Monthly expenses too much - should I sell my rental property

I need someone financially astute to help me make a decision.

My wife and I live in our main residence, and we also own a rental property.
My wife is a teacher and is currently on a career break, she is due back
to work in September 2008 (i.e. one more full year). We have 2 small children,
so there is no possibility of her going back to work any earlier than that.

I do not earn enough each month to meet all the bills. We spend about 1500 euro more than I earn ! We have survived up to now because we both had savings policies which we cashed in, in the last couple of years.
I have about 10k left but that won't be enough to get through the next year.

I have 2 options.

1. Sell our rental property (this will give a profit of about 60K after CGT).
This will obviously solve our problems.

2. Try and get through the next year by extending my car loan, credit union loan,
etc., when my 10K runs out.
When my wife is back working, the pressure will be off, and we will be able to meet
our monthly outgoings.


My question is, is it worthwhile fighting tooth and nail to hold on to our rental property,
or are we being silly trying to keep it when selling it would solve our problems immediately ?

I mentioned that I have only 2 options, is there any other option that I can't see
(both the mortgages are fixed, so I don't think I can suspend payments on either) ?

All advice appreciated.

Thanks

James

Additional Information
Home: €550k
Mortgage: €250k
Equity: €300k

Investment property: €210k
Loan: €130k
Equity: €80k

rental income before interest and tax: 10k p.a.
Interest on loan: (not sure what this means; however, the interest paid in 2006 on my investment mortgage was €5300)

The idea of borrowing to fund living expenses is not a good one; in fact it’s a really bad one. Unless you have a very high income then an overspend of €1500 a month is far too much to cope with.
You say that your wife will go back to work next year and your problems will be over. Have you factored in childminding, travel and other costs that will occur when she is no longer at home? If she earns €40’000 a year then she will be taking home between €2000 and €2500 a month. That means that you will be just about treading water when she does go back to work. Without more detail it’s hard to be emphatic but I would suggest that you are living beyond your means now and when she does go back to work you will find it hard to clear the debt that you have accrued between now and then. Topping up car loans etc is also a very expensive way of borrowing.

What is the yield on the investment property? If it is not covering the costs then my advice would be to sell the rental property and use the €60k to reduce the mortgage on your PPR.
Even if it is you should then calculate the interest you will pay on the debt that you will accrue over the next year and factor that in as a cost.

Then there’s the bigger issue; you have two small children and life is about more than accruing wealth. Ask yourself if your quality of life will be better if you sell up.
By selling and reducing the mortgage on your PPR you are keeping the equity you have built up, you are just transferring it to another property, one that will not be subject to capital gains tax in the future.

Imust concur with the other posters. If you can clear 60k (it may be less in the current environment and including all costs, so be prepared for this) I think it is far better foryou and your family's peace of mind to have some certainty about your financial position in the next couple of years rather than being consumed by money issues.
Ask yourself this question - if the investment property was sold in the morning would you and your wife be breathing a sigh or relief or not?? There's your answer

The idea of borrowing to fund living expenses is not a good one; in fact it’s a really bad one.

Click to expand...

I would agree with this as a general rule, but not in this case. It if perfectly good financial planning to borrow money for living expenses during a period of especially high living expenses or during a period of low income. You have made a family friendly decision for your wife to take a career break. As it's just for a few years, then borrowing to fund that is a good idea.

What are the repayments on your mortgages? If you are paying off capital, this is a form of saving. Speak to the mortgage provider and explain your situation. They might reduce the mortgages to interest only or extend the term or give you a payment holiday, especially if you have a good record.

The mortgage on the investment property should be interest only anyway. If you are making repayments of capital, they should be against your home.
You may be able to remortgage your home to fund you through the next year. What size is your mortgage and what value is your home?

Thanks to everyone who responded - very much appreciated.

Brendan asked

You may be able to remortgage your home to fund you through the next year. What size is your mortgage and what value is your home?

Click to expand...

My current mortgage is 250K and my home is worth about twice that. Unfortunately I have already asked my mortgage provider to top-up this mortgage by 30K (to pay off my car loan and credit union loan), but they will not entertain the idea until my wife returns to work. The manager in my branch says that he has strongly recommended it but the mortgage section are not budging.

My rental property mortgage is with a different bank. It is not an interest only mortgage. When I asked for it to be changed to interest only, they refused. I can't remember the exact reason (it was last year) but I think it was again due to the fact that my spouse was not working.

Purple mentioned quite correctly that

an overspend of €1500 a month is far too much to cope with

Click to expand...

I currently have 3 loans (credit union, car loan and one other) which cost 850 euro per month in total.
My plan was that when my wife returned to work, we could (i) change our rental property mortgage to interest only, (ii) increase this mortgage by 25K to pay off the loans.
These 2 steps would clear that 850 cost I have at the moment, and also give me an income each month from the rental property (about 400 euro after tax).
That is 1250 in total, which means that I am only overspending by 250 euro ! My wife's income would then give us that extra bit of security. Travel and child-minding will not be a big factor.

Please let me know if I am making sense.

I would be grateful for any additional advice.

Thanks again

James

Without getting into the ins and outs of the property market personally if I was in your situation I would hold onto the property.
As Brendan poined out, borrowing to fund living expenses ad infinitum in an unsustainable way is outrageous financial behaviour but what you are doing is not. You are funding a finite period of your lives where your collective income has dipped.
I would at least hold out until your wife returns to work and your mortgage options become greater to make the sell/keep decision.
Don't worry, you have your head screwed on and are on the right track. Best of luck

I would have thought the answer depends a lot on the return being made by the rental property: if it's low then there seems little point in tying up funds with a low return whilst simultaneously paying off significant debts.

My inclination would be to sell the property, using any gain to reduce debt and save/invest anything remaining.

From what you say, if you paid off your debts, you'd probably end up being able to live within your means even in the short term. Apart from anything else, there's a huge benefit in terms of reduced stress if you do this.

The medium to long term return from the rental property would have to be pretty spectacular to justify getting further into debt than you already are.

I would renegotiate the investment mortgage to interest only first off. Would get a halifax or nib credit card now and then take the other in six months to give you up to 12 months 0% credit. I would go to them with the carrot of a mortgage (investment) also to make this work. in the meantime use xs funds to knock down the car loan/credit union. Do not underestimate the fact that your wife is returning to a secure job. The banks know this too.

James are you up to date with your mortgage payments? If so, you should be getting a better response from your lenders. Even if you are behind, but doing your best, they should be helping out.

Which mortgage companies are you with? See can you go to an alternative provider. If one of them is at a fixed rate, you won't be able to do so and you are on a lower rate anyway. But you should be able to switch the variable rate mortgage. When is the fixed rate period up. Write a strong letter to the Manager expressing your disappointment and telling them that you will switch as soon as the fixed rate period is up.

Brendan

Brendan said:

I would agree with this as a general rule, but not in this case. It if perfectly good financial planning to borrow money for living expenses during a period of especially high living expenses or during a period of low income. You have made a family friendly decision for your wife to take a career break. As it's just for a few years, then borrowing to fund that is a good idea.

Click to expand...

I don't agree that in this case the debt that will accrue over a 13 month period (€1'500x13 = €19'500) is a good idea given that the equity in the rental property is low and not likely to increase in the short to medium term and the yield seems to be low as well. Allowing for a slight increase in living costs when James's wife returns to work there will still be very little excess income to pay off the €19'500, and that's after other current loans for non-capital items have been rolled into the mortgage in their PPR.

If it were me I'd sell off the rental property. As you don't know what around the corner and you are leaving yourself with little margin if something else crops up in the meanwhile. Its good to leave some lines of credit open. Theres every possibility that you might be able to buy another rental propery again in 2008/9 perhaps when market conditions are more advantageous.

Irrespective of the other 'internal' factors, one key external factor is that it is a bad time to be selling any property (investment or otherwise). You might wait 3-9 months to sell the property in the current market, unless you sell for a "below value" price. And the price you get might not release as much as €60k that you hope. I'd hold the rental property if you can.

Simple one on the mortgage - have / can you extend it out to a longer term?

Thanks again to everybody for the helpful information. I don’t have internet access all day so sorry for the delay in responding.

Ang1170 makes the point that the answer depends a lot on the return being made by the rental property. This is an area that I can’t really figure out. On the one hand, it seems great that I have a rental property worth 220K, but if the net return is only 400 euro per month after tax (if I change the mortgage to interest-only), then is it worth holding onto after all ?

To both Brendan and Markowitzman, both my mortgages are fixed rate (for about 10 more months). I am up to date on repayments, and I would have a good credit history.
The main residence mortgage is with Ulsterbank, and the investment one is with Permanent tsb. I have written a letter to Ulsterbank expressing my feelings, but as I said, the manager there agrees with me but he says that all the mortgage stuff is decided in their mortgage section in Dublin.
Markowitzman, are you suggesting to get use my current 10k savings to reduce my loans, and get Halifax and Nib credit cards to fund my everyday spending ?

To Purple, I still have 10k left from a savings policy, so I estimate my overspending over the next 13 months to be 9.5k (not 19.5k). This includes the 850 per month on my current loans (over 13 months this amounts to 11k which will take a significant chunk off my loans, which in turn means I will have to borrow less to clear my loans when my wife returns to work).
Now that things are becoming clearer(!) to me, I think that if I had a cash injection of another 10k, in about 6 months, then that would keep us going until my wife goes back working. Am I being too simplistic here ? If not, then it seems that it would be a shame to sell the rental property.

To Propman, both mortgages are currently 25 year ones, so I don't know if it's a great idea to extend the term. I'm not too sure of that though.
Some of the posters think I should sell, and others don’t, and to be honest, I’m still pretty confused about the whole thing.

I would very much appreciate further input.

James

How long would people think is reasonable to over extend yourself in a case like this? Extending term, and loans etc. Is it ever "reasonable". As rather than decreasing your position, risk etc. You're increasing it.

Your yield is 2.18%. That’s calculating based on 100% rental (all 12 months) and doesn’t take into account other costs like insurance, management fees (if applicable), refurbishment, etc.
If you calculate based on 10 months occupancy (as is advised as the norm) and allow for even €1500 costs a year then your yield is only 1.14%.
This is all based on yield on the current value. If there is €60k equity then the purchase price was €160k plus cost or approx 10% = €176k so yield on investment, based on 10 months occupancy and costs as above, is 1.42%. It’s still very low. Forget about any more capital appreciation for the purpose of your calculations in the current market and just look at yield. If I were not making more than 3 or 4% above the rate of inflation on a leveraged investment I would get out. Take your profit and scram!

One thing that you haven't looked at is can you reduce your monthly spending, is there anyway you can say not go on holidays, give small gifts for Chrismas, go out only once a month just for one year to bring down your monthly spending? I would recommend getting out a piece of paper and writing down exactly what ye spend the money on to get an idea where cuts can be made.

Aileen2 said:

One thing that you haven't looked at is can you reduce your monthly spending, is there anyway you can say not go on holidays, give small gifts for Chrismas, go out only once a month just for one year to bring down your monthly spending? I would recommend getting out a piece of paper and writing down exactly what ye spend the money on to get an idea where cuts can be made.

Click to expand...

Or use spread sheet from the Banking, Borrowing, Budgeting and Credit Cards forum.

Purple said:

Take your profit and scram!

Click to expand...

This is fantastic advice and the OP would do well to listen to it. Seriously, do you own the rental property or does it own you? How would you feel if the property were to depreciate to the point where you had no (or negative) equity (no matter how unlikely that may seem)?

I agree with the last postings, sell the rental property, no one knows how long the current situation is going to last, you are obviously not in a financial position to sit it out. Maybe in a few years time when when your financial situation improves you car re invest.

I don't think that the three previous posts should be so categorical.

Property is a long term investment and temporary cash-flow difficulties should not be given excessive weight. You can't just sell now and buy back again in two years when your temporary problems are over. The transaction costs alone would be around €35k. And that is without all the hassle of selling, getting rid of tenants, buying and finding new tenants.

If you have 25 year mortgages, that means that you are paying off capital each month. So you are actually saving money, so your deficit is lower.

If the rates are fixed for the next 10 months, you will have some penalty for paying off the mortgage early, so even if you do decide to sell, wait until the fix is up.

Don't forget that your monthly repayments will probably increase when the fixed rate period expires.

Run down the €10k savings over the next 6 months and then decide how you feel about it. As you will be approaching the end of the fix period, you will be free to move to another lender and so the banks will have to treat you better.

Brendan