Key Post Should I sell my home or keep it as an investment?

Brendan Burgess

Brendan Burgess

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It is time to update this Key Post – feedback welcome as always.

This is an issue facing many people. They want to trade up, usually for family reasons. They are finding it difficult to sell their existing home, so they consider letting it instead. To make it easy, let’s assume you want to trade up from an apartment to a house

The best way to think about this question is…
If you were living in the house now, would you buy the apartment as an investment?

For most people, the answer is a clear “No!”

Say you are living in a house worth €400k with a mortgage of €300k, would you borrow a further €200k to buy an apartment?

By buying an apartment, you are increasing your exposure to the property market to €600k and your borrowings to €500k. Most people consider this excessively risky.

Reasons for not investing:
You are increasing your exposure to the property market – and exposed to price falls
You are overborrowed – and exposed to interest rate rises or a fall in income
You are limiting your flexibility – you may want to borrow for something else in the future, and you won’t be able to.
You may want to take a career break, but won’t be able to afford it.
Property management is a hassle

Reasons for investing:
Some people think that property is a good long term investment
They want to have an apartment close to college for their kids
You get tax relief on the interest on money borrowed to buy an investment
The mortgage is paid off, so the risk is low.

On balance, most people would not consider borrowing money to buy a property. It is different if you are investing money you already have.

The way most people think about this issue is flawed

“The rent will cover the mortgage repayments, so it’s not costing me anything”.

If you sell the apartment for €200k, you can pay €200k off the mortgage on your house. If you are paying 3% on your home loan, then the real cost is €6,000 a year. If the rental income exceeds this, it may be a good investment.

However, if you have a very low tracker mortgage, then it might be worth holding onto the apartment. If the mortgage is €200k at 1.5%, then it’s only costing you €3,000 a year in interest to own it. If the rent is higher than this, then maybe it’s a good investment. When interest rates rise, then you should review the decision.

“The apartment will be useful when my children go to college”
If they are in college now or if they are going to be going soon, then it is worth considering. If they are not going to college for some years, you would be better off waiting until they have signed up and then buy an apartment closer to that particular college.


Some valid reasons for holding onto the apartment
You may need the apartment for your children- see above

You have a very low tracker mortgage – see above
You have already paid the stamp duty when buying the apartment.


But I can’t sell the apartment and I need to trade up urgently
In this case, then you should seriously consider renting until your apartment is sold.


Tax advantages of selling your apartment
If you have a capital gain, you won’t pay any CGT if you sell it now or within 12 months of letting it.
However, if you let it, you may end up paying CGT on gains which arose while it was your principal private residence.

Will there be a stamp duty clawback?
If you bought the apartment as your home, you may have been exempt from stamp duty. If you rent it out within 5 years, you may face a stamp duty clawback

If you are comfortable with a high exposure to the property market and if you are comfortable with high borrowings, why not sell the apartment and buy a much bigger house than you were planning to?
 
Would anyone like to write a companion Key Post for this for people who do decide to let their home?

Tax issues
Registration with PRTB
Using a Letting Agent etc.
 
Additional arguments for retaining your home as an investment
provided by a friend to whom I emailed the thread

Transaction costs on buying/selling property are excessive (6% to 10% depending on property value when you take into account stamp duty, solicitor, surveyor and estate agents). Hence property tends to be a long-term buy. One could argue that if you already own a property you are investing in an asset class at circa 10% discount by retaining existing premises.

Selling a property in a downward moving market is difficult and in many cases results in a forced sell discount off the asking price. If the market is potentially closer to the bottom than the top would it be better to wait for an upward moving market and take less of a loss on the sale.

Investing in property is not as safe as investing in cash/government bonds, however is arguably safer than equities, where most people’s cash goes.
 
I think you've left out one of the bigger drawbacks - tax. Both tax on income and pseudo-taxes on holding the asset.

If you choose to buy an investment property you will most likely get proper tax advice in this regard but people holding onto a former PPR tend not to and seem to drift into a state of non tax compliance.

Last year you could offset 100% of your mortage interest payments against your rental income, it is now 75%. It seems possible this % may be lower still after the next series of budgets. Basing an investment which relies to such a large degree on a changing tax system doesn't seem sound in my view.

NPPR tax of 200 Euros - this is almost certainly the thin end of the wedge.

PRTB registration of 70 Euro per tenancy - whilst small this is often times ignored by accidental landlords. Without paying it no mortgage interest relief can be claimed.

You have to stop claiming Mortgage Interest Relief from the bank. It would not be unusual for the bank to reappriase the terms of the mortgage at this stage and reassign it to a Investment Mortgage at less generous terms.

Any investment which is predicated on ignoring your tax liabilities or lying/not telling the truth, isn't sound in my opinion.
 
Howitzer said:
If you choose to buy an investment property you will most likely get proper tax advice in this regard but people holding onto a former PPR tend not to and seem to drift into a state of non tax compliance.

Last year you could offset 100% of your mortage interest payments against your rental income, it is now 75%. It seems possible this % may be lower still after the next series of budgets. Basing an investment which relies to such a large degree on a changing tax system doesn't seem sound in my view.

Any investment which is predicated on ignoring your tax liabilities or lying/not telling the truth, isn't sound in my opinion.
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That's a very sound piece of advice. We have (had!) a culture of parting with money very easily with little or know knowledge of the investment and an unwillingness to take or pay for advice.

The income tax implications on the value of investment properties to each separate individual can vary hugely e.g. an investment property with little or no mortgage makes practically no financial sense if you are a top rate tax payer (unless rental yields were to rise significantly from current levels)

If the proportion of mortgage interest allowable against rent (in the calculation of income tax) falls further then what might previously have been a sensible long term investment can quickly become loss making
 
Howitzer said:
Last year you could offset 100% of your mortage interest payments against your rental income, it is now 75%. It seems possible this % may be lower still after the next series of budgets. Basing an investment which relies to such a large degree on a changing tax system doesn't seem sound in my view.
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I think this is a major factor to bear in mind at the moment. In the last decade there have been different tax laws attached to investing in property and being allowed to write off mortgage interest as an expense. It has varied from writing off 100% of mortgage interest to 0% after one of the Bacon reports, reintroduction of writing off mortgage interest to what's happening now where the the rate is dropping to 75% in 2009 and undoubtably down further in the future.

This is going to cause huge problems and expense to many landlords. I think it will be especially tough on people who kept an apartment as an investment and bought another house as their PPR. Very often there is still a substantial mortgage on the apartment and a close-to-100% mortgage on the PPR.

Coupled to this, is the fact that the government now sees landlords as fair game - the NPPR fee of €200 will undoubtably be pushed up exponentially in the next few years to try to plug the funding deficit in the local authorities.

In the past it seemed like a great plan to keep an apartment as an investment and move to a bigger house. Prices were rising rapidly and it seemed like no-one could lose. Now it's easy to see how people can lose on this.....

I sold a house in 2004 to buy another home in a different area. I can remember thinking back in 2006 that if I had kept the original house and rented it out for two years and sold it in 2006 - I could have cleared the mortgage on my new home and have been mortgage free at 33 years old.

That would have been great but I probably wouldn't have sold the first house in 2006 (rising prices make it hard to make a rationale decision about selling an asset). Today that house is worth (at best!) what I sold it for in 2004. The rental market is difficult, costly and will only get more difficult & costly in the immediate future, so now I'm thankful that I didn't hold on to that original house.

I'm not completely against investing in property and have actually done so (but had decent cash payments to put down.) I would say that over the last decade I have broken-even in cost terms but certainly haven't made a load of money. Neither is being a landlord easy at times.
But equally my private pension has returned exactly 0% over a decade (not taking into account inflation either).

Sorry - it's long post. Ultimately though, I don't think that keeping an apartment/house as an investment while moving to a new property (both mortgaged) is a sound plan.
 
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