# Need advice. Which property should I sell?



## nbc (30 Mar 2007)

Hi,
Looking for some opinions. Here's my situation.
I bought a house in a midland town in 1998 for E80,000.
I bought 2 further houses in the same estate 2 years ago for E175,000. These were interest only and the idea was that the rent covered the interest only mortgages and I would sell one in 7 years and use the capital appreciation to pay for the other one so one house for free.

All 3 houses have been hassle free and fully let (including the 1998 ) all the time. I charge E650 for each which is E75 below market rate. This covers the int only mortgages just about now and more than covers the original repayment mortgage (1998 property)of which there is E50,000 outstanding.
All houses are valued at E250,000 currently.

I now wish to sell one as I feel I'm over exposed in this location(however the location is central and excellent for renting). I am thinking of selling the original house but will pay over E30,000 in CGT.
Should I sell one of the interest only properties instead? I'm confused.
Many thanks
nbc


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## Bob_tg (30 Mar 2007)

Two questions:
1) Why would you prefer to sell your orginal house?
2) What would you plan to do with the surplus (170K or so??) once the sale is realised?


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## ClubMan (30 Mar 2007)

nbc said:


> I charge E650 for each which is E75 below market rate. This covers the int only mortgages just about now and more than covers the original repayment mortgage (1998 property)of which there is E50,000 outstanding.


What about rental income tax?


> Should I sell one of the interest only properties instead?


 Why? Because the _CGT _will be c. €15K? Have you factored in indexation relief (up to c. 2003) and allowable expenses into your _CGT _calculations on the original property?


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## barryl (30 Mar 2007)

my feeling is to sit tight,maintain what you have,take 10k out if you need cash,ride out the storm and youll be in good shape to build on your gains whenever the market picks up.


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## Howitzer (30 Mar 2007)

barryl said:


> my feeling is to sit tight,maintain what you have,take 10k out if you need cash,ride out the storm and youll be in good shape to build on your gains whenever the market picks up.


 
Insightfull.


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## ClubMan (30 Mar 2007)

barryl said:


> take 10k out if you need cash


Out of what?


> ride out the storm and youll be in good shape to build on your gains whenever the market picks up.


 Did you read the original post?


> I now wish to sell one as I feel I'm over exposed in this location


Diversification would seem like a good idea in this case.


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## auto320 (30 Mar 2007)

barryl said:


> my feeling is to sit tight,maintain what you have,take 10k out if you need cash,ride out the storm and youll be in good shape to build on your gains whenever the market picks up.



My instinct would be to limit my exposure in a market that is in over-suply mode at present. In particular, you are on interest-only mortgages, not making headway in the face of a strengthening wind!


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## barryl (30 Mar 2007)

ClubMan said:


> Out of what? draw 10k from equity on the first rip if you need cash to carry you through a dip in the market,this cannot be taxed as it is a loan and is yours to keep,put it in a high int.account
> Did you read the original post?
> 
> Diversification would seem like a good idea in this case.


 
I dont agree, in general terms people who hold onto property in down or sideways markets win out in the long term,and are in great shape to take full advantage of the new wave of cap. app. I dont believe that he/she is over exposed as the debt to equity ratio is not high,I also believe that these mid range properties will not suffer in a downturn,but if he/she sells they will lose money


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## ClubMan (30 Mar 2007)

barryl said:


> in general terms people who hold onto property in down or sideways markets win out in the long term,and are in great shape to take full advantage of the new wave of cap. app.


Evidence please?


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## amgd28 (30 Mar 2007)

barryl said:


> but if he/she sells they will lose money



I've yet to see anybody lose money by taking a profit.....


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## barryl (31 Mar 2007)

ClubMan said:


> Evidence please?


 
people who held onto their rips during the downturn in the uk.There is an abundance of evidence


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## Marie (31 Mar 2007)

I very much doubt this last reference as I have half-a-dozen friends here in the UK who _were and are no longer_  engaged in small-scale rental (3 to 5 local properties).  According to them, the reality is that there is at best a modest gain, at worst break-even, when rental income is averaged over the long term in a sluggish or bottomed-out market and of course there is the spectre of negative equity and lack of liquidity.  In addition (as  responses above highlight) the cost to the small landlord of an investment property is not just the purchase price-tag........it's the price-tag PLUS interest MINUS all the transaction charges, taxes etc!  

However this is drifting away from the OP's question which I understood to be whether s(he) would be liable for more tax on sale of the longer-held house.


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## ClubMan (31 Mar 2007)

barryl said:


> people who held onto their rips during the downturn in the uk.There is an abundance of evidence


Can you point to independent, objective evidence please? Not just anecdotal evidence such as the above.


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## liteweight (31 Mar 2007)

No one can really crunch the numbers for you without knowing your personal financial circumstances. I'd pay attention to some of the posts above, e.g. Clubman asked about income tax. The interest on monies borrowed to purchase/repair an investment property is tax deductible. On that basis the older property is saving little in tax because of its low mortgage. The older property is also the one which will free up most capital for you to invest elsewhere. 

Personally I would not pay down the interest only mortgages as, even if they make a loss in rental, this can be carried forward to reduce the tax burden in subsequent years. However I would raise the rent. Why do you charge 75 euro less than everybody else? Presumably it's to make it attractive to tenants but does it have to be by this much?

Also are you sure of your capital gains tax bill? As has already been said, make sure you factor in everything. If I had to choose, I'd sell the older property as this would give me most money to diversify with. Pay down some of the interest only loans if it gives you peace of mind. Personally, I'd take the tax break and diversify profit.


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## barryl (31 Mar 2007)

ClubMan said:


> Can you point to independent, objective evidence please? Not just anecdotal evidence such as the above.


 
check  armchairinvestor.co.uk

during the period 1989-1993 uk property declined on average by 7% before they started to climb again. If you bought property in 1989 at the start of the crash and held it ontill 2004 it would have trippled in value


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## Marie (31 Mar 2007)

barryl said:


> check armchairinvestor.co.uk
> 
> during the period 1989-1993 uk property declined on average by 7% before they started to climb again. If you bought property in 1989 at the start of the crash and held it ontill 2004 it would have trippled in value


 
That is not necessarily evidence for the inevitability of long-term property investment giving good returns.  The mortgage interest-rate in the UK was 17% at the beginning of the 1980's.  During the period you quote it fell to below 7.5% (in 1988) which of course led to a stampede to purchase properties with what seemed, relatively, rolleyes: )  'free money'.  However interest rates soared again and by the end of 1988..... up again to 13%.  At that stage to try to curb runaway inflation in 2003 the Bank of England reduced the base mortgage interest rate, this time to 3.5% and it has (again!) been climbing steadily since.

To make the point again - the _real_  cost of property is the initial purchase-price plus interest, less fees and costs of acquisition and disposal, maintenance, tax payable on rental income etc.  Any calculation of gains for an investor on a UK property purchased at the beginning of the 1980's would have to factor-in the cost of the mortgage at average MIR of the average of 17% p.a. for 8 years, 13% p.a. for 5 years and 3.5% for the remainder (and then adjusted to take account of inflation).


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## nbc (31 Mar 2007)

Thanks a million guys for all the replies. Just to clarify a couple of things. 

1)I don't need to sell a house because I need money for investment or any other reason.
2)I am not selling because I feel the market is entering a downturn. 
3)I am selling because I know that although the rental market is very strong currently this will not always be the case and as I have 3 properties in the one location I feel that reducing my exposure here might be sensible. My problem is which one MAKES MOST SENSE to sell form a tax view. I aso thought that there may be another compelling reason to sell one over another which I can't see but some clever lad or lassie on here might spot.
Before I bought the 2 properties I placed a question on this site and found the comments very helpful so once again many tanks for bothering to reply to me.
nbc
ps The figure of 30,000 is accurate enough give or take a couple of grand. I am factoring in indexation and other deductable expenses. Rental income tax is neg up to a year ago due to previous losses.


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## barryl (1 Apr 2007)

Marie said:


> That is not necessarily evidence for the inevitability of long-term property investment giving good returns. The mortgage interest-rate in the UK was 17% at the beginning of the 1980's. During the period you quote it fell to below 7.5% (in 1988) which of course led to a stampede to purchase properties with what seemed, relatively, rolleyes: ) 'free money'. However interest rates soared again and by the end of 1988..... up again to 13%. At that stage to try to curb runaway inflation in 2003 the Bank of England reduced the base mortgage interest rate, this time to 3.5% and it has (again!) been climbing steadily since.
> 
> To make the point again - the _real_ cost of property is the initial purchase-price plus interest, less fees and costs of acquisition and disposal, maintenance, tax payable on rental income etc. Any calculation of gains for an investor on a UK property purchased at the beginning of the 1980's would have to factor-in the cost of the mortgage at average MIR of the average of 17% p.a. for 8 years, 13% p.a. for 5 years and 3.5% for the remainder (and then adjusted to take account of inflation).


 
good property investors,like any good invester can make profits in up or down markets.Property at times may lose some value but the general trend is up


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## Dreamerb (1 Apr 2007)

nbc said:


> My problem is which one MAKES MOST SENSE to sell form a tax view.



I think this is a jam-today or jam-tomorrow question. You'll have tax liabilities on the others when you come to sell them, so it's really a question of which liability you want to incur first. If you want to reduce your income tax liability, it makes sense to dispose of the first property, since it has fewer tax-deductible expenses - but this will mean you incur a larger CGT liability at this stage. 

If you want to reduce your risk profile but take the hit on income tax, it makes sense to sell one of the second two properties. You may have a larger CGT liability down the road though. 

There's no single right answer to this. My instinct, in your situation, would be to sell one of the interest-only properties (they are where your exposure is greatest), but I'd also be looking very carefully at the numbers and at all of the assumptions I was making.


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## liteweight (1 Apr 2007)

Well if you don't need the money AND you don't need the tax break, I'd sell one of the interest only properties, as they are costing you more in a potentially over exposed location. I'd hold onto my 30K!

I'm not sure I'd pay down the other interest mortgage though, as long as the rent was making enough to pay it and any repairs, maintenance etc. Still have those tax bills in mind!

The only property you are making a decent yield on is the older one and with interest rates rising you might find yourself in a loss making situation if you hold onto both int only properties.


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## liteweight (1 Apr 2007)

Oops went out to get paper in the middle of my post and didn't see Dreamerb's reply which is put more eloquently than mine and I agree with everything s/he said.


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## Dreamerb (1 Apr 2007)

liteweight said:


> Oops went out to get paper in the middle of my post and didn't see Dreamerb's reply which is put more eloquently than mine and I agree with everything s/he said.



Why thank you!


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## Bob_tg (2 Apr 2007)

Nbc - re my original question (2) above, I'm still intrigued to know what you would do with the 170k (assumed) once you sell your property?  I think this is an important question to answer before deciding to sell.


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## nbc (2 Apr 2007)

hi bob,
I'm not 100% sure what I would do with the money but initially I would place it in a new zealand savings account I opened when I worked there for a short period recently and gain 7.5% interest. 
What do you think? It would earn more than paying off any of the int only mortgages where the effective return would be 5%.
nbc


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## CCOVICH (2 Apr 2007)

Earning 7.5% in NZ is not necessarily going to leave you better off than saving 5% in Ireland.


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## Bob_tg (3 Apr 2007)

If the money is only going to be used for a 'passive' investment such as cash deposit, then the transaction charges of selling the house could outweigh any perceived advantages.  Additionally, over the longer term, you are more exposed to inflationary risk with cash.

It might be worth considering what are your longer term goals for your investments.  Are you using the houses to fund your retirement?  Do you need a wad of cash in the next 5 years?  Are you planning to set up your own business?  How are your retirement/pension plans? ... etc.

Finally, before deciding to sell (I'm not convinced there is a case for it yet... the case becomes compelling when you move funds from a _good_ place to a _better_ place), are you confident that you have maximised your potential return from the existing properties?  The earlier point from Liteweight touches on the below-market rental income.  But other ways of maximising your return with a little further equity release could include attic conversion, interior re-design, extension...


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## nbc (6 Apr 2007)

Thanks bob for your reply. 
I know what you are saying. I have no immedeiate plans so that was why i was going to put it on deposit earning E750 after DIRT (proceeds of sale will leave 150,000 aprox) which is greater than my rental income currently. Once I see a good opportunity I may reinvest it then. My primary concern is I have 3 houses in 1 location. There are no problems whatsoever letting them now but that may not be the case in the not so distant future. I'm just thinking ahead.
nbc


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