Key Post Key Post Sell home or keep as an investment?

I'm trading up to a bigger house and have put my existing home on the market. My friends say I'm crazy. They say I should hang on to the house as an investment, even if this means I'd have to borrow a lot more to buy the bigger house.

My home is on the market at €315k. It has a mortgage of €95k which costs €550 per month in repayments. I'm planning to spend about €470k on the bigger house and have savings of about €20k.

If I sell the first house, my new mortgage would be €210k or €1,220 a month.

If I keep the house, I'd have to borrow €450k, which would cost €2,620 a month. Against that I'd expect to get rent of about €1,000 a month, so my net outlay would be about €1,620 a month.

So for an extra €400 a month, my friends say I could keep both houses. That looks great on paper and I could probably afford the €400 a month. But is it worth going into debt to the tune of €430k?

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I'm in a very similar situation to yours and again most amateur 'advice' I'm given is to keep the first house and rent. In fact in my own situation I'd probably be able to cover both mortgages on the rental income from the first house.

In the end I found that even at that I was very uncomfortable being so highly leveraged against the property market. Not that I'm of the opinion we're heading for a major bust or anything but I am convinced we've peaked and it's a good time to get out.

For me it's also about lifestyle. I could keep the house and rent it out but be worried about tenents, rents not going down, interest rates staying low, economy holding up etc. etc. If everything stays peachy it could work out and in 20 years I'd be laughing. However if things turned bad in any way I could find myself forced to sell to a buyers market with no other choice. I'm not convinced the gravy train will keep going the way it has for close to a decade now.

On the other hand by selling I'll have a very easy to manage mortgage on my own home(with a view to repaying early) that I can cope with in the event there's a few points interest rise (long-term) and roughly €150k left over which I plan to split between a property abroad and long-term stock market investments. (By the way the foreign prop isn't an 'investment' it's a sun-retreat for 5-6 trips a year any rental will be a bonus).

I sleep easy this way and enjoy a lifestyle I can afford. Sure maybe, just maybe if I kept the other house and everything worked out I could be loaded in years to come but it could also turn out badly and leave me considerably worse off than right now.

Personally I'm happy to cash out now but your approach to risks/investments may be different.

Re: -

This is something we're thinking of doing in the future as well and whilst I appreciate what Landlord1 chose to do, personally I think it's worth going for. We should be able to remortgage our current home which has appreciated significantly in value since we bought it and with the extra money combined with our savings we hope to be able to buy a home down the country and rent out our current home. This way we hope to be able to pay all (or the vast majority) of the mortgage repayments with the rental income on our current home leaving us with little or no payments on our new home. Of course should we be unable to rent our rental property for a period of time we should be able to make the mortgage repayments ourselves (after all we've managed up until now!). I don't see any real risk in this but maybe I'm missing something?

Sell home or keep as investment

Lark
One other point worth mentioning re your calculations. You say that if you had mortgage payments of eur2,620 per mth, you'd have an offset of rent of eur1,000 per month. However, only the interest portion of the mortgage payment on your rental property, is offsettable against the rent of eur1,000, the balance is chargeable to tax, leaving you not only with eur2,620 mortgage payment on your new home but a potential tax liability on your rental "investment" on top of that.
As a rough estimate
Rental income eur1,000 per mth
Mortgage payment eur550 per mth
Say for example interest portion of the eur550 is eur250
On top of your 2,620 mortgage on new house, per mth you also have a tax potential liability of:
42% x [1,000 - 250) = eur315 [ignoring any other allowable expenses for the time being]

Hamlet

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Everyone situation is different and everyones approach to the risk (and realise there *is* risk) is different but run the numbers and see if it still looks ok.

Be aware of Hamlets advice re: tax liabilty (trust me,keeping rent 'off' the books is a very dogey road to go down and could cost you *very* dearly in years to come, ignore anyone who says 'it's grand' and 'sure i've gotton away with it for years')

Work out realistically how much rent you can expect (consult daft.ie for a good estimate, be conservative). Work off a 10-month year on the basis of tenants changing etc..

Figures still look ok? Good. Now add 1 or 2 points onto the mortgage interest rate (use www.jeacle.ie/mortgage/ for figures). U can still manage fine? Great. Now cut your rental income in half. You can still manage from your own income? Now youre laughing.

If you find you're struggling financially after the above situation they don't just bury your head in the sand along with the usual 'as sure it'll never happen'. None of the above (substantial rent decreases/considerable unoccupancy/small ecb rate rises) are exactly catastrophic and probably more likely than not over the medium term. Rents have already softened and with more rental property coming online location is more than ever a prime consideration to ensure occupancy.

I'm deliberatly playing devils advocate here because property is an investment like any other. You *must* be able to handle any potential downside and if this is likely to cause you hardship then give it some very serious thought.

Getting off my soapbox I'm not actually saying 'don't do it' but really make sure you approach it with all the info to hand and ensure you can handle unforeseen problems to stay with it for the longterm.

Re: -

How much of your personal time will be required to manage the rental property?

To be or not to be . . . . . a Landlord

How much of your personal time will be required to manage the rental property?

Click to expand...

Not much. Once you get some "handyman" type contacts that you can trust, it's mostly a case of just making the occasional phone call to someone to nip up to the house and fix a window, or whatever other remedial work is due. Then you've also got to keep an eye on the mortgages to ensure that you're getting the best rates available.

I agree with Landlord1 in this case, however - it's a lifestyle choice, and it really depends on your personality. With a 15/20 year timeframe, it's unlikely (but not impossible) that a property investment even in today's market will make a loss. There's no telling where the property market will go, but on the balance we're unlikely to see the 15%-style of capital appreciation we've seen in the past. But who knows.

More important would be to ask yourself if you want to be a landlord? An equity based investment is not "as safe as houses", but on the other hand a bond or stock will never:

* Ring you up at three in the morning to complain about the other tenants.
* Deal drugs in your property, resulting in a friendly visit from the Gardai.
* Use your newly fitted kitchen cabinets for firewood during the long cold winter.
* Refuse to pay the rent for 4 months and then quit the country, leaving a filthy house and a personal "present" strategically placed in the hall for you to clean up.
* Threaten you with violence for wanting to collect the rent.
* Leave rice boiling in a pot for 8 hours and burn your house down.

If you're the kind of person who can compartmentalise these incidents (and believe me they do happen) then by all means, if the sums work out, you should invest. If incidents such as these would trouble your sleep, and you'd need to have a neck as thick as a Mayo Flynn for them not too, then you should consider other investments also.

Good luck in either case, just don't go into property investment thinking that it's always plain sailing . . .

-- James

Re: Sell home or keep as an investment?

I am also trading up and considering renting out my current property. The option of fixing rates on the investment property and still clearing the mortgage cost based on a moderate rent expectation seems to make sense to me. This is purely a longterm investment but at least it offers you more control than say giving your money to someone else to invest for you (eg) pension scheme.

Re: To be or not to be . . . . . a Landlord

When deciding whether or not to keep your existing home as an investment, treat it like any other investment decision. Look at it as if you were making the investment for the first time. Be careful not to focus on issues which are easy to understand, but irrelevant e.g. the repayments on your old mortgage.

Taking Lark’s figures:

Existing home is worth €315k.
Mortgage €95k.
Potential rent €12k

Buying a new house for €470k

I think that this rental yield may be optimistic. The reality is that you will have expenditure on repairs, agency fees, advertising for tenants, and vacant periods. Experienced landlords suggest that you should allocate 50% of the gross rent towards expenses. It’s better to be conservative when doing these figures.


You should view it as borrowing the full €315k. So the interest cost is around €9k. ( 315k @ 3%)
So it looks to me that in the current market, this is a loss making proposition:

Net rental income* * * * * * * * €6k
Tax at 47%* * * * * * * * €2k ( €3k less tax relief on €95k mortgage)
Mortgage interest €9k

Net loss €5k

The two big variables are rental income, which might be higher and mortgage interest rates which will probably be higher. It might give a better picture to do the calculations at the 5 year fixed rate of 4% which increases the loss to €8k!

Capital Appreciation

Whether or not keeping your house as an investment is a good idea, will not be known until the house is sold and you see what the capital appreciation has been.

No one knows whether house prices will rise or fall in the long term. There is a significant risk that house prices will fall from their present levels when interest rates eventually rise.

Are you overborrowed?
Lark will have borrowings of €565k against property worth €785k. That’s 72% loan to value. If interest rates rise and the property is difficult to let, will Lark be able to meet the repayments out of his other income?

If Lark needs to borrow for some other purpose at a later stage, he will find it more difficult if he has such high borrowings. Of course, if the properties continue to rise in value, he may find it easier to borrow.

Are you overinvested in the property market?
All investment decisions should be looked at in the context of one’s overall finances. Lark has a €470k exposure to the property market with his new house. He will benefit from any price rise anyway. Perhaps he should look at investing in the stockmarket with the money to balance his portfolio?

Tax consequences of retaining your existing home as an investment
Any capital gain on your home is tax free. So let’s say he bought it for €115k ten years ago. He has a €200k tax free capital gain. Now let’s say he sells it for €315k in 10 years time. He will still have a €200k capital gain. €100k will be attributed to the time he held it as an investment, even though it did not rise at all during this period. He will pay €20k CGT on gains he never made.

Against that, if it rises at the same rate of growth, it will be worth €900k in ten years time. His gain over the next 10 years will be €600k, but his taxable gain will be only €400k ( 50% of €900 - €100)

Will there be a stamp duty clawback
If you buy a new property to live in it, you will be exempt from stamp duty. If you rent it out within 5 years, you must pay the full stamp duty you would have paid on it had you bought it as an investment.

Lifestyle and other issues
As Landlord1 pointed out, these are very important issues. Managing a property is work. If you enjoy this type of work and have the time for it, this won't be a problem. But if you have a busy life, you may not have the time for managing your property and it will suffer.

If Lark sells his old house, he will have a mortgage of €250k on a home worth €470k. That's a 53% loan to value vs. 72% loan to value if he keeps his old home. So it gets down to whether you place a higher premium on risk or comfort?

Brendan


Edited by sueellen to fix titles

Re: Sell home or keep as an investment?

Consider buying a bigger home

If Lark is comfortable with a €785k exposure to the property market and €565k in borrowings, he should consider buying a home for €785k.

It will cost him an extra €4k a year (rental income after tax).

It will also cost him an extra €35k in stamp duty up front.

Advantages
The huge advantage is that Lark will have a much nicer home to live in. Bigger house or better location.

There will be no Capital Gains Tax on the increase in value of the home. So, if property rises by 5% a year, he will save €3k a year. (315K @5% @20% CGT)

Disadvantages
If Lark needs cash, he won't be able to sell part of his home whereas, if he has a smaller house and an investment, he can always sell the investment.

Is this his final home?
If Lark is even remotely thinking of trading up again in a few year's time, then this would swing it for me and he should trade up to one big house now. This would save him €35k in stamp duty.

Brendan

Edited by sueellen to fix titles

Re: To be or not to be . . . . . a Landlord

Hi Brendan - Isn't your analysis very short term? The real value of the rental property will be in 20 years time when the mortgage is cleared and it is providing steady cash flow.

Re: Sell home or keep as an investment?

Hi Rainyday,

Any investment should be viewed as a long-term investment, although it's important to look at the annual return.

The earlier analysis in this thread referred to the €95k mortgage. Most people make this mistake with a rough and ready analysis - The rental income will cover my repayments, therefore it's a good investment.

The first question to be asked in any analysis should be - "If I had €315k cash, would I invest it in this property?". In other words, is the investment justified without any borrowings. The only way to answer this question would be to compare the options. In most cases, cash investors are much better off investing in shares as the return should be much higher over the longer term.

The second question, should be - "Is it appropriate to borrow 100% to buy this property?". Borrowing increases the risk substantially. If the overall return is higher than the cost of borrowing, then it will turn out to be a good investment.

Let's turn the clock forward 10 years. Lark now has a house worth, say €600k with a mortgage of €95k. He should still apply the same critical analysis. "Is this the best place to invest €600k?". His next question would be, "Is it appropriate to borrow €300k to fund half of this investment?". His personal circumstances may have changed, which may make the investment more or less attractive at that stage.

So the analysis is done on an annual basis, but the strategy is long term.

Brendan

Re: To be or not to be . . . . . a Landlord

Just on a revisit and since posting last we have decided to sell and invest surplus elsewhere until we see what happens to property (etc) . Prices in our particlar area have gone sky high because of lack of new builds. The option will be there to get back in if we want later while we have secured substantial capital in the meantime.

Re: >> Key Post Sell home or keep as an investment?

Congrats Capet.

Coming to this thread late but just a qucik point on Brendan's illustration; it allowed nothing for maintenace costs. depreciation of FnF, management etc. which I assume were included when saying net rent was 50%. So while a loss is still on the books probably that loss would be reduced.

Please correct above if need be - helps us all.

Rgds,

Noobie.

Not sure if Brendan is considering all angles of the game:

Tax consequences of retaining your existing home as an investment

Any capital gain on your home is tax free. So let’s say he bought it for €115k ten years ago. He has a €200k tax free capital gain. Now let’s say he sells it for €315k in 10 years time. He will still have a €200k capital gain. €100k will be attributed to the time he held it as an investment, even though it did not rise at all during this period. He will pay €20k CGT on gains he never made.

> why are you not considering the extra 12 months after the place is not your family-house anymore in the exemption for CGT as described in:

would that be because the 12 months exemption does not applies if the place is rented? could someone confirm that?

Lifestyle and other issues
As Landlord1 pointed out, these are very important issues. Managing a property is work. If you enjoy this type of work and have the time for it, this won't be a problem. But if you have a busy life, you may not have the time for managing your property and it will suffer.

> I am not sure I agree here - you can always give the rental management to an agency and be charged 7% (like SherryFG does) - in the end of the day you can claim back those 7% and not pay tax on it, so not much useful to have all the hard work yourself! - unless of course you are planning to not claim it to the Revenue....:-(

I've read through this thread and some people who have been here for an awful long time have posted what they consider detailed replies.

The price of houses in Ireland has shot up over the past few years. All well and good. People see them as a chance to invest.

Two things to beware of

1/ House crash - It will happen. Only a matter of time. However, when it does it will be followed by recovery. If you can ride out the storm then great, if you can't then it's going to hurt, and it will hurt bad

2/ What will your Yield be? Yield? Yes, Yield! It's 3.8% and that isn't good. It's only this high if you rent full term. Any voids and this figure drops.

Take into mind as well that your lender might charge you more. Your insurers will charge you more. You will have to pay the mortgage and other bills during any voids.

Pure madness to let in the current market.

Sm1ler as a property devotee why do you say it is pure madness to let in current market?
As an asset backed leveraged investment where the tenant pays the mortgage I think property is a delight!
You do not make the big bucks in property by focusing on yield per se.
You leverage up and invest in location with good capital appreciation with low vacancy.
As a matter of fact high yields make me wary as high yield often means high risk.
With respect 3.8% yield is fine in my books due to leverage effect the return on invested money is close to double figures.

Because you are relying on the property increasing in value to make money. Yes it's been that way for a while, but it won't last. It can't.

By the time you see the bandwagon it's too late.

You've made money. Good luck to you and I really do mean that, but have you heard the expression "best to leave a bit of profit for the next man"?

I see people taking on 35-40 year mortgages and to me this is a real danger sign.

May I offer two pieces of advice

Pop over to The Fool and have a gander at their property boards. UK based yes but more importantly it's balanced, pro and anti letting. I only see one side of the story here.

In addition to this sit back and have a good long hard look at the Irish economy.

markowitzman said:

Sm1ler as a property devotee why do you say it is pure madness to let in current market?
As an asset backed leveraged investment where the tenant pays the mortgage I think property is a delight!
You do not make the big bucks in property by focusing on yield per se.
You leverage up and invest in location with good capital appreciation with low vacancy.
As a matter of fact high yields make me wary as high yield often means high risk.
With respect 3.8% yield is fine in my books due to leverage effect the return on invested money is close to double figures.

Click to expand...

Leverage works both ways. Oh boy, it does. I fear a lot of people will be finding this out first hand. In the pending recession/housing bust highly leveraged investors will be handing the keys back to the bank and taking the bus to bankruptcy court. Prices will fall below anything deemed possible today and cash will be king. Debt will return to being the four letter word that it's always been.

My advice to the OP is to keep one primary residence and make sure your mortgage is as tiny as possible.

BTW anyone who says yield has no bearing on the price of an asset that produces economic rent, be that buildings, land, bonds, or capital equipment, is dangerously misinformed. Dublin res property yields are real negative.

Easy come, easy go I suppose in the land of the accidental property barons!

WTTW

I would welcome feedback on my situation in this area...

My wife and I kept our first house (bought in 1989 for 32k pounds) and bought a second house in Feb 2004 for 290k. So we have a mortgage on the 2nd house of 240k (borrowed 267k) and no mortgage outstanding on the 1st house.
We have been lucky enough to have had hassle-free tenants in the 1st house for most of the last five years, with current tenants leased till next March, at least.
Currrent rental income: 1400pm
So after tax and expenses, we have had 10k approx per annum to help offset the mortgage on the 2nd house.
Current monthly payment on 2dn house:1350 (tracker ecb +.75%).

At the market peak in 2006, each house was valued at 450k.

Different world now, each house probably woth 350k tops, assuming buyers available.
Should we sell our 1st house now and cut our losses, or wait till the market recovers?