# Renting property out for €1,300 costing €1,622: depreciated by 50%, suggestions?



## wino (9 Oct 2008)

Hi, 

I'm renting out a property and getting €1,300 a month. The house is costing €1,622 a month , so I'm covering the rest. 

It also has depreciated by 50% and I now have about 100k equity in it. 

Selling is probably not a good option at the moment but would my money be better elsewhere? 

Any suggestion would be kindly appreciated.

wino


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## ajapale (9 Oct 2008)

*Re: Buy to let property*

moved from Mortgages and Buying and Selling Homes to Property Investment.


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## CGorman (10 Oct 2008)

*Re: Buy to let property*

It is hard to give advice or suggestions without knowing:

1) What is your investment timescale - can you sit back and wait for 20yrs?
2) What the total value of house is and outstanding mortgage?
3) Your level of income - how big a dent does the 322e a month make in your pocket?
4) What level of risk do you want?

In addition it is worth pointing out that a significant loss has already been made (50%) and you are fortunate to both still have equity and tenents as well as the ability to finance the difference in income/repayments. Should you sell up you will lock in the 50% loss (at least), pay a range of fees, and be left with a range of options...

a) invest in residental property - this would appear foolish given all you will have done is swap houses and paid fees/stamp for the privilage.
b) put money on deposit - perhaps your appetite for risk is greater than this
c) invest in equities - perhaps your appetite for risk is less than this
d) blow the lot - maybe not a bad idea!
e) other - PPR extension, childrens education account, a managed fund, medium term deposit until time is right to reinvest etc.


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## wino (12 Oct 2008)

*Re: Buy to let property*

Thanks for that quick reply cgormon
The house is on interest only for 25 years, worth about 400k at present with a mortgage of 298K. My earnings are about 75K and I consider the investment as long term, just having doubts at the moment the way everything is going.

wino


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## CGorman (13 Oct 2008)

*Re: Buy to let property*

Let me get the numbers straight...

Purchase Price: €800,000
Current Value: €400,000
Mortgage Amt: €298,000
Implied Equity: €102,000
LTV: 74.5%

100% Occupancy Rental Yield: €1,300pm 
92% Rental Yield: €1,192pm (avg. if one month idle per annum)
83% €1,083pm (avg. if two month idle per annum)
Rental Yield: 3.25% - 3.9% (min - max)

Interest Only Repayment: €1,622pm 
25Yr Capital + Interest Repayment: €2,030pm (approx.)
Implied Interest Rate: 6.5% (approx.)

1) Ok, firstly you appear to be paying interest of around 6.5%. A quick glance at the AIB website for instance shows buy-to-let rates closer to the 6% mark and indeed under it. Even with your massive loss in capital, your loan to value is still respectable and should probably warrent a lower interest rate.

2) Currently you have lost money on the capital investment AND you are continuing to lose significant money on the rental return. As you are on an interest only mortgage you obviously are interested in capital return rather than the rent itself. On this basis you need massive capital appreciation to recover/profit on your investment

3) At present you are losing €322pm. Allowing for a just one idle month per annum and the implied annual loss is €5,160. This is real, cash out of your pocket loss and does'nt even include depreciation, maintainence etc...

4) For you to break even you need a 100% growth in capital and a very significant growth in rent. Even if this were to happen you will have lost money in real terms.

5) If you are serious about this investment, you have to understand that you bought for speculative capital appreciation. This was a poor reason to buy and in the current climate is non-existant. The 400k is lost, it is gone.

6) Having understood this, wipe the slate clean and ask yourself this, if I could buy now at 400k and rent as you are, would you do it? At an implied rental yield of under 4% with little prospect of capital appreciation, this is still a terrible investment.

My personal opinion from the limited facts would be to sell. It's very sad and upsetting for you, but unless your rent were to dramatically increase this is a poor investment. A rule of thumb is that without capital appreciation, an investment like this only begins to make sense if rental income exceeds interest only repayments. Currently this investment does'nt make sense.

By all means, if you have reason to believe the value will recover to say 600k, or that rent will grow by say 15% per annum, then it may be worth sticking with it. Or perhaps you have an emotional connection or tax reason for keeping the property, then, again it may be worth keeping. But from a cold calculated investment point of view, this is not worth keeping. 

If you could sell up and put the 100k on deposit at 5% you could 'earn' 5k per annum, rather than lose 5k per annum! Thats 10k a year difference in cash terms to you. In addition you'd have access to the cash at any time and could perhaps re-invest in property in a few years when yields may be more attractive.

Best of luck wino, my apologies if any of the above sounds harsh and please before you act, seek professional advice -  I am nothing more than an accountancy & finance student!


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## Lia (13 Oct 2008)

*Re: Buy to let property*

CGorman, this is a comprehensive analysis of the situation. I'm hoping you can do the same for me.

I bed apartment on LUAS Green Line
Bought 250K
Interest Only Mortgage 190K 
Monthly Repayment approx €900
Rent €1050pm 

Has not been empty since we bough it 5 years ago. Another similar property in complex for sale at now at €350.  (these properties selling for €390 9 months ago).

Our tenants of 5 years have just left and we have re-decorated. We are considering selling for less than other property in the complex. Any advice gratefully received.


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## CGorman (13 Oct 2008)

*Re: Buy to let property*

Hi Lia, firstly i'll re-iterate that the following will just be my opinion based on available facts and that you should seek independent professional advice before making a decision. Here goes...

Purchase Price: €250,000
Current Value: €330,000 (i've knocked 20k off to be relatively conservative)
Mortgage Amt: €190,000
Implied Equity: €140,000
LTV: 57.6%

100% Occupancy Rental Yield: €1,050pm
92% Occupancy Rental Yield: €962pm (avg. if one month idle per annum)
83% Occupancy Rental Yield: €875pm (avg. if two month idle per annum)
Rental Yield: 3.18% - 3.81% (min - max)

Interest Only Repayment: €900pm
25Yr Capital + Interest Repayment: €1,202pm (approx.) 
Implied Interest Rate: 5.69% (approx.)

1) You are in the fortuante situation to actually still be sitting on a nice paper profit on the asset itself. This notional profit amounts to about 80k before the costs such as mortgage (less rent), fixtures, refurbishment, and professional fees are taken into account. Even with all these it appears you've made a nice profit.

2) However the asset value has stopped growing and indeed is currently falling. Hence the only commercial reason for not selling would be if you expect the price to start going up again; or for the rent to start to exceed the mortgage. 

3) Unlike in the OP's case, your rent actually covers the mortgage repayments (interest only). However allowing for a weaker rental market it is likely rent for this year and next will just about equal the cost of financing the mortgage. Add in your other costs such and it is most likely you will lose money in the next year or so on the income/mortgage side.

4) It is important to note that an interest only mortgage is a speculative tool as you are betting on either significant rental or capital growth. At present you are not paying off any of the mortgage, yet the underlying asset is falling in value. 

5) My opinion would be to get out now unless you really believe that rents will rise and prices will stabalise.

6) If prices were to stabalise and rents were to grow to say €1,200 a month, then it may seem like a good idea to keep the apartment... however rent is currently not rising, and prices have not stablised. 

7) Unlike the OP, your situation is not as bad as you currently only have to come up with €100 a month and you are still sitting on a paper profit.

8) On a highly personal note, if I was you i'd sell out and put money on deposit for a few years. I'd then think about re-investing in a better property (e.g. a house or even better located apartment) in a few years if rental yields rose to say 5-6%... again this is purely my point of view.

Best of look lia

PS: Lia, the 390k peak price mentioned indicates that prices have only fallen 11% or so... so there is plenty of scope for continued falls. If for example prices fall by 35% over the course of the downturn, you could be looking at selling for well under €300k which would probably represent a breakeven situation for you after you factor in all costs and inflation. Also just because you've been lucky with tenents does'nt mean the same will be true in the next few years. The market _may_ become much more demanding resulting in shorter lets and lower rents.

_Note to Mods: I am not predicting property price movements - i'm only indicating what would happen if such movements were to occur._


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## NANA01 (13 Oct 2008)

*Re: Buy to let property*

HI CGORMAN

Love your down to earth and direct answering and would appreciate any advise with my situation.

Situation as follows:-

Purchased buy-to-let property in Dublin 15 (apartment) 2 years ago at the peak thinking of kids future and mayble college in Dublin etc.

Purchase price €355,000 Plus €23000 Stamp Duty Plus €6,000 Extras & futniture etc.

Overall cost:                                  €385,000 (approx)
Mortgage on same:


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## CGorman (13 Oct 2008)

*Re: Buy to let property*

NANA01, it appears much of your post is missing. I'll happily answer your query should you give me more details re current value, mortgage, repayments and rent.

_SUGGESTION TO MODS: I note this topic has moved off the original posters query, perhaps it may be wise to split off the subsequent queries by other posters into new threads. My apologies if i've encouraged this. _


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## Lia (13 Oct 2008)

*Re: Buy to let property*

Many thanks for this objective analysis CGorman - much appreciated! Concur with other posters - your responses are to the point and well balanced.


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## NANA01 (13 Oct 2008)

*Re: Buy to let property*

To CGorman,

Sorry about that, dont know what happened.  To follow on...

Total Purchase Price                    €385,000 (approx)
Mortgage                                   €350,000 (from 2 banks)
Monthly Instalment


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## NANA01 (14 Oct 2008)

*Re: Buy to let property*

THANKS CGORMAN,

Will try again

Purchase of property                       €385000
Mortgage raised                              €355000 (2 banks)
Monthly Mort repayments                  €1700 (AIB) €520 (BOI)
Monthly Mortgage protection              €280
Monthly Rental Income                      €1300

I also pay the yearly management fee of €3000 (at present) so I reckon Im supplementing approx €1500 per month from my own funds.  Value of apartment at present €300000 approx.  Im in negative equity but my question is should I sell (if possible!) and cut my losses rather than throwing good money after bad.  I can afford to keep up these payments but would like to start saving a bit too.... Any advice would be appreciated.


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## dodo (15 Oct 2008)

*Re: Buy to let property*

Should you not have your rental mortgage interest only, those payment suggest you are paying interest plus capital which does not seem right for a rental property,


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## Steve D (15 Oct 2008)

*Re: Buy to let property*

CGorman - you must have plenty of time one your hands!


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## CGorman (16 Oct 2008)

*Re: Buy to let property*

Hi Nano01, I had a large answer written out, but lost it when i was logged out. Heres the gist of it (figures as i can best recall)... Please understand I cannot tell you what to do - to do so whould be to make a prediction about a host of things like rental and capital value growth - I am neither allowed to do this nor qualified to do so. The following are just financial workings to indicate what could happen

1) Even if you were on interest only, you would be losing over 10k per annum (assuming 100% occupancy, which is unlikely). As it stands you are seeing about 16.5k negative cashflow per annum. You would require rent to rise to well over 2k per month to see the interest covered by the rent. This would be the minimum to justify keeping the investment (aside from capital appreciation).

2) As for capital. If sold at 290k to a new investor, this investor would earn a yield of about 4.3% if there was 100% occupancy (unlikely). This is very poor in a historical context and suggests that the price has to fall more unless rental yields are expected to rise sharply in order to attract a new buy-to-let investor. Hence it is only what owner-occupiers are willing to pay that will continue to drive the price of this property for some time.

3) I would like to point out that the mgt fee eats up over two months rent which significantly hurts your returns.

I will now detail two possible scenarios (both opposites) - to sell now or in 5yrs with the hope of a bit of a recovery. I have assumed interest rates remain the same (will not be in reality) for simplicities sake.

SCENARIO A: SELL NOW FOR 290K

You will have seen a 95k loss on capital and add in at least 10k for each year you've had property. Assuming two years, then total loss is at least 115k. This option would involve you paying 65k out now to meet the difference between the mortgage and the proceeds of the sale.

SCENARIO B: SELL IN 5YRS FOR 350K, RENT keeps up with inflation (say 4%)

You will have lost 35k on capital and about 65k on funding the interest repayment balance (which would still be nowhere near being breakeven). Total loss of at least 100k. This is due to the fact that your rent does'nt even cover interest. If this scenario where to be 6, 7, 8yrs etc... loses would be even greater.

So basically even if the property value stops falling AND jumps by 50k in the next 5yrs AND rent grows by 22% over the 5yrs... you'd still make a current money loss of 100k. 

So as you can see neither option is great... which you pick depends on your anticipation of rental growth and what happens to prices over the next few years. You may believe prices will grow significantly in the long run; but I must point out to you that you need rent to grow by over 60% and to have 100% occupancy in order for you to meet the interest payments & mgt fee alone (breakeven). The former will not happen for a very long time (no matter how bullish you are), whilst the latter is plainly unrealistic in all but the most sought after locations.

If I was in your shoes i'd be inclined to sell rather than see 16.5k of my income swallowed up for the next few years trying to sustain an asset whose price is unlikely to dramatically recover (to above 385k) for a very very long time. If you threw that 1.5k into a savings account each month for five years you'd have over 100k in cash. If you continue to fund your property as in scenario b, you'd have probably just 10-15k in equity to show for it (assuming price growth and rent growth).

The big hitch to all this is that you would have to pay off 55k-65k now to sell the property... so unless you have the cash, then it may be the case that you have to keep in there!!

Obviously you could take a 20yr view on it; over which time the price will have most likely gone up significantly and the rent will have exceeded breakeven. However the return on your investment after all this commitment and hardship may be disapointing (or it may be great... depends on predictions). This option would avoid ever having to put your hand in your pocket for a lump sum to bail out the investment (i.e. sell up); however keep in mind the 16.5k (which will drop as rent grows) that you have to come up each year to keep the investment going. 

I am sorry if I have been harsh or insensitive. These are just my rambling opinions. I don't even yet own a property (i'm only 19!), so take my advice with extreme caution!!!


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## CGorman (16 Oct 2008)

*Re: Buy to let property*



Steve D said:


> CGorman - you must have plenty of time one your hands!



I'm an accounancy & finance student who believes there has never been a better time to learn from peoples mistakes with regard to property investment. So here I am! Learning away! 

Ha; seriously, I do enjoy the maths of it all and have seen several relatives make the same mistakes in recent years as the posters here - hence it is of great interest to me to see the exact details. I see these queries above as another question in my textbooks... except the figures are awful


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## Steve D (16 Oct 2008)

*Re: Buy to let property*



CGorman said:


> I'm an accounancy & finance student who believes there has never been a better time to learn from peoples mistakes with regard to property investment. So here I am! Learning away!
> 
> Ha; seriously, I do enjoy the maths of it all and have seen several relatives make the same mistakes in recent years as the posters here - hence it is of great interest to me to see the exact details. I see these queries above as another question in my textbooks... except the figures are awful


 
Good for you! A good way for you to learn and get experience of real problems and a good way for amateur investors to see how to go about attempting a structured, logical approach to their decision making!


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## calculator (17 Oct 2008)

I would use a Return On Capital Employed metric to compare investments and to decide whether it's better to cash out than keep something.

E.g. if you've got something worth 330,000, with 190,000 of a loan, your equity is 140,000.   If this is bringing in 1050 per month with 900 expenses, then your annual return is 1800.   This is a return of ~1.29%.   (Rental Yield of ~3.82% = annual rent/asset value).

To the annual return, add any appreciation/depreciation.   So, if you expect no change in the value (what you can sell it for), your overall return is 1.29% p.a. - in which case you'd probably be better off selling and putting the cash somewhere else.

If an asset appreciates, it certainly makes sense to have borrowed most of its cost - e.g. if you borrow 90% of the cost and it appreciates by 10%, your equity doubles.   The corollary is true as well - a 10% drop wipes out all your equity.   I think it will be hard to make a decent income on an investment property you don't own outright, without appreciation in the value of the property (e.g. see difference between 3.82% and 1.29% above).   The value of a property should be calculable from the Rental Yield - something is correctly priced if the rent on it gives a yield similar to that from another investment.

Anyway, that's my theory 
A.


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## cerberos (17 Oct 2008)

CGORMAN - would supplying a basic spreadsheet save you any work?


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## CGorman (17 Oct 2008)

I'm sure a spreadsheet would be of use to any of the posters... however i'm sure a google search should throw up a few caluclators for them. The method I used above can easily be replicated by anyone who wants to... it's just a bit of maths!

Personally I don't intend to do the above for everyone by hand (as it were)! I often think a template like that in the money makeover section would be of use in this forum... even doing the basic calculations themselves can show up a lot of advice for a poster... perhaps a sticky post explaining ways of caluclating investment returns/metrics would be of benefit?


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