# Property Investment Scenario



## ronaldo (13 Dec 2005)

Hi,

I've come across this board in the past 6 months and am an avid reader. I've read a few different posts from people asking is the investment worthwhile in their case. The general idea I get from replies is that "if it's too good to be true, it probably is" and my scenario does actually seem to good to be true so I thought I'd post it in the hope of finding out if I'm missing something.

Basically, it is a self-build house. Me and my brother are have come to an agreement with a landowner to buy a site (subject to planning permission) - we've already got plans drawn up and submitted to the planning authority.

The site cost €60,000 and is big enough to build 2 detached houses (one each). The reason we got the site so cheap (about 65% of market value) was that a relative of mines owned a two-foot-wide strip of land between the site and the "good access road". Therefore, other bidders had to take the fact that their access to the site would be down a narrow road behind 2 other houses.

Anyway, we've got an estimated cost from a contracter (also a relative) of €97,500 to build each house. Each house will be split into 2 two-bedroom apartments.

This gives a total cost of €127,500 (€97,500 + €60,000/2) - below the lower stamp duty limit so there will be no stamp duty.

Typical rent in the area is €110 per apartment per week giving a total of €950 per month for 2 apartments.

So the cash-flow I'm considering is as follows:

*Income:*

Annual Rent €11,400
-2 months voids € 1,900
*Total Rent € 9,500*

*Expenses:*

Insurance €600 - no idea of what it actually costs
Annual Maintenance €750 - (fixtures and fittings, etc.)
Mortgage €7,100 - 25 year repayment (€590 p/m)
*Total Expenses €8,450*

*Surplus €1,050*


Obviously, I must then consider tax. So lets take the average interest on the mortgage for the first 5 years as a ballpark figure (€3,750)

Rental Income €9,500
-Insurance € 600
-Maintenance € 750
-Mortgage Interest €3,750
*Taxable Income €4,400*

*Tax at 20% €880*

This leaves a surplus after tax of €170 per year (with my mortgage being paid of). Also, I have read that rents tend to rise with inflation while my mortgage will stay the same. This will be cancelled out by the fact that my tax bill will increase as the years go on (due to less mortgage interest to claim relief against) but all-in-all, I can't see any disadvantages to this investment.

As an added advantage, typical rent is actually €125 per week but my figures have been conservative. I was also thinking of renting them as part of the RAS scheme, i.e. LOWER RENT, NO VOIDS.

As I am only 22 and don't even have a PPR of my own yet, I'm kinda thinking - "what the hell are you doing ya mad eejit taking on a mortgage of €120,000 (I have a €7,500 deposit as I've always been careful about taking on debt)". I'm kinda getting cold feet even though it seems like a dream investment.

Have I missed something???


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## markowitzman (13 Dec 2005)

Sounds good........hope you get planning.
Is it urban or rural?
Have you or your engineer had a pre-planning meeting with your local council?
Is two units on and how big is the site?


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## asdfg (14 Dec 2005)

Does the 97.5 k to build include all costs ie tiling kitchen bathrooms floors.
What about carpets or other flooring in rest of house, furniture etc you have to pay up front (depending on the size of the property you could easily throw 20K at each property). You can write off the furniture over 5 years. 

When you do decide to purchase your own PPR, you will not be a first time buyer and so cannot avail of the advantages of being a first time buyer. 

Do your figures take into account the latest increases and expected increases in interest rates. Stress test your figures by adding 1% to the current interest rate. You may need to borrow more to cover legal expenses, cost of fitting out the house, contingency etc


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## cosy (14 Dec 2005)

Have a pre-planning meeting with the council.  They will probably put an occupancy clause in your planning. i.e. you and your brother must live in the property??  Good luck


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## Kitty Kat (14 Dec 2005)

You mentioned that there was no stamp duty, what about the stamp duty on the site???  also, are the figures inclusive of VAT? asdfg raised some very good points on costs.  Does the building cost take into account cost of providing services, ie water, ESB, Gas.  You also may have to place a bond with the Council.  

Another tax is actually payable too, if you do not work and the rent is the only income you have then you have 5% on top of you tax, if you are working and are says class A then the extra charge is just the levy at 2%.

In relation to rates, it would appear that you are working off an interest rate of about 2.85% which may be a 1 year fixed rate for residential borrowings but definately not a five year fixed rate.  In relation to the borrowing that you will require for the build, this could cost you a lot more than that as it is development and you will also need to provide the lenders with architect reports for them to release the monies, have you costed for their professional fees.

One final point, I think the lenders will require you to be putting in a bit more that €7,500 of your own money albeit the property would probably be worth a great deal more when completed.


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## cosy (14 Dec 2005)

> Another tax is actually payable too, if you do not work and the rent is the only income you have then you have 5% on top of you tax



What does this mean


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## ClubMan (14 Dec 2005)

I presume they're referring to _PRSI_?


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## Kitty Kat (14 Dec 2005)

Sorry, yes I mean PRSI.


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## cosy (14 Dec 2005)

Kitty Kat

Does this mean that if you do not work and your only income is "rental Income" that you are paying PRSI of 5%.  Are you paying 52 weeks PRSI if you pay 5% on yearly rental income.  Hope this makes sense?


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## Kitty Kat (14 Dec 2005)

Rental Income is subject to Class S PRSI however you cannot be in two classes of PRSI at any one time.  So if you are an employee under say Class A, and have rental income then you would only be charged the 2% levy.  If you were a Self Employed person classed under S for your main occupation and had rental income then you would have to pay 5% PRSI.  Even in cases where you are offsetting previus years losses against rental profits, this is subject to PRSI.


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## Bamhan (14 Dec 2005)

Also you will have to have insurance while you are building, banks insist on this and it comes to about 3k.
And it sounds like a very conservative figure for building and finishing two apartments.
Are you including grounds works in this figure.....landscaping driveways etc.
When you say 95K to build what does this include?
Have you included all the payments to your Co COuncil, these are quite high in some cases.
Just some considerations which come to mind.


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## ronaldo (17 Jan 2006)

Just thought it may be worthwhile keeping you all up to date on my progress.

The planning permission has now been approved. We will begin building next month. 

I will post some figures when the house is near completion. Thank you for all your advice.


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## ronaldo (9 Jun 2006)

As it stands now, the house is ready for roofing. I have prices for alot of the work left to complete and my new estimate is €140,000 max. This means I'll also need to pay stamp duty @ 3% which is €4,200 so lets say the total build will cost €145,000. This includes the payment to my County Council of about €6,000. As for insurance, the €3,000 quoted by Bamhan refers to public liability insurance. Most lenders only need fire and theft insurance... mines cost under €200.

I will be renting the flats out as part of the RAS scheme and below are my new figures (using a 5 year fixed rate of 4.35% available from NIB after yesterdays rate rise).

*Income:

*Annual Rent €12,000  (figure quoted by friend using RAS)
NO VOIDS
*Total Rent €12 ,000*

*Expenses:*

Insurance €600 - no idea of what it actually costs
Annual Maintenance €1000 - (fixtures and fittings, etc.)
Mortgage €7,800 - 30 year repayment €130k (€650 p/m)
*Total Expenses €9,400*

*Surplus €2,600*


Obviously, I must then consider tax.

Rental Income €12,000
-Insurance € 600
-Maintenance € 1000
-Mortgage Interest €5,655
*Taxable Income €4,745*

*Tax at 20% €949*

This leaves a surplus after tax of €1,651 per year (with my mortgage being paid off). Alternatively, I could convert the mortgage to a 21-year mortgage and break-even.


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## CCOVICH (9 Jun 2006)

ronaldo said:
			
		

> *Tax at 20% €949*


 
Am I missing something here?  Rental income accruing to an individual is taxed at their marginal tax rate, so are you sure that the tax rate is not 42%?  Plus of course PRSI (if applicable) and health levy.

So unless you are under your tax band for the higher rate, or you the rent is being paid to a company, you will be paying tax at a higher rate than you have allowed.  

Sorry if I have missed something that was said earlier.


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## ronaldo (9 Jun 2006)

yes, i am in the lower tax band - currently earning 28,500 euro....


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## CCOVICH (9 Jun 2006)

But once you earn anything over €32,000, it will be taxable at 42%, and it looks like you are not far away from that.  

And currently all your rental income will be liable for Health Levy, so that's another 2% to factor in.


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## ronaldo (9 Jun 2006)

If I'm taxed at 42% my income/expenditure will look as follows:

*Income:

*Annual Rent €12,000 (figure quoted by friend using RAS)
NO VOIDS
*Total Rent €12 ,000*

*Expenses:*

Insurance €600 - no idea of what it actually costs
Annual Maintenance €1000 - (fixtures and fittings, etc.)
Mortgage €7,800 - 30 year repayment €130k (€650 p/m)
*Total Expenses €9,400*

*Surplus €2,600*


Obviously, I must then consider tax.

Rental Income €12,000
-Insurance € 600
-Maintenance € 1000
-Mortgage Interest €5,655
*Taxable Income €4,745*

*Tax at 42% €1993*

This leaves a surplus after tax of €607 per year (with my mortgage being paid off).


This seems like a dream investment that cannot be matched in other places throughout Ireland. Yet only one of the replies in this post have a positive outlook on the investment. Am I missing something?


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## CGorman (9 Jun 2006)

To my innocent eyes, it really does look like a dream investment!... but i'm the guy who reckons he's going to buy his first property within the next two years... at just 18-19yrs of age!


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