# Judging an investment-worthwhile to rent?



## Snail (31 Mar 2011)

I've been reading the FAQ and the revenue guide. I'm posting my estimate and would hope some posters might correct where I've gone wrong.

I have two houses, with a mortgage of 180,000 on them at 4.64%.

The rental income is 1100 per month. 

Assuming I get 12 months rent, I can make the following deductions:

1. NPPR levy x 2 @ 400.
2. PRTB reg fee x 2 @ 180.
3. Insurance @ 1000
4. Wear and Tear ( based on fittings valued at 20000 in each house) @ 5000
5. Mortgage interest @ 6045
6. Maintenance costs 500
7. Advertising 240.

This makes a monthly loss of 165, so no income tax?

The rent is a shortfall on the mortgage meaning I have to make up 100 per month if the properties are rented out for 12 months, more if not.

What kind of return is this?


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## jpd (31 Mar 2011)

Return % = earnings / capital invested x 100 for the period

where

earnings = net rental income (-1200) + change in capital value (ie  value at end of period - value at start of period)

capital invested = value of property - loan outstanding


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## Brendan Burgess (31 Mar 2011)

> capital invested = value of property - loan outstanding



The current capital invested is the current value of the property. 

The loan outstanding is not hugely relevant. 

The decision to buy or sell should be made on the basis of how much  you will get if you sell it.

Brendan


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## Snail (31 Mar 2011)

The current value of the properties is approximately 400,000- this is a conservative guess based on nearby properties which have sold. As you can imagine there aren't too many of those and even of those, none exactly comparable. So I would probably achieve a net profit of somewhere betwee 200000 to 220000 if I sold. However this would be liable to CGT. And in this climate it may be very difficult to sell. 

I don't understand how to calculate the return- is it (1100x12/400000) x 100? This would be 3.3%

But if I take the loan into consideration, it would be 1100x12/180000)x 100=7.3%.


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## shesells (31 Mar 2011)

Wear and tear figure is very high, they reckon the average value contents is 7-12k, if you were to claim 20k value per property, you would be asking for an audit...and the NPPR is non deductible


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## Snail (31 Mar 2011)

shesells said:


> Wear and tear figure is very high, they reckon the average value contents is 7-12k, if you were to claim 20k value per property, you would be asking for an audit...and the NPPR is non deductible


 
Thanks Sheshells. The houses are newly renovated with new kitchens, bathrooms, heating, windows, doors etc. Does that justify 20,000 or is it still too high?


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## Howitzer (31 Mar 2011)

Also, I thought wear and tear was deductible over 8 years? So 12.5% of 20K, if that hasn't changed of late.

Is that mortgage interest number 75% of the total, as that is all that is currently deductible?


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## Snail (31 Mar 2011)

Hi Howitzer- yes, that's 12.5% of 20,000 by two houses, totalling 5000.

Yes, the interest is 75% of the annual interest.


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## jpd (31 Mar 2011)

For the capital invested, I would use the net figure ie market value minus outstanding loan - after all, that is the amount you would have to invest in another investment, if you sold the property and paid off the loan. 

This way you can compare thye return on the investment property against the return on a safe investment such as a depoist account.

Not sure where you got you return of 1100 x 12 from, I thought you weren't making any profit


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## Snail (1 Apr 2011)

@jpd- Sorry, I don't understand your formula- how do you calculate change in capital value?


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## jpd (1 Apr 2011)

Estimated value of property at end of period - estimated value of property at start of period.

Can be positive, zero or negative depending on the period you are evaluating.


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## Greta (1 Apr 2011)

Snail said:


> Thanks Sheshells. The houses are newly renovated with new kitchens, bathrooms, heating, windows, doors etc. Does that justify 20,000 or is it still too high?



You can't claim wear & tear on the items that are part of the structure of the property, i.e. are not removable, so you can't claim for fitted kitchens (unless it's free-standing, not fixed to the walls or floors), bathrooms, heating (unless it's free-standing heaters), windows, doors etc.

You can claim for a kitchen table or a bathroom cabinet, say, but not for the bath, WC, tiling etc. 

If the renovation was an upgrade of what was there before (e.g. upgrading single-glazed windows to double-glazed, putting in central heating where there was none before etc), it's classed as capital expenditure and no relief against income tax is available. You can deduct the cost of these improvements when calculating the capital gains tax, if and when you sell.

If the renovation was not an upgrade (e.g. replacing a central heating with a similar one), then you can deduct the cost from you income in the year it happened, provided you had been letting the properties out before the work was done.

If you renovated the house before you first let them out, then you can't claim the renovation expenditure against income tax, you can only deduct it from the proceeds of sale (when you sell) in calculating your capital gains tax.

You can claim wear & tear on furniture, kitchen appliances, gardening equipment provided to the tenants and similar.


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## Brendan Burgess (1 Apr 2011)

Hi Snail

I  think you are asking a meaningless question "What sort of return am I getting?"  The answer to the question doesn't help you make any decision. 

If I buy a house for €100k without any borrowing and I get a rent of €10k, I am getting a return of 10%. 

If I buy a house for €100k with a €99k mortgage and the rental profit is €1k, I am getting a return of 100%. €1k rental profit on a net investment of €1k. But this doesn't actually tell you anything useful. By "useful" , I mean it doesn't help you make a decision on whether it is a good investment or not. 

If I bought a property 10 years ago for €50k cash and I am now getting €10k rent, I am getting 20% return. If the property is worth €100k today, you could argue that I am getting 10% return. 

The questions you need to ask yourself are"Am I investing wisely? Can I get a better long-term return on my money with an appropriate level of risk?" It requires much more than a one off measure.


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## Snail (2 Apr 2011)

@jpd, sorry, I still don't understand. What period should I be assessing. It must be in the past as one cannot know what they will be worth in the future. Is it since purchase to date? 

@Greta- thank you very much for your comprehensive answer- that is very informative.

@Brendan- yes, you're right- those ARE the questions I should be asking. To answer them, should I go and see an independent financial adviser?


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## jpd (3 Apr 2011)

That all depends on your question - what do you want to know?

What return did I make last year?
What return have I made since the purchase?

Whilst these informations are of some interest, the more important question, from a financial planning point of view, is what return am I currently making and what return will I make in the future?

Brendan is correct


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## cremeegg (13 Apr 2011)

Here is my take on your return. €2,500 on your investment of €220,000. just over 1%, which is not good but sufficient to give you time to consider your options. 

What is your sell and walk away value. €220,000 (€400,000 - €180,000) looks like a good idea. How much CGT would you have to pay out of this? That might make it a better idea to hang on.

Ultimately what you expect to happen in the future is the most important thing. In my opinion nothing good for landlords. 

Here is how I calculated the return.

Rental Income		 13,200 		

Interest Expense		  8,352 		
NPPR		                    400 		
PBRT		                    180 		
Insurance		          1,000 		
Wear and Tear		 -   	    W&T allowance is irrelevant here
Maintenance		    500 		
Advertising		            240 		

Total Expenses		 10,672 		

Profit before tax		 2,528 		



Tax Caln				

Rental Income		 13,200 		

Allowable Interest		 6,264 		
PBRT		                    180 		
Insurance		          1,000 		
Wear and Tear	     	   5,000 		Using your figure
Maintenance		     500 		
Advertising		             240 		

 Allowable Expenses 	 13,184 		

Taxable profit		       16 		

Tax due		                8 		

Profit after tax		   2,520


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## Snail (14 Apr 2011)

Thanks for taking the time to post such an informative reply, creme egg.

At the moment the properties are making me a small loss in real terms ( as I see it on a yearly basis) which I can afford to make up. Over time the rent should pay the majority of the remaining mortgage.

If I sold ( and looking at the market, who knows?) and IF I make 220000 less CGT, what would I do with it? I already have some money in shares ( and have made a loss with BOI and AIB, but balanced with gains elsewhere- no gain but at least, no loss), I have a very modest amount of cash in the bank and I think I would be paralyzed with indecision!


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## Bronte (15 Apr 2011)

Snail said:


> If I sold and IF I make 220000 less CGT, what would I do with it?


 
That's the million doller question.  You'll get about 3.5 on deposit but subject to DIRT etc.  If you find something that gives you a great return please let us know.


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## Tom189 (15 Apr 2011)

Greta said:


> You can claim wear & tear on furniture, kitchen appliances, gardening equipment provided to the tenants and similar.



Does this include laminate flooring/ carpets?? Is there a detailed list of what can be claimed for and what cannot?


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## Snail (16 Apr 2011)

Bronte said:


> That's the million doller question. You'll get about 3.5 on deposit but subject to DIRT etc. If you find something that gives you a great return please let us know.


 
LOL. 

I don't think I'm over exposed on the property market so might stick for a while.


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