Trading up, should I keep my existing property?

C

charlie_45

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Quick question on how to approach evaluating whether it's better to sell or rent. Current situation is we own a property with no mortgage which is valued at ~€450k and are looking to trade up. Our options are to either sell the property and put the full proceeds into the new property, or keep it and take a much larger mortgage and use the rental income to pay a portion of the mortgage. We have mortgage approval to do either.

We're evaluating if it's better to sell or rent by comparing the difference between the net rental income and the increased repayments on €450k additional mortgage. Rental of the property would be ~€2.5k pm, and as we'd be paying ~50% tax and have no mortgage interest to write off, we're estimating net rental income of ~€1.2k pm. Borrowing the additional €450k increases the mortgage by ~€1,800 pm. From this simple calculation, we think it's financially better to sell rather than take a higher mortgage and rent.

However, if we kept the property and covered the additional ~€600pm, it would cost €216k to have an asset worth €450k at the end of the 30yr term. When we look at it this way, we think it might be better to keep and rent. We don't love the idea of becoming landlords and all that goes with it, but want to ensure we fully explore the financial implications of both options before making a decision.

Any advice on how we should be evaluating this situation, and if there's something we're not considering would be much appreciated.
 
What is your combined salary?
How secure are your jobs?
What is the price of the house you are trading up to?
How much of a deposit do you have?
Where are you getting your mortgage and what is the interest rate?
Do you have other investments?
How well funded is your pension scheme?
What are your ages?
 
charlie_45 said:
Rental of the property would be ~€2.5k pm, and as we'd be paying ~50% tax and have no mortgage interest to write off, we're estimating net rental income of ~€1.2k pm. Borrowing the additional €450k increases the mortgage by ~€1,800 pm. From this simple calculation, we think it's financially better to sell rather than take a higher mortgage and rent.
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Projected after-tax net rental income of €1.2kpm, versus an increased mortgage payment of €1.8kpm on your PPR?

No brainer, sell.
 
What
Sarenco said:
Projected after-tax net rental income of €1.2kpm, versus an increased mortgage payment of €1.8kpm on your PPR?

No brainer, sell.
Click to expand...

I don’t think it’s right to describe it as a ‘no brainer’.

€14,400 a year on a €450,000 asset is an after-tax return of 3.2%.

One can borrow at 2.2%.

And it’s an asset with an element of PPR Relief built into it to partially shelter any future gains.

It’s a long way from being a ‘no brainer’, subject to getting additional information around other assets and liabilities, pensions, etc.
 
No matter what the OP's broader financial position, there is:
  1. Tax payable at marginal rate on all rental income
  2. No mortgage interest relief available
Highly unlikely to be worth it, given the risk.
 
Gordon Gekko said:
One can borrow at 2.2%.
Click to expand...
Only at LTVs up to 60% (UB's five-year fixed rate). Based on the OP's figures, it looks like he is projecting an initial mortgage rate of ~2.7%.

Also, the OP hasn't factored any expenses into the projected net rental profit. What about insurance, maintenance, LPT?

There isn't anything like a sufficient margin to cover voids, over-holding periods, negative cash flow, hassle, falling property prices/rents, etc.

Sorry, but to me this is a no brainer - it's a clear sell.
 
NoRegretsCoyote said:
No matter what the OP's broader financial position, there is:
  1. Tax payable at marginal rate on all rental income
  2. No mortgage interest relief available
Highly unlikely to be worth it, given the risk.
Click to expand...

Again, it is simply wrong to say that “it’s highly unlikely to be worth it” without undertaking meaningful analysis.
 
The framework in this post may help -

Key Post - Keep Apartment as Rental or Sell?

Updated May 2020 The question regularly comes up on AAM whether somebody should keep an apartment that their family has outgrown as a rental or whether they should just sell up. Borrowers often run projections on the anticipated rental income from an apartment with a cheap tracker and conclude...
www.askaboutmoney.com
 
Sarenco said:
Only at LTVs up to 60% (UB's five-year fixed rate). Based on the OP's figures, it looks like he is projecting an initial mortgage rate of ~2.7%.

Also, the OP hasn't factored any expenses into the projected net rental profit. What about insurance, maintenance, LPT?

There isn't anything like a sufficient margin to cover voids, over-holding periods, negative cash flow, hassle, falling property prices/rents, etc.

Sorry, but to me this is a no brainer - it's a clear sell.
Click to expand...

Incorrect; that rate is available for LTVs up to 80%.

It is not a ‘no brainer’ as I’ve pointed out previously.

Further analysis is required; it is also important not to fall into the trap of believing that ‘one size fits all’ in the context of financial advice.
 
Gordon Gekko said:
Again, it is simply wrong to say that “it’s highly unlikely to be worth it” without undertaking meaningful analysis.
Click to expand...

The phrase "highly unlikely" was about the probability of there being a scenario where it would be worth it give the two constraints.

Meaningful analysis could of course prove me wrong, but it would be an unusual congruence of circumstances.
 
Thanks for the responses so far, here is our situation:

What is your combined salary? - 180k combined
How secure are your jobs? - private sector, but quite secure
What is the price of the house you are trading up to? - budget 850k
How much of a deposit do you have? - 250k savings for deposit
Where are you getting your mortgage and what is the interest rate? - Approved for UB 5yr fixed 2.2% (I estimated at a slightly higher rate to account for future fluctuations or shorter term)
Do you have other investments? - no
How well funded is your pension scheme? - private pension, 15% contribution from one salary (125k), pension paused for second salary (55k). Combined pensions are currently at ~80k.
What are your ages? - 34 and 36. No kids yet, but planning
 
Gordon Gekko said:
Incorrect; that rate is available for LTVs up to 80%.
Click to expand...
Sorry, you're right - I forgot about their recently introduced high value rate.

But it doesn't really move the dial materially.

If you assume (say) €4kpa in deductible expenses and €855 in LPT, you are looking at a marginal net return over the savings that the OP would make by simply having a lower mortgage on the PPR. And that assumes that all goes well (no tenant default, no falls in rent, etc.).

On a risk return basis, it's simply not worth it - a clear sell for me. No brainer.
 
NoRegretsCoyote said:
The phrase "highly unlikely" was about the probability of there being a scenario where it would be worth it give the two constraints.

Meaningful analysis could of course prove me wrong, but it would be an unusual congruence of circumstances.
Click to expand...

I’m sorry, but that just isn’t correct. Applying that logic, hardly anyone would ever do anything. Mortgage interest rate is a thing of the past and 50% tax rates are a fact of life.

The OP’s after-tax return is circa 50% higher than his/her cost of borrowing.
 
Sarenco said:
Sorry, you're right - I forgot about their recently introduced high value rate.

But it doesn't really move the dial materially.

If you assume (say) €4kpa in deductible expenses and €855 in LPT, you are looking at a marginal net return over the savings that the OP would make by simply having lower mortgage on the PPR. And that assumes that all goes well (no tenant default, no falls in rent, etc.).

On a risk return basis, it's simply not worth it - a clear sell for me. No brainer.
Click to expand...

Okay. So if you apply a completely inaccurate LPT rate and throw in a few arbitrary expenses, it becomes a ‘no brainer’ in your view. I think that more meaningful analysis is required.

That isn’t even the LPT rate for a €450k property now, nevermind the fact that the payment is based on the valuation years ago (2013?).
 
OP, you’re borrowing at 2.2% to hold an asset which you believe will generate an after-tax return of around 3.2%. Any future gain will be partially sheltered as a result of PPR Relief. If your circumstances change or if you find being a landlord tiresome, you could sell the unencumbered property. You will have €600k of borrowings on €1.3m worth of property, an LTV of 46%. This is far from being a ‘no brainer’. Personally, I would hold on to the property, but I would look at your pension funding again and look to maximise both your AVCs. I would also maintain an appropriate emergency cash reserve.

You are in good shape financially; well done.
 
Hi Charlie

In summary, I would sell. But it's not a no-brainer.

You should compare interest paid and rent received after tax. Don't compare repayments. They are misleading as they include capital.

This is my summary

4528


You will see that, based on those assumptions, it makes very little financial difference.

But I certainly would not be subjecting myself to the hassle of being a landlord for an extra €2k a year, when I earn €180k. I would not want to be a landlord in the current political environment in Ireland. Payment of rent seems optional. I could not handle that.

But as a general principle, the future is very uncertain at the moment. And I would recommend taking the least risky option. And that is selling the property and reducing your borrowings.

If you sell, you will still have an €850k exposure to the Irish housing market. That is a lot. €1,300k is a lot more. You can handle a non-paying tenant or a rise in interest rates, but I am not sure that the benefit outweighs the risk.

What is the CGT situation?
If the selling price of the house is less than you paid for it, there might be an argument for holding onto it until it comes back to the price you paid for it as this increase would be free of CGT.

If the selling price is more than you paid for it, then it would strengthen the case for selling it within a year of it ceasing to be your PPR. Even if it falls in value from today until the day you sell it, you could end up paying CGT if you sell it for more than you paid for it.

Summary: Go for an easy life
Don't get involved in rental in Ireland.
Get your mortgage down to a very low level, so if anything happens, your repayments will be very low.

Not a no-brainer, but fairly clear.

Brendan
 
A handy way of looking at it is this.

If today you owned a property worth €850k and had a mortgage of €150k, would you borrow €450k to buy an investment property?

I doubt it.

But even if you did choose to borrow to invest in property, would you buy that house or would you buy somewhere else?

And it might be worth selling it and borrowing the money to buy a new property as you will get tax relief on the interest on the borrowings. But probably not as the rate would be higher than 2.2%.

Brendan
 
If you are borrowing €600k , you should be looking at taking out a cash back mortgage so that BoI will pay you 2% up front. Then switch to Ulster Bank.

Brendan
 
@Gordon Gekko

To arrive at a reasonably accurate projection of net, after-tax rental income you have to properly account for all projected costs and expenses. You are completely ignoring expenses in arriving at your after-tax return.

We are long overdue a revaluation for LPT purposes.

At best, the OP could earn a couple of grand by retaining the property as a rental over and above simply having a lower mortgage on the PPR.

That doesn't come anywhere close to compensating the OP for the very considerable risks inherent in the property rental business. Never mind the hassle.

So, I still maintain that this is a no brainer - it's a sell!
 
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