# Sell investment property or keep?



## ellaoibhe (11 May 2010)

Age: 39
Spouse’s/Partner's age: 39

Annual gross income from employment or profession: 40k
Annual gross income of spouse: 45k basic with average overtime of 20k p.a. but often more. Also good prospects for advancement.

Type of employment: e.g. Civil Servant, self-employed
Me -Private Sector, Spouse Semi-State

In general are you:
(a) spending more than you earn, or
(b) saving?  Not spending more than we earn but not saving as much as we should/could either

Rough estimate of value of home: Our home is valued at 350k approx 
Amount outstanding on your mortgage: 139k
*What interest rate are you paying? Tracker ecb + .75%*
Rough estimate of value of home: Second Property value 200k  
Amount outstanding on your mortgage: No mortgage

Other borrowings – car loans/personal loans etc
Personal Loan of 4k, no other borrowings

Do you pay off your full credit card balance each month? Yes
If not, what is the balance on your credit card? 800 euro outstanding on BofScotland Visa card which I plan to pay off in full by mid June. 

Savings and investments: Savings of 25k

Do you have a pension scheme? Yes, both in Occupational DB Schemes

Do you own any investment or other property? As above - investment property, value approx 200k, long term tenant paying 650 per month.  No mortgage.  

Ages of children: 7, 5, 2

Life insurance: None other than mortgage life cover and death in service benefits provided by our employers.


*What specific question do you have or what issues are of concern to you? *

Looking for some opinions/advice please on some major decisions we need to make.  We have an opportunity to move from our current home, which we love but is starting to feel very small now that we're a family of five.  The move will cost us in the region of 300k and is something that we've always talked about doing eventually, as it will bring us closer to my husbands family and will give us all the space we need.   When the opportunity arose we originally decided we'd sell our second property to help finance the move, and hold on to the house we currently live in and hopefully rent it out.  Selling our current home is not really an option that we'll consider unless absloutely necessary, for strong sentimental reasons mainly but in any case, as an investment we feel its a much better long term prospect due to its location.  However we're now wondering if its possible to at all to make the move without having to sell anything.   We have a great long term tenant in the rental property who we have a good relationship with.  Our home is in a good location and we should be able to rent it out, or possibly rent it as a holiday let for the Summer months even.  So it would mean taking out a mortgage of 300k, on top of the mortgage of 139k that we already have.  Really its the idea of having that much debt that frightens us.  Would we be mad to even consider it?  And thats assuming that the banks would even lend us this amount.  On the other hand though, I have a strong feeling that I'd like to hold on to our rental property if possible.  Even though we'd be heavily borrowed, we'd still be a long way off being in negative equity (I hope), with borrowings of 439k and property worth approx 800k.  And if we found the going too tough then we could always just go ahead and sell later on to bring our borrowings to a more manageable level.  But if we hold on to it, and things work out then we still have that asset to use at a later date when and if we need it.  As I said, selling our current home would be a total last resort, and our ultimate goal is to hold on to it and pass it on to our children.  The second property was always our cushion, and something we figured would be there to finance our retirement, or the kids education or whatever we needed it for, and I feel that by selling it we're losing our cushion.  
At this stage my head is spinning from trying to work through all of this and I'm sure I'm not necessarily seeing things as clearly as I should be.  I'm hoping that some of the folks on AAM might be able to give me some perspective.  Thanks in advance!


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## csirl (11 May 2010)

What rental income would you expect to get for your current home if you rented it?

Would I be correct and saying that if both homes were rented, your approx. total gross income would be c.120k per annum?

So the question is - can you afford to service mortgage borrowings of 439k on a gross income of 120k per annum (some of which is not guaranteed)?


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## ellaoibhe (11 May 2010)

Hi csgirl,

A conservative guess would be €700 per month rental income from our current home.  If we went down the holiday let route we could potentially earn more, but it's less certain than having a steady reliable long term tenant.  

Yes, assuming both homes were rented our gross incomes would be c.120k per annum.  

I've done some very rough calculations myself.  If we take on a mortgage of 300k at a rate of 4.5% over 25 yrs, we'd be repaying c.1700 per month.  Add this to our current repayment of 960 per month and that would bring our total repayment to 2,660 per month.  Scary.  However I think if we can generate €1,100 or so per month in rental income (already have 650 per month) then the repayments would be a much more manageable €1,500 pm.  Also, we currently have childcare costs of €1,000 pm which we expect to reduce significantly in the next couple of years once our youngest starts school.  I know I'm probably taking a very simplistic view of it, and I'm sure there are lots of other things to be factored in, obviously the figures for the rental income that I've used are gross figures and dont take into account that some will have to be put aside for tax, repairs etc.  

I know things would be very tight for a few years, but if it worked out with a bit of luck and plenty of hard work we'd be able to hold on to our "cushion".  On the other hand if we were finding things tough down the line then we'd be happy to go ahead and sell it.  Are we mad to even consider holding on to it?


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## PaddyBloggit (11 May 2010)

I'd take a more simplistic view of it.

You have an investment property, mortgage free that's bringing in regular income. I'd hold onto this.

You're trading up the family home to make life more comfortable for you all. I'd forget sentimental reasons .... you'll build up new sentiments and memories in your new home. If you can sell your current home at a reasonable price then I say sell, get a small mortgage for the new property and stay on the right side of your finances.

You're proposing taking on a third property at a time when our economic circumstances are at their most precarious. 

Ask yourself the question ... what if my pay drops or my overtime dries up?

The next budget will probably be more severe than the last ... will your incomes stand up to all the stresses of mortgage payments, increase taxes, increased fuel bills etc.?

I say:

* Keep the investment property.
* Sell your current family home.
* Buy new home to suit your growing family.

And don't mortgage yourself into austerity.

Best of luck with whatever decision you make.


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## aristotle (11 May 2010)

Also, if we have learned anything over the last few years is that you shouldn't have all your eggs in one basket. You are proposing to have 3 properties and a small amount of cash, and no other investments?

I would, as Paddy says, keep the investment property, and sell the current home and trade up. Build up a bigger pension and other means of investment besides more property.


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## Howitzer (11 May 2010)

Sell the investment property.
Sell the current family home.
Buy new home to suit your growing family.
Buy a new investment property.

Why? Tax, tax, tax.

Sell the investment property:
You currently receive 650 a month in rent. However you have no mortage interest to offset this income against. Assuming you are tax compliant, this 650 works out to be only 300/350 after tax. This is a really bad investment. Unless the location is "poised" for significant capital growth it doesn't make much financial sense to keep it.

Sell the current family home: If you sell now (or within 12 months) you will incur no capital gains tax on the gains you made. Unless the location is "poised" for significant capital growth it doesn't make much financial sense to keep it.

Buy new home to suit your growing family: Take all the money from the 2 previous transactions and buy your new family home for CASH. Ensure you have little or no mortgage.

Buy a new investment property: If you want an investment property then proceed to buy a new property. Ensure all your property debt is lumped onto this property. Buy a property which will achieve the maximum rental income, will require the minimum work and is convenient to your new home.

You will obviously incur higher transaction costs but from a tax point of view this is a no brainer.


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## ellaoibhe (11 May 2010)

Thanks for taking the time to reply, it's definitely given me food for thought and the consensus seems to be that, yes, we would be mad to take on so much debt.  One thing though, I know it makes more sense and when it comes to financial matters, sentiment should not come in to it but really we do not want to sell our current home.  Without going in to all the detail, it was left to us by my late mother, who made big sacrifices to do so.  She spotted it's potential long before anyone else and as I said made sacrifices to get it, it would break my heart to let it go, no-brainer or not.  Long term I truly believe it's worth holding on to if at all possible, its in a wonderful location and even with the downturn and collapse in property prices it hasnt suffered as much value wise as most of the property in our area.  We've also put alot of blood sweat and tears in to bringing up to the standard it is, unfortunately it's just not big enough for us now.  

So that leaves us with option 2, sell our current investment property, and take out a smaller mortgage to finance our move which would leave us with more breathing space and scope to start building up some decent cash reserves, pay more into our pensions etc.    

I take on board your point about tax Howitzer (and yes we are fully compliant!) and going forward it's likely to get even tougher.

The unrational part of my brain is telling me to ignore the good advice, sure didnt my parents get through the tough times and the high interest rates and high tax regimes of the past, and they managed to get through with hard work and sacrifice and a bit of risk taking and it all paid off in the end.  But I have to tell that part of my brain to shut up and start seeing things more clearly!


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## aristotle (11 May 2010)

Unless you can rent out your current house to a close family member or friend then do you think you will be ok with the place being rented out, probably not looked after anywhere near to the extent you currently do, potentially showing a lot of wear and tear after being rented out etc etc. You could even get bad tenants who may make a right mess of the place.


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## csirl (11 May 2010)

Howitzer's plan has some merit.

The alternative is to sell the investment mortgage and use the cash towards buying a new family home with a relatively small mortgage. Rent out the old family home - as it still has a mortgage, there are some tax efficiencies to be gained.

I agree with the posters who say taking on a third property is too much. My family income wouldnt be that different to yours and we've got young children - there are always a lot of expenses associated with kids - childcare, medical etc. etc. I couldnt imagine us being able to service two mortgages even if we had some rental income.


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## Howitzer (11 May 2010)

Then sell the investment property, rent the old family home and buy a new family home.

You should know within the 12 month CGT window whether you can live with other people renting your old home. If you can't then sell it then or leave it empty as a holiday home.

The investment property is the one to sell as it makes more income for the Govt than it does for you.


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## ellaoibhe (11 May 2010)

Thanks to all for helping to focus my mind, yes it makes sense to sell the investment property and not burden ourselves with all that debt.  As for renting out our current home, yes it will be hard to think of strangers living there who will undoubtedly not look after the place the way we have, but not half as hard as if I had to lose it altogether.  Also the place we're relocating to is near enough for us to be able to keep an eye on things.  

Howitzer, would you mind explaining what you mean by the 12 month CGT window?
Also could anyone fill me in on the tax efficiencies that we can achieve by virtue of the fact the house we'll be renting out is still mortgaged?  I was of the belief that there was no mortgage interest relief available on investment properties anymore (and presumably once we no longer lived there and were renting it out it would be classed as an investment property?)  Apologies for my lack of knowledge!


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## Protocol (11 May 2010)

*I was of the belief that there was no mortgage interest relief available on investment properties anymore (and presumably once we no longer lived there and were renting it out it would be classed as an investment property?) *

Investors / landlords do still get tax relief on mortgage interest, but it has been cut to 75% of the relevant interest.


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## ellaoibhe (11 May 2010)

Ah I see, it never applied to us as our rental property had no mortgage.  Thanks for that.


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## dmos87 (11 May 2010)

Talk to the tenant in the investment property - they might be interested in relocating to your current house? It might suit them to do so. Also you have a track record of this person and you like them - they can be trusted in your mothers home.


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## niceoneted (11 May 2010)

I had the same thought as DMOS87.
Also is there any possibility of extending your current family home? You might not think there is but if an architect had a look they might see potential.
APart from that I think you should sell the investment property and use that money to fund the new buy as you seemingly will not sell the current family home. 
Also the current tenant might like the opportunity to buy the house they have been renting from you so you might have an automatic buyer.


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## ellaoibhe (12 May 2010)

Thanks to everyone for taking the time to reply. 

Thats a good idea about asking our tenant to relocate to our current property, although the rent should be higher (bigger house, better location) we would be prepared to take a lower rent to hold on to her as she's a very good tenant. I'm sure she'd also love to buy the property she's in from us, but I'm fairly sure too that she wouldnt be able to afford it but who knows. Wont know until we ask. As for extending our current property, we already extended and extentisely refurbished it when we moved in, with the help of an architect, and have done as much as can be done with it. And even if it was an option, to be honest, this move has been my husbands dream for a long time to go back to the area where he was brought up and where most of his friends still are, and it also brings us very close to his mother who's a widow living on her own in a country location so it'll give him peace of mind even if it does mean we're the next 20 years paying back the banks, but some things are more important than money! Better get moving on getting the house on the market. If some economists predictions are to believed, house prices are going to continue to fall. Would like to try and get it sold while we can still get a decent price for it. 
Again thanks to everyone for the good advice.


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