# Should I sell Investment Property?



## 0028673 (6 Dec 2017)

I am a long time lurker and find myself needing some advice.


Age: 36
Spouse’s/Partner's age: 31

Annual gross income from employment or profession: 55k (private sector)
Annual gross income of spouse: 52k (public sector)

Monthly take-home pay : 5.5k + after AVCs

In general are you:
Saving approx 500 per month

Home:
Rough estimate of value of home: 340K
Amount outstanding on your mortgage: 142K, 13 years remaining
What interest rate are you paying? 2.75 % AIB

Other borrowings – none

Do you pay off your full credit card balance each month? Yes

Savings and investments: around euro 30k cash on deposit in bank, 

Do you have a pension scheme? Yes,Contribute 7% and employe matches my contribution. Spouse has public pension.


Do you own any investment or other property? Yes, 2 bed apartment North Dublin. Rent €1175PM,, Mortgage €670PM (13 years left). Apartment worth about 230K today and remaining mortgage is 84K

Ages of children: 1 year old (childminding fees 800/month)

Life insurance: yes

Question: 

I am debating whether to sell the investment property and pay off my home mortgage?
I am paying a tax bill of just less than 3K which is likely to rise (Once the mortgage interest relief is tapered out over the next 3 years).  I have good tenants who maintain the place well and have letting Agent who looks after the property.

On the negative side tenants could trash the place or withhold rent, I could be hit for excessive repairs, the rent controls and frequent Government interference.  Who knows when the property bubble will burst again and how much my apartment will be worth in the future.

Any help making this decision much appreciated.


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## llgon (6 Dec 2017)

Without doing any figures I think your property is a good investment and that you should hold on to it. With the equity you have in your properties along with your incomes and ages I think you can afford to take the risk of a property bubble bursting or bad tenants.

If you did sell your investment property have you thought about what you will do with the surplus income that will be generated by paying off your main mortgage. Spend it and improve your lifestyle? Move to a more expensive home in the near future? Save it in the bank at today's interest rates? Invest in stock market- you already have exposure to this through your pension presumably? I think you will struggle to find something better than your investment property.


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## 0028673 (6 Dec 2017)

Thanks for your response IIgon.

If I were to pay off my main mortgage I would probably just max out my pension contributions.  I take your point regarding the stock market. I am 100% invested in equities for my pension and am not willing to take on any additional risk of playing the stock market. We do not plan on upgrading the house or trading up homes.

It's hard to know how much the apartment will be worth in 13 years. It was as low as 110K at one stage so that is one of my fears. Ideally if the investment property held it's value of 230K I would be looking good in 13 years time - but it is a long road to get to that place.


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## Gordon Gekko (6 Dec 2017)

The missing piece in your case appears to be pension funding; you should be looking to contribute the maximum (€11k).

What’s the rate on the investment property mortgage?


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## 0028673 (7 Dec 2017)

Hi Gordon.                                               The mortgage rate is 2.95% for the investment property. I do agree that I should be aiming to max out my pension contributions but I do not have a lot of spare cash at the end of the month.       If you were in my position what options would you assess before making any decision?


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## Gordon Gekko (7 Dec 2017)

You could max out your AVCs for €350 a month and still save €150 a month. And you don’t really need to save with €30k in the bank.

I’d do that and invest all of your pension fund in the cheapest global equity fund available to you.

Where in North Dublin is it and is the owners management company in okay shape?


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## Sarenco (7 Dec 2017)

At current rates, you would save almost €4,000 in interest by paying off the PPR mortgage, whereas you appear to be making an after-tax profit of around €3,000 on the rental.

Beyond that you are simply speculating on house price movements.

If it was me, I would pay off the PPR mortgage and use the additional cash flow to ramp up your AVCs.

Getting to a mortgage free position in your 30s would be pretty impressive.


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## llgon (7 Dec 2017)

Sarenco said:


> At current rates, you would save almost €4,000 in interest by paying off the PPR mortgage, whereas you appear to be making an after-tax profit of around €3,000 on the rental.
> 
> Beyond that you are simply speculating on house price movements.



This will not be the case in 13 years if the investment property is kept. If there is no significant increase in interest rates or decrease in rents it won't even be the case in a few years as both mortgages reduce.

Future rental income (and increased profit) are the main reasons I see for keeping the apartment as a long-term investment. I don't think this is speculation on house price movements.


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## Sarenco (7 Dec 2017)

llgon said:


> Future rental income (and increased profit) are the main reasons I see for keeping the apartment as a long-term investment.


If you assume that rents and interest rates remain the same, then the rental will gradually become less (not more) profitable over time, particularly on an after tax basis.

My basic point is that there is no point earning a risky return on an asset when a higher return is available with less (or in the case of paying down a debt, zero) risk.


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## llgon (7 Dec 2017)

Sarenco said:


> If you assume that rents and interest rates remain the same, then the rental will gradually become less (not more) profitable over time, particularly on an after tax basis.
> 
> My basic point is that there is no point earning a risky return on an asset when a higher return is available with less (or in the case of paying down a debt, zero) risk.



I wouldn't make that assumption about rents and interest rates.

As a short-term strategy your point is true. The OP may want to think of his medium to long-term objectives and as I have already said I think he can afford to take the risk you mention. However he may prefer not to.


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## 0028673 (7 Dec 2017)

Gordon Gekko said:


> You could max out your AVCs for €350 a month and still save €150 a month. And you don’t really need to save with €30k in the bank.
> 
> I’d do that and invest all of your pension fund in the cheapest global equity fund available to you.
> 
> Where in North Dublin is it and is the owners management company in okay shape?



Hi Gordon,

The apartment is in Swords and is managed by a management letting company. the apartment is 12 years old and in reasonable shape.


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## Gordon Gekko (7 Dec 2017)

I’m a property bull, but I’d keep it and max out the AVCs.

You’ve plenty of cash already.


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## Sarenco (7 Dec 2017)

llgon said:


> I wouldn't make that assumption about rents and interest rates.


Sorry but I thought that was what you meant by this phrase -


llgon said:


> If there is no significant increase in interest rates or decrease in rents


The only reason to accept a risky current return of ~€3,000 over a risk-free return of ~€4,000 is because you expect the capital value of the property to increase over your holding period.  That's called speculation.


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## 0028673 (7 Dec 2017)

Hi Sarenco & Ilgon,

Thank you both for your feedback.

The points you have both made as well as Gordon is what I am struggling with. Currently I am not making any profit on the apartment due to mgt Fees and other costs. I am paying down roughly 5K a year on the investment property. Assuming interest rates and rent rates remain the same (assuming 4% growth every 2 years) than I will be left with a greater tax bill as the mortgage interest relief is phased out.

It would be a great position to be in to pay off your PPR mortgage and than to redirect any excess funds into maxing out my pension contributions.  But if I were to keep the apartment than potentially I would have an asset worth 230K (assuming it maintains it's current price) and potentially getting rental income of 6-7K after tax on an annual basis.


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## Sarenco (7 Dec 2017)

0028673 said:


> Currently I am not making any profit on the apartment due to mgt Fees and other costs. I am paying down roughly 5K a year on the investment property.


Well, you must be making a profit or you wouldn't have an income tax bill.  The rental may well be cash flow negative - because you are paying down the principal outstanding on the mortgage - but that doesn't mean it isn't profitable.

By way of example, your rental accounts might look something like this:-

*Gross rental income..........................................................................14,100*

Expenses:
Allowable Interest (80% of €84,000k @ 2.95%).........................................1,982
Mortgage Protection Premiums...................................................................500
Annual Service Charge (OMC)..................................................................2,000
Estate Agent Letting/Management Fee......................................................1,410
Repairs/Replacements & Maintenance.......................................................1,000
Advertising Costs........................................................................................ - 
RTB Registration Fee...................................................................................90
Cleaning.................................................................................................... -
Legal......................................................................................................... -
Landlord Insurance Premiums.....................................................................100
House Insurance Premiums........................................................................... -
Refuse Charges/Local Authority..................................................................... -
Gardening.................................................................................................. -
Sundry (phone, postage, key cutting) ........................................................... -
Accounting................................................................................................200

Total Deductible Expenses......................................................................(7,282)
Taxable Rental Profit............................................................................... 6,818

Tax (Income Tax, USC & PRSI) @ 50%.......................................................3,409
LPT...........................................................................................................267
Non-deductible interest............................................................................... 495

*Net Rental Income After Tax*.................................................................*2,647*
Principal Repayments................................................................................5,562

*Net Cash flow Position..........................................................................(2,915)*


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## llgon (7 Dec 2017)

Sarenco said:


> The only reason to accept a risky current return of ~€3,000 over a risk-free return of ~€4,000 is because you expect the capital value of the property to increase over your holding period.  That's called speculation.



I've already explained why this is not the only reason, I won't repeat myself.

OP, whether you decide to keep the investment property or not you will be in an excellent financial position for your age. You can still max out your AVCs while keeping ownership and if increased tax in the future affects your cash flow you could reduce AVCs slightly until mortgages are paid off, you should have no problem going back to the max then.

I think it just boils down to whether you are happy to continue as a landlord or not and be comfortable with the risks involved.  As I've already said, I would keep it in your situation.   It's important before making that decision for you to look closely at what your investment strategy for surplus income will be in the coming years, if you do sell the property. You need to be happy with this as well and know that it's a better option for you.


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## 0028673 (7 Dec 2017)

That’s a good breakdown of my costs. I take your point that I am in profit but I am viewing it as a negative cash flow position.                                                 I will be in a negative cash flow position until the mortgage has been fully paid. If I were to pay off the mortgage I could be saving myself the interest on the mortgage 30-50k depending on future mortgage rates. Potentially reinvest our monthly payments into my pension .            Having said that I think I am leaning towards keeping the apartment for another year or two and to reassess again after that. I should hopefully have paid down another 10k off the investment property and hopefully another 20K off the PPR. Thank you all for giving your views. It’s been very helpful. I am a big fan of this site and it’s posters.


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## Sarenco (7 Dec 2017)

0028673 said:


> If I were to pay off the mortgage I could be saving myself the interest on the mortgage 30-50k depending on future mortgage .


That's really my key point.

Obviously nobody can accurately predict future interest rates, rents, taxes, etc. so the best we can do is take the factual position as it stands today and extrapolate that into the future.  If the facts change, well so should your strategy.

Next year you would save around €4,000 in interest if you had paid off the PPR mortgage but in doing so you would have given up €2,647 (per my figures) in net rental income after tax.

The following year you would have saved slightly less than €4,000 in interest if you had paid off the PPR mortgage (because the principal balance would be slightly lower) but in doing so you would have given up slightly less than €2,647 in net rental income (because there would be slightly less leverage in the deal and, all being equal, your tax bill would be slighty higher).

And so on.

Obviously the difference between €4,000 and €2,647 is not massive so I think it's a reasonably sized "wager", given your circumstances, on rising house prices (or the principal inputs - rent and funding costs - that impact housing costs).  However, you are absolutely right to keep this under review.


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