is no borrowing included, this is because unless you can borrow at less than the net return, borrowing makes no sense. The table shows a net rental yield of 2.2%, there is no point borrowing at 5% or more to invest at 2%. The partial tax deductibility of the interest changes that but not enough.

Any comments welcome.



Investment 140,000


Rental Income 8,250
Number of months 11
Rental Income per month 750


USC on Gross 7% 578
PRTB 90
Property Insurance 500
Property Tax 225
Advertising 100
Other Expenses 1,000

Total Projected Expenses 2,493

Gross Return after expenses 5,758


42% Tax on Gross 2,418
4% PRSI On Rental Profit 230

Income Tax and PRSI 2,648

Net Return 3,109

Net Return on Investment PA 2.22%



If any one can PM me how to post a table I would be grateful.
 
What expenses can you expect from letting property?

On initial rental
Furnishing
Kitchen equipment


Ongoing
Decoration & refurbishment
Repairs




Other expenses which you may have to pay
Management charge
Letting agent fee
Legal costs of lease
 
The Allsop challenge.

There is much talk of properties yielding 10% at the moment.

This is the ratio of rent to purchase price.

Each individual property would have to be looked at separately to see if it made sense but here are some thoughts as to why these properties may not be as good as they seem.

1. Management charges. These properties are invariably apartments, and that means management charges. A €1,000 charge will reduce your profit considerably.

2. Many of these properties are purpose built rental apartments and many have associated problems. Perhaps only suitable for students and no market during the summer.

3. Issues with apartments. See this thread http://www.askaboutmoney.com/showthread.php?t=182003&highlight=apartment
 
Interesting start, could you explain the €1,000 in misc exp (just for completeness) There should also be some capital allowances on furnishings ect.

Also the USC is computed on rent after expenses but before capital allowances.
 
Hi Cremeegg

Good idea to assume no borrowing in calculating the yield. When this first stage is done, then it would be worth doing one with borrowing.

Suggest reformatting it as follows

Rental income
Exenditure
Net Rental income before tax
Income tax
PRSI
USC
Net income after tax

I suggest this because the three taxes are calculated on the net rental income.

In line with Joe 90's, it's worth doing a separate post "What expenses can you expect?" so I have inserted a blank post for you to complete.

Brendan
 
cremeegg said:
Investment 140,000
Click to expand...

cremeegg said:
Net Return on Investment PA 2.22%
Click to expand...

To put this in perspective, over the last five years:
- European large caps delivered 5.9% pa
- Euro Gov Bonds delivered around 6.9% pa
- European Property delivered around 4.2% pa
That is right, over the past five years while Irish investors have been sitting on masses of negative equity, investors in European stocks, bonds and even property have seen their investments recover and start to deliver good returns.

European property did reasonably well for two reasons: diversification and because the UK/Ireland are traditionally excluded from the investment strategy.

As for considering this proposal as a business, it's a long time ago since I practice as an accountant, but I can never recall us advising anyone to take up a business in which the net margin was only a couple of percent! The risks and efforts versus the returns just do not lend merit to it.

No matter how you present it, you will be very hard pushed to find a long term investing period in which property competes reasonably well as opposed to the alternatives. And if you take the time to search you'll even find studies that show that even the mortgage = rent theory does no better.
 
Investment|||140000
Rental Income||8250|
Number of Months|11||
Monthly Rent|750||
||||
PBRT||90|
Property Insurance||500|
Local Property Tax||225|
Advertising||100|
Other Expenses||1000|
||||
Total Projected Expenses|||1915|
||||
Gross return after expenses|||6335|
||||
USC on Rental Income|7%|443||
Income Tax|41%|2597||
PRSI|4%|253||
||||
TOTAL TAX|||3294|
||||
NET RETURN|||3041|
||||
NET RETURN %|||2.17%|
 
I am just exchanging on a cash purchased property investment at the moment. I would love to use the table as a template to show myself/others on here my potential rental yield. Perhaps if someone was good with Excel they could create a spreadsheet with the necessary formulae already in to calculate the rental yield for us. Then we could just transfer the spreadsheet to the AAM table template?
 
Joe_90 said:
Interesting start, could you explain the €1,000 in misc exp (just for completeness) There should also be some capital allowances on furnishings ect.
Click to expand...

The €1,000 is an estimate to cover repairs, replacements and maintenance.

These occur sporadically, you may have none for a year or two, then like buses several come at once.

The kinds of thing I have experienced are, repairs to kitchen appliances, repair leaks, repair gutter and down pipe, replace kitchen appliances, replace mattresses. Clean up after tenant. Painting. I think at €1,000 a year you are well covered.

I regard all these things as expenses, and have deducted them from the profit in the table. From a tax point of view some would be capital expenditure and attract capital allowances instead. This has the effect of delaying the tax relief, looked at over the term of a property it doesn't seem to make much difference.

Joe_90 said:
Also the USC is computed on rent after expenses but before capital allowances.
Click to expand...

Thanks for that I have edited the table accordingly.
 
Jim2007 said:
To put this in perspective, over the last five years:
- European large caps delivered 5.9% pa
- Euro Gov Bonds delivered around 6.9% pa
- European Property delivered around 4.2% pa
That is right, over the past five years while Irish investors have been sitting on masses of negative equity, investors in European stocks, bonds and even property have seen their investments recover and start to deliver good returns.

European property did reasonably well for two reasons: diversification and because the UK/Ireland are traditionally excluded from the investment strategy.

As for considering this proposal as a business, it's a long time ago since I practice as an accountant, but I can never recall us advising anyone to take up a business in which the net margin was only a couple of percent! The risks and efforts versus the returns just do not lend merit to it.

No matter how you present it, you will be very hard pushed to find a long term investing period in which property competes reasonably well as opposed to the alternatives. And if you take the time to search you'll even find studies that show that even the mortgage = rent theory does no better.
Click to expand...

Did European equities really only yield 5.9% in the 5 years after Lehman. I would have thought there would be a bigger rebound.

This is all backward looking, the prospective yield on property is forward looking, based on tangible forecasts.
 
cremeegg said:
Did European equities really only yield 5.9% in the 5 years after Lehman. I would have thought there would be a bigger rebound.

This is all backward looking, the prospective yield on property is forward looking, based on tangible forecasts.
Click to expand...

As I have already pointed out since the beginning of the recession, well balanced portfolios have fully recovered and done well over the past 5 years. This is not surprising, since equities have always trumped property in long term investment periods....

There are no reasons to expect that this will suddenly flip around in the near future and remain so for the next 10 to 15 years, unless you are expecting there is to be a prolonged recession, while some how property will still do well during the same period!
 
I am currently investigating the return on Irish property since 1970 compared to a global equity portfolio.

My initial results are that a second hand property in Dublin actually matches an equity portfolio over the whole period until 2009.

However, from 2009 onwards you would have been considerably better off with equities.

We should not expect property to do as well as equities. Internationally residential property actually tends to match inflation over the long run.

Therefore we can estimate that the long run return on property should be something like 3%pa capital returns plus rental income.

Using the 2.2%pa figure in this thread this would imply a total expected return from residential property (capital appreciation plus rental income) of something like 5%pa compared to say 7.5%pa for equities.
 
Not 100% certain, but the 2.17% net return (Cremeegg) does not seem correct. Would you not first have to account for offsetting the expenses and then also the capital allowances?. Although I suppose for capital allowances/expenses it is not till the following year after purchase that you can claim any. Assuming you intend to hold on to the investment for a few years, I guess you should factor this in???
 
landlord said:
Not 100% certain, but the 2.17% net return (Cremeegg) does not seem correct. Would you not first have to account for offsetting the expenses and then also the capital allowances?. Although I suppose for capital allowances/expenses it is not till the following year after purchase that you can claim any. Assuming you intend to hold on to the investment for a few years, I guess you should factor this in???
Click to expand...

I am very interested in how realistic people think my estimated net yield figure is. I would like to say thanks again to the people who pointed out errors in the original table, and all errors that I am aware of have now been corrected.

Can property be purchased in todays market that will give a better result.

Regarding Capital Allowances, in short, no. See my response to Joe 90 above.
 
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