# Middle aged family - how to use savings



## RosaRosae (10 Mar 2021)

Age: 47
Spouse’s/Partner's age: 54

Annual gross income from employment or profession: 73k
Annual gross income of spouse: 28k

Monthly take-home pay: 6000 combined

Type of employment: US corporation
Spouse: county council

In general are you:
(a) spending more than you earn, or
(b) saving?
Mostly saving

Rough estimate of value of home: 320k
Amount outstanding on your mortgage: nil
What interest rate are you paying? n/a

Other borrowings – car loans/personal loans etc: nil

Do you pay off your full credit card balance each month? yes
If not, what is the balance on your credit card? n/a

Savings and investments: 78k

Do you have a pension scheme? yes, defined contribution, fund value 115k. Spouse: single pension scheme with county council, plus previous occupational pension fund valued at 44k

Do you own any investment or other property? no

Ages of children: 17, 15, 13

Life insurance: yes - 200k dual life (premium 58eur/mth), plus death in benefit pension self 292k , spouse 56k (will only kick in in 2 years time)- plus old mortgage protection (mortgage was estinguished) for 60k on a reducing basis (premium 17 eur/mth)

Question: how to optimize savings so they help us with retirement. Should we use part of them for a deposit on a buy to let, spend some of them on much wanted home improvements, throw them into the pension scheme... (We have eyed a buy to let for 176k, projected rental income 1k/mth.)


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## cremeegg (10 Mar 2021)

Looking at your circumstances, it would seem that your children's education may be an issue sooner than retirement.

You will get lots of people telling you to stay away from a BTL, while I am a believer in property, it does have its pitfalls, and you need to be willing to roll up your sleeves and commit to it, are you happy to do that.


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## RedOnion (10 Mar 2021)

RosaRosae said:


> Do you have a pension scheme? yes, defined contribution, fund value 115k


How much are you contributing to the pension?


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## RosaRosae (10 Mar 2021)

RedOnion said:


> How much are you contributing to the pension?


only 5% at the moment, matched by employer - but will resume either 10 or 15% asap. Had lowered last year as husband had been out of work for a period


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## RosaRosae (10 Mar 2021)

cremeegg said:


> Looking at your circumstances, it would seem that your children's education may be an issue sooner than retirement.
> 
> You will get lots of people telling you to stay away from a BTL, while I am a believer in property, it does have its pitfalls, and you need to be willing to roll up your sleeves and commit to it, are you happy to do that.


Thank you! i think we should be able to pay for education mostly out of salary, even if it means less foreign holidays or cuts elsewhere - we should manage with minimum use of savings. Plus they dont seem very academically inclined so far...
Tackling Buy is something i have always wanted to do, i am aware of pitfalls but would very much like to give it a go...


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## RedOnion (10 Mar 2021)

Since your original question was specifically in relation to retirement, it would seem obvious that you should increase your pension contributions to maximum that you can get tax relief on.

If you only paid 5% last year, you can contribute a further 15,600 now, back dated.  You'll get tax relief on it, so net cost to you is 9,400
Increase your contributions now for this year.  Just by doing these things, with no market growth, your pension pot would go from current 115k to c. 150k in 12 months.

On a salary of 78k, with contributions of 25% plus 5% from employer, assuming just 3% growth per annum, you'll have over 800k in pot by the time you're 65.  Take 200k tax free.

Or buy a BTL now, and aim to have the mortgage repaid in the same timeframe?


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## RosaRosae (10 Mar 2021)

RedOnion said:


> Since your original question was specifically in relation to retirement, it would seem obvious that you should increase your pension contributions to maximum that you can get tax relief on.
> 
> If you only paid 5% last year, you can contribute a further 15,600 now, back dated.  You'll get tax relief on it, so net cost to you is 9,400
> Increase your contributions now for this year.  Just by doing these things, with no market growth, your pension pot would go from current 115k to c. 150k in 12 months.
> ...


Thank you, great points. We repaid mortgage on our main house in 12 years.With BTL, I really like the idea that if i have any extra cash i can use it to repay the mortgage early. I would aim at paying everything back in 10/15 years... and yes maximise my pension contributions as well on an ongoing basis. Looking for the flaws there, appreciate any input


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## RedOnion (11 Mar 2021)

RosaRosae said:


> With BTL, I really like the idea that if i have any extra cash i can use it to repay the mortgage early.


Have you actually worked out the numbers on it?  Look at at like a business proposal. 
How much cashflow will you need every year, how much tax will you pay, etc etc.  Don't go into it blind just because it seems like a good idea.

If you buy for 176k, you'll need 30% deposit.  Plus stamp duty & legal fees.  That'll leave your emergency fund a little light.

You'll have a mortgage of 123k to start.
Assuming no rental voids, interest of 4%, and expenses of 1,200 per annum, you'd need to put in an extra 3,200 of your own cash in year 1 to make repayments on a 15 year term.  To repay over 15 years you'll need to put in an extra 63,500 of your own money, in addition to the total after tax rental income.


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## NoRegretsCoyote (11 Mar 2021)

RosaRosae said:


> Do you have a pension scheme? yes, defined contribution, fund value 115k.


I would say that is pretty low given your income and age. I would maximise tax-relieved pension contributions immediately.

I tend to agree with @RedOnion on the BTL. For starters €12k/€176k =7% isn't an incredible yield. You could get something touching double digits if you look for an apartment in the right place. Financing at 4% isn't cheap, profits are taxed at marginal rate, and there is a huge amount of *risk *in having a lot of your wealth tied up in one place. 

Remember:
*Pension*: contributions tax relieved, growth tax free, almost no hassle.
*BTL*: profits taxed at marginal rate, CGT at 33% on any increase in value, lots of hassle, potential negative equity.


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## RosaRosae (11 Mar 2021)

RedOnion said:


> Have you actually worked out the numbers on it?  Look at at like a business proposal.
> How much cashflow will you need every year, how much tax will you pay, etc etc.  Don't go into it blind just because it seems like a good idea.
> 
> If you buy for 176k, you'll need 30% deposit.  Plus stamp duty & legal fees.  That'll leave your emergency fund a little light.
> ...


Thank you. I have tried to work this out , assuming minimum repayments as per mortgage terms- additional /faster payments would only happen if i have extra funds or savings, but in the first few years i would look at rebuilding up the emergency funds - and yes maximising pension too.
To me it looks like yes I will be tying up a lot of the funds, but on the other hand I should be able to make the mortgage repayments with minimum effort - save for the intrinsic risk of something going wrong with the tenancy. In 15 to 23 years I should be able to own 100% of the equity - which I think is worth more than I would be able to save up during the same period of time... and if rental income does keep materializing, this should not affect my saving ability too much, so I could keep saving and repaying my mortgage at the same time... 
Thank you for pointing out any obvious flaws. I will try and project this for the full lifetime of the mortgage, to see what it shows

Please see workings:
PROPERTY PRICE         176,500 
MORTGAGE APPROVAL     123,550 
RENTAL INCOME         1,090 
TERM            23
rate            4.65%
MTHLY REPAYMENT        €729.69

deposit             52,950 
solicitor         2,000 
stamp duty 1%         1,765 
land registry fee     640 
land reg mortgage fee     175 
commissioner for oaths     44 
search fees         150 
valuation fee         150 
repairs/furniture     1,000 
home insurance         300 
Local Property tax     283 
RTB registration     90 
total cash outlay     59,547 
total funds         80,443 
left over funds         20,896 

YEAR 1
monthly mtg repayment         €8,756.27    

rental income             €13,080.00     

ALLOWABLE DEDUCTIONS        
Mtg Interest Relief        €5,680.06    
home insurance            €300    
residential tenancies board reg    €90    
wear & tear allowance        €125    12.5% OF COST OVER 8 YEARS
maintenance & repairs        0        
preletting expenses        0        

Taxable rental profit           €7,399.94     

PAYE 40%             €2,959.97     
USC 8%                 €591.99     
PRSI 4%                 €296.00     

Net cash flow             €475.76


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## RedOnion (11 Mar 2021)

RosaRosae said:


> wear & tear allowance €125 12.5% OF COST OVER 8 YEARS
> maintenance & repairs 0
> preletting expenses 0


Where are you getting a wear & tear allowance from?

I'll rerun numbers based on your figures.


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## RosaRosae (11 Mar 2021)

NoRegretsCoyote said:


> I would say that is pretty low given your income and age. I would maximise tax-relieved pension contributions immediately.
> 
> I tend to agree with @RedOnion on the BTL. For starters €12k/€176k =7% isn't an incredible yield. You could get something touching double digits if you look for an apartment in the right place. Financing at 4% isn't cheap, profits are taxed at marginal rate, and there is a huge amount of *risk *in having a lot of your wealth tied up in one place.
> 
> ...


Thank you very much - I will do more research


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## RedOnion (11 Mar 2021)

I really think you should be looking at pension funding first, and then investments outside of pension.  A BTL might make sense, but you need to analyse it fully.

You've calculated 'leftover funds' of nearly 21k, so I can't see how you're making the additional contribution of 15,600 for last year?

Re BTL, here are the numbers I'm coming up with.

On left hand side is calculation for Tax, and on right is the cashflow piece.  There's a tiny inaccuracy in the USC calculation, but it's not material.

A few key assumptions:
I've assumed no rental voids, & no growth in rent.
Based on 23 year term, and 4.65% rate.
I've gone with 1,000 for repairs every 8 years - I think this is light. 

It's negative cashflow early on, and would need cash input of over 21k using these numbers.


ProfitCashflowYearRentInterestExpenses for TaxW&TProfitTaxAfter Tax ProfitRentRepaymentsCostsRepairsTaxNet Cashflow1​13,080.00​5,677.76​390.00​125.00​6,887.24​3,581.36​3,305.87​13,080.00​-8,752.73​-390.00​0.00​-3,581.36​355.91​2​13,080.00​5,531.69​390.00​125.00​7,033.31​3,657.32​3,375.99​13,080.00​-8,752.73​-390.00​0.00​-3,657.32​279.95​3​13,080.00​5,378.68​390.00​125.00​7,186.32​3,736.89​3,449.43​13,080.00​-8,752.73​-390.00​0.00​-3,736.89​200.39​4​13,080.00​5,218.40​390.00​125.00​7,346.60​3,820.23​3,526.37​13,080.00​-8,752.73​-390.00​0.00​-3,820.23​117.04​5​13,080.00​5,050.50​390.00​125.00​7,514.50​3,907.54​3,606.96​13,080.00​-8,752.73​-390.00​0.00​-3,907.54​29.74​6​13,080.00​4,874.63​390.00​125.00​7,690.37​3,998.99​3,691.38​13,080.00​-8,752.73​-390.00​0.00​-3,998.99​-61.72​7​13,080.00​4,690.41​390.00​125.00​7,874.59​4,094.79​3,779.80​13,080.00​-8,752.73​-390.00​0.00​-4,094.79​-157.51​8​13,080.00​4,497.43​390.00​125.00​8,067.57​4,195.13​3,872.43​13,080.00​-8,752.73​-390.00​-1,000.00​-4,195.13​-1,257.86​9​13,080.00​4,295.29​390.00​125.00​8,269.71​4,300.25​3,969.46​13,080.00​-8,752.73​-390.00​0.00​-4,300.25​-362.97​10​13,080.00​4,083.54​390.00​125.00​8,481.46​4,410.36​4,071.10​13,080.00​-8,752.73​-390.00​0.00​-4,410.36​-473.08​11​13,080.00​3,861.74​390.00​125.00​8,703.26​4,525.70​4,177.56​13,080.00​-8,752.73​-390.00​0.00​-4,525.70​-588.42​12​13,080.00​3,629.40​390.00​125.00​8,935.60​4,646.51​4,289.09​13,080.00​-8,752.73​-390.00​0.00​-4,646.51​-709.24​13​13,080.00​3,386.02​390.00​125.00​9,178.98​4,773.07​4,405.91​13,080.00​-8,752.73​-390.00​0.00​-4,773.07​-835.79​14​13,080.00​3,131.08​390.00​125.00​9,433.92​4,905.64​4,528.28​13,080.00​-8,752.73​-390.00​0.00​-4,905.64​-968.36​15​13,080.00​2,864.03​390.00​125.00​9,700.97​5,044.50​4,656.47​13,080.00​-8,752.73​-390.00​0.00​-5,044.50​-1,107.23​16​13,080.00​2,584.29​390.00​125.00​9,980.71​5,189.97​4,790.74​13,080.00​-8,752.73​-390.00​-1,000.00​-5,189.97​-2,252.69​17​13,080.00​2,291.27​390.00​125.00​10,273.73​5,342.34​4,931.39​13,080.00​-8,752.73​-390.00​0.00​-5,342.34​-1,405.07​18​13,080.00​1,984.33​390.00​125.00​10,580.67​5,501.95​5,078.72​13,080.00​-8,752.73​-390.00​0.00​-5,501.95​-1,564.68​19​13,080.00​1,662.80​390.00​125.00​10,902.20​5,669.14​5,233.06​13,080.00​-8,752.73​-390.00​0.00​-5,669.14​-1,731.87​20​13,080.00​1,326.00​390.00​125.00​11,239.00​5,844.28​5,394.72​13,080.00​-8,752.73​-390.00​0.00​-5,844.28​-1,907.01​21​13,080.00​973.20​390.00​125.00​11,591.80​6,027.74​5,564.06​13,080.00​-8,752.73​-390.00​0.00​-6,027.74​-2,090.46​22​13,080.00​603.64​390.00​125.00​11,961.36​6,219.91​5,741.45​13,080.00​-8,752.73​-390.00​0.00​-6,219.91​-2,282.63​23​13,080.00​216.53​390.00​125.00​12,348.47​6,421.20​5,927.27​13,080.00​-8,752.73​-390.00​0.00​-6,421.20​-2,483.93​


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## RosaRosae (11 Mar 2021)

RedOnion said:


> Where are you getting a wear & tear allowance from?
> 
> I'll rerun numbers based on your figures.


I am thinking I would need to buy a new bed and couch, as the house is partially furnished and kitted out - total around 1k€ (I am thrifty, found good discounted stock) - so it seems from what I have read I can amortize this capital expenditure over 8 years at 12.5% of the cost each year - if I have got that right. For the rest the apartment is walk in conditions and sandwiched in between a supermarket and a dart station, in a quiet village...


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## RedOnion (11 Mar 2021)

RosaRosae said:


> I am thinking I would need to buy a new bed and couch, as the house is partially furnished and kitted out - total around 1k€


Sorry, I had missed the 1k spend first time.



RosaRosae said:


> the apartment


Ah, an apartment. How much are the management fees?


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## RosaRosae (11 Mar 2021)

RedOnion said:


> Sorry, I had missed the 1k spend first time.
> 
> 
> Ah, an apartment. How much are the management fees?


1200/annum - right, I will add that back into the calc, unless i can rebill to the tenant...


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## RosaRosae (12 Mar 2021)

RedOnion said:


> I really think you should be looking at pension funding first, and then investments outside of pension.  A BTL might make sense, but you need to analyse it fully.
> 
> You've calculated 'leftover funds' of nearly 21k, so I can't see how you're making the additional contribution of 15,600 for last year?
> 
> ...


Thanks RedOnion, I really appreciate you taking the time to run these numbers and indulging my ramblings.
I have done some homework as advised, and produced a new set of calcs, see below.
I have changed the assumptions slightly, built in a 1% rent increase each year (possibly realistic), and added back in to the negative cash flow in year 1 about 5k between stamp duty, solicitor, registration fees etc. I have also added 1200€ management fee each year.
Yes the cash flow doesnt make a pretty reading, with further outlays of cash to the tune of 25k€ over the 23 years.
However when I look at equity, and assuming no increase in property value (very conservative, as at least an increase in line with inflation could be reasonably expected), I can see I would be sitting on an asset worth at the very least its present value of 176k€ - versus an initial investment of 53k€ over 23 years, plus a further 25k€ paid throughout the course of the 23 years. 
Plus this asset would still be able to produce income after the mortgage has been fully repaid - (whereas in my simple mind, with a pension, you have to give up the asset in order to get the annuity... with a property, I can pass the property onto my children, while still getting the income - am I looking at this the wrong way around?)
What I am trying to figure out is, is if I wanted to do something else with the money, e.g. put it into the pension or in an investment fund, while getting the same or better returns - what kind of interest rate/investment performance would I need to look at, in order to end up sitting on an asset of around 180k€, while investing 52k€ today and 25k over the course of the next 20 or so years...
I know this is a bit primitive thinking as investing isn't my strong suit - but hopefully I can gradually re-organize my idea also thanks to your input...
Here are my calcs

ProfitCashflowYearRentInterestExpensesW&TProfitTaxAfter Tax ProfitRentRepaymentsCostsRepairsTaxNet Cashflow1​13,0805,6801,5901255,6852,9562,72913,0808,7566,5902002,956- 5,4222​13,2115,5341,5901255,9623,1002,86213,2118,7561,5902003,100- 4363​13,3435,3811,5901256,2473,2482,99913,3438,7561,5902003,248- 4524​13,4765,2211,5901256,5413,4013,14013,4768,7561,5902003,401- 4715​13,6115,0531,5901256,8443,5593,28513,6118,7561,5902003,559- 4946​13,7474,8771,5901257,1563,7213,43513,7478,7561,5902003,721- 5207​13,8854,6921,5901257,4773,8883,58913,8858,7561,5902003,888- 5508​14,0244,4991,5901257,8094,0613,74814,0248,7561,5902004,061- 5849​14,1644,2971,5901258,1524,2393,91314,1648,7561,5902004,239- 62110​14,3054,0851,5901258,5054,4234,08214,3058,7561,5902004,423- 66411​14,4483,8631,5901258,8704,6124,25814,4488,7561,5902004,612- 71012​14,5933,6311,5901259,2474,8084,43914,5938,7561,5902004,808- 76213​14,7393,3871,5901259,6365,0114,62614,7398,7561,5902005,011- 81814​14,8863,1321,59012510,0395,2204,81914,8868,7561,5902005,220- 88015​15,0352,8651,59012510,4555,4375,01815,0358,7561,5902005,437- 94816​15,1852,5851,59012510,8855,6605,22515,1858,7561,5902005,660- 1,02117​15,3372,2921,59012511,3305,8925,43815,3378,7561,5902005,892- 1,10118​15,4911,9851,59012511,7916,1315,65915,4918,7561,5902006,131- 1,18719​15,6461,6631,59012512,2676,3795,88815,6468,7561,5902006,379- 1,28020​15,8021,3271,59012512,7616,6356,12515,8028,7561,5902006,635- 1,38021​15,9609741,59012513,2716,9016,37015,9608,7561,5902006,901- 1,48722​16,1206041,59012513,8017,1766,62416,1208,7561,5902007,176- 1,60323​16,2812171,59012514,3497,4626,88816,2818,7561,5902007,462- 1,727336,36977,84436,5702,875219,080113,922105,158336,369201,39441,5704,600113,922- 25,117

and the equity (year 1 cash flow includes the 52k deposit plus expenses):


Prop. valueOutstanding MtgEquityCapital rpmtNet CashflowAmount invested to dateEquityRETURNOpening bal176,500.00123,550.0052,950.00-Year 1176,500.00120,473.7956,026.213,076.2158,012.4458,012.4456,026.21- 1,986.23Year 2176,500.00117,251.4659,248.543,222.34435.6458,448.0859,248.54800.47Year 3176,500.00113,876.0462,623.963,375.41451.8358,899.9162,623.963,724.05Year 4176,500.00110,340.2966,159.713,535.76471.1659,371.0766,159.716,788.65Year 5176,500.00106,636.5769,863.433,703.72493.8259,864.8869,863.439,998.55Year 6176,500.00102,756.9073,743.103,879.66519.9760,384.8573,743.1013,358.24Year 7176,500.0098,692.9477,807.064,063.96549.8260,934.6777,807.0616,872.38Year 8176,500.0094,435.9382,064.074,257.01583.5661,518.2482,064.0720,545.83Year 9176,500.0089,976.6986,523.314,459.24621.4162,139.6486,523.3124,383.67Year 10176,500.0085,305.6291,194.384,671.07663.5762,803.2291,194.3828,391.17Year 11176,500.0080,412.6596,087.354,892.97710.2963,513.5196,087.3532,573.84Year 12176,500.0075,287.25101,212.755,125.40761.8164,275.31101,212.7536,937.44Year 13176,500.0069,918.37106,581.635,368.88818.3765,093.68106,581.6341,487.95Year 14176,500.0064,294.45112,205.555,623.92880.2465,973.92112,205.5546,231.62Year 15176,500.0058,403.38118,096.625,891.08947.7166,921.63118,096.6251,174.99Year 16176,500.0052,232.45124,267.556,170.931,021.0667,942.70124,267.5556,324.85Year 17176,500.0045,768.38130,731.626,464.071,100.6169,043.31130,731.6261,688.32Year 18176,500.0038,997.24137,502.766,771.141,186.6770,229.97137,502.7667,272.79Year 19176,500.0031,904.44144,595.567,092.801,279.5771,509.54144,595.5673,086.02Year 20176,500.0024,474.71152,025.297,429.731,379.6872,889.22152,025.2979,136.07Year 21176,500.0016,692.03159,807.977,782.671,487.3674,376.58159,807.9785,431.39Year 22176,500.008,539.65167,960.358,152.381,603.0075,979.58167,960.3591,980.77Year 23176,500.00-176,500.008,539.651,727.0077,706.58176,500.0098,793.42


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## RedOnion (12 Mar 2021)

RosaRosae said:


> What I am trying to figure out is, is if I wanted to do something else with the money, e.g. put it into the pension or in an investment fund, while getting the same or better returns - what kind of interest rate/investment performance would I need to look at, in order to end up sitting on an asset of around 180k€, while investing 52k€ today and 25k over the course of the next 20 or so years...


This is where pensions are very powerful.  Your looking at the return on investment property vs anything else you could invest in outside a pension, and it might make sense then.  

For the same net cost to you (i.e. 52k now, and 1,000 per year for the next 23 years) you'd actually be putting in 86k, plus 33k into a pension.  At just a 2% growth rate, that would grow to 185k in 3 years.  At 6% it would be over 400k.  You can take your tax free lump sum when you retire, and still be left with a pension.  If you put enough into your pension, you could have a tax free lump sum that's enough to buy an investment property at that point.
(the calculation isn't correct, because you can't get immediate tax relief on the full 52k, but it's accurate enough to illustrate point).

In my view, your pension should be your number 1 priority first.  The tax relief on contributions, and tax free growth within the pension makes it very difficult for anything else to make sense.

Once you are fully funding your pension, then a BTL (or other investment) might make sense.



RosaRosae said:


> whereas in my simple mind, with a pension, you have to give up the asset in order to get the annuity... with a property, I can pass the property onto my children, while still getting the income - am I looking at this the wrong way around?


You don't have to buy an annuity.  If you do, then yes, it dies with you - the annuity is like an insurance contract, in that it guarantees an annual payment regardless of how long you live.  
But you don't have to buy an annuity - you can get an ARF, and continue to make investments, and then the ARF can be willed to your estate.  You could even use part of the ARF to buy a property if you wanted to, and end up with the same result.


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## cremeegg (12 Mar 2021)

A few observations on an excellent analysis.

Put Cashflow on the left, cashflow comes first, if the cashflow is a problem you will not survive to see a profit.

Figures projected too far into the future are not very reliable, cashflow starts day 1, profits will not be realised for a long time. In other words the cashflow projections are reliable, the profit projections are not meaningful. 

Until you sell or pay off the mortgage the profit or indeed loss is meaningless.

The return figure in year 23 of €98,793 does not reflect any increase or decrease in the property price, it does not reflect any level of inflation (inflation would effect the value of borrowings and rent as well as property prices). 

The return figure includes a 1% increase in rent, that is not meaningful, nor is any other number you might use.

To try to be constructive. The opportunity exists if the cashflow is manageable, in my opinion your cashflow is not really acceptable. (I am looking at  the cashflow in the first table not the one in the equity table).

Final point, the rental income seems low, there are properties at a €176k purchase price which give higher rents, I am thinking about regional towns, I am not familiar with Dublin.


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## RedOnion (12 Mar 2021)

cremeegg said:


> Final point, the rental income seems low, there are properties at a €176k purchase price which give higher rents, I am thinking about regional towns, I am not familiar with Dublin.


Agree, at that price point, the rental yield would want to be higher. Particularly with the management fees thrown in. I'm assuming it's a 1 bed apartment on the Dart line, but quite a bit from city centre. I wouldn't consider the rent to be 'certain' enough over long term to justify a low yield.

Fair point re cashflow Vs profit layout - I was just lazy copying in first analysis and had to calculate profit first to get the tax cashflow. It's the cashflow that matters.


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