# Landlord subsidising tenant



## Corleone (14 Jul 2006)

Hi all,

Assessing the merits of property investment, I notice that people advocating that property is over-priced often make reference to that fact that there is a shortfall between the rent received and the mortage payment by the investor, and in effect, the investor is "subsidising" the tenant....I personally take the view that it's the other way around and that the tenant is this case is subsidizing the landlord...ie if the tenant was to only cover the interest payments, then isn't this representing an interest-free loan, as such, for the landlord to acquire a property? Can't think of too many ways to obtain a 25 year interest free loan? Any views?

C.

PS: sorry if this is a little heavy for a "hazy sunny afternoooon..!"


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## SkepticOne (14 Jul 2006)

It depends on the degree of shortfall. A small shortfall might still amount to the tenant subsidising the landlord. A large one would suggest the other way round.

The normal situation would be the tennant subsidising the landlord. This would compensate the landlord for taking on the risk and responsibilities. Also in normal situations not everyone can get a mortgage and the landlord is going to take advantage of the situation.

It is my opinion that over the last few years the situation has reversed but only for landlords who bought in those years. I only have anecdotal evidence for this however.


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## Corleone (14 Jul 2006)

Thanks for your reply..agree in full. 
C.


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## Persius (14 Jul 2006)

Regarding the discrepency between rents and morgage repayments on properties, I asked a guy who invested last year in an appartment does this not worry him. His reply was that morgages had to be more expensive than rents. Otherwise everyone would buy and no-one would be renting.

Says something about the irish psyche.


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## CelloPoint (15 Jul 2006)

I know someone who forked out 430k for a 2-bed flat in Summerhill about a month ago. It won't be built until next year.

He plans to let it out while he goes to work abroad this Autumn. He's paying €2000 a month at current interest rates. He most certainly will be subsidising his tenants - i'd say to the tune of at least €800 a month + stamp duty + maintainence + rental income tax + hassle.

I don't think this was a very wise move. Or maybe I just can't stand the sight of my friends getting richer? No, I prefer my money elsewhere. Even rabodirect will guarantee you a miserly 3%+.


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## phoenix_n (17 Aug 2006)

CelloPoint said:


> I know someone who forked out 430k for a 2-bed flat in Summerhill about a month ago. It won't be built until next year.
> 
> He plans to let it out while he goes to work abroad this Autumn. He's paying €2000 a month at current interest rates. He most certainly will be subsidising his tenants - i'd say to the tune of at least €800 a month + stamp duty + maintainence + rental income tax + hassle.
> 
> I don't think this was a very wise move. Or maybe I just can't stand the sight of my friends getting richer? No, I prefer my money elsewhere. Even rabodirect will guarantee you a miserly 3%+.


 
Have you voiced your concerns to him ?


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## CelloPoint (17 Aug 2006)

phoenix_n said:


> Have you voiced your concerns to him ?



Actually interesting you should say that to me. I felt it was my 'duty' to tell him what I thought. I met up with him in a Dublin pub for a chat about anything and everything. When I brought up property, he started getting very defensive indeed - I basically said I'm a complete bear and wouldn't go near Irish property.  He then started spurting a load of estate agent speak like "I'm in it for the long term", "management fees are 'only' E2000", "the estate agent told me it's now worth 500k", "I can use this flat as equity when I'm buying more property", etc. - my mate thinks he's going to be a property tycoon by the time he's 35.

Anyway, before pressing him too much I asked him if he signed the contracts - 'yes' was his answer but not before telling me about the free sofa voucher he'd be getting.

This guy earns 40k and is 25. I don't think he'll be going to London any time soon if he has a 2k pm committment here in Dublin for the next 35 years. I don't say this out of spite, I say this because I think he's made the stupidest decision of his life.


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## Calina (17 Aug 2006)

How in the name of all that is holy did a 25 year old on 40K get a mortgage for a property priced 430K? And what's his mortgage - I assume that 2K monthly is somewhere in the region of 360K, right?

And, more to the point, are there really that many 25 year olds on 40K? What in the name of God is he doing?


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## CelloPoint (17 Aug 2006)

Calina said:


> How in the name of all that is holy did a 25 year old on 40K get a mortgage for a property priced 430K? And what's his mortgage - I assume that 2K monthly is somewhere in the region of 360K, right?
> 
> And, more to the point, are there really that many 25 year olds on 40K? What in the name of God is he doing?



He works in a large US bank as a java developer. It sure is madness alright. I think he got some money from bank of mam and dad too.


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## Calina (17 Aug 2006)

I'm stunned. The last time I looked at java dev jobs they weren't that well paid. Maybe I should look again.

not only that I think 2K is a fairly high fraction of monthly net income for a gross salary of 40K. 

Sorry. I knew things were insane but that really...I don't know.


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## room305 (17 Aug 2006)

My father is a landlord and I've had this conversation with him a few times. His take on it is simple. You should _never_ be subsidising your tenant. The tenant is risk-free, you are incuring the risk of capital depreciation, wear-and-tear to your property, vacant months etc.

Now he truly is in it for the long term. He paid a significant portion of the costs upfront and the loan on the balance will be paid off before he retires. The rental income stream will then provide an additional cushion for his pension during retirement.

I don't think he has any plans to ever sell so capital appreciation (while admittedly nice) is academic in this regard.


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## soma (17 Aug 2006)

Calina said:


> not only that I think 2K is a fairly high fraction of monthly net income for a gross salary of 40K.



AFAIK 40k after tax is roughly ~€2500pm.


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## autumnleaf (17 Aug 2006)

Is this guy a contractor or in a fulltime job?


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## dontaskme (17 Aug 2006)

Corleone said:


> ie if the tenant was to only cover the interest payments, then isn't this representing an interest-free loan, as such, for the landlord to acquire a property?


 
Yes, as long as the interest payments are covered it makes sense.

Interest is "dead money".


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## wiggzie (17 Aug 2006)

40k for java developer is alright - assuming he's not a J2EE developer, otherwise is poor.


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## liteweight (18 Aug 2006)

CelloPoint said:


> I know someone who forked out 430k for a 2-bed flat in Summerhill about a month ago. It won't be built until next year.
> 
> He plans to let it out while he goes to work abroad this Autumn. He's paying €2000 a month at current interest rates. He most certainly will be subsidising his tenants - i'd say to the tune of at least €800 a month + stamp duty + maintainence + rental income tax + hassle.
> 
> I don't think this was a very wise move. Or maybe I just can't stand the sight of my friends getting richer? No, I prefer my money elsewhere. Even rabodirect will guarantee you a miserly 3%+.



Is this Summerhill in Dublin??? He could have bought D4 for that! When last I looked, it was not considered the safest area in town. He'll be lucky to  get 1600 a month for it. Perhaps he's going to, like some others on AAM, 'forget' there's a stamp duty clawback if he rents it before owning for 5 years. I don't think he'll have a problem with income tax because he'll be running at a loss, depending on how much he borrowed. You're forgetting that he'll have a letting agent's fees as well, if he intends to live abroad.


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## Cityliving (18 Aug 2006)

Deciding to be a landlord can be a difficult choice in Ireland at the moment. If interest rates go up it will become more and more difficult for landlords to have a viable investment unless they bought 5 years or more ago lets say. However the higher the rates go the more difficult it becomes for people to get their first mortgage and therefore they are forced to rent in good areas or buy in not so good areas so landlords may then be able to push rent up due to the increased demand.
Renters may not have the risk (and the hassle!) but they also dont have an asset that will appreciate in the long term. Forget about double digit growth but over a 20 year period property is a solid investment (even the UK returned to health after its property crash)


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## macbri (19 Aug 2006)

quick question on the guy who bought in Summerhill.

How did he get a mortgage for $350-380k if hes' only earning $40k a year.

Do the banks in Ireland not look at buyers'earnings level for investment properties,from the above it looks like that they don't.

I think the above illustrates the current madness of the Irish property market


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## liteweight (19 Aug 2006)

Banks will also take the potential rental income into account. I haven't bought in 2 years so I'm not sure, but then, an investor had to supply at least 20% deposit.


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## beattie (20 Aug 2006)

liteweight said:


> Banks will also take the potential rental income into account. I haven't bought in 2 years so I'm not sure, but then, an investor had to supply at least 20% deposit.


 
Do the banks really insist on this? I would find that very hard to believe that many new investors would be able to stump up this 20%.


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## bearishbull (20 Aug 2006)

Cityliving said:


> Renters may not have the risk (and the hassle!) but they also dont have an asset that will appreciate in the long term.


If renters invest the money they save by renting they will have a nice appreciating asset in 20/30 years time(if they dont buy by then at a cheaper price)


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## liteweight (21 Aug 2006)

beattie said:


> Do the banks really insist on this? I would find that very hard to believe that many new investors would be able to stump up this 20%.



Yes and if you can give them 25% deposit there is usually no check on income. The mortgage is granted on the potential rental.

Also, lots of new investors/speculators (whichever you like to call them) borrow this deposit on their PPR. A Bank will also let you borrow the full amount of the investment property depending on the value of your PPR. Where there is a will, there is a way.


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## liteweight (21 Aug 2006)

CelloPoint said:


> I know someone who forked out 430k for a 2-bed flat in Summerhill about a month ago. It won't be built until next year.
> 
> He plans to let it out while he goes to work abroad this Autumn. He's paying €2000 a month at current interest rates. He most certainly will be subsidising his tenants - i.



Why doesn't your friend opt for an interest only mortgage, at least for the first few years? In that way he will make a small yield and have more disposable income.

Whatever about subsidising a tenant by a small amount, 800 a month might lead him into trouble very quickly. The argument may be made that he has an asset which is appreciating, but that's little consolation if the bank comes looking for it due to missed payments!


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