# Keep current home as an investment when trading up?



## nest egg (8 Jan 2017)

Here's our situation, married couple both 34, one baby.  Have a house which we like, but which is ultimately too small for our needs.   Net income of €7,600 p/m (excl. annual bonus), mortgage of €1,250 p/m (155k equity / €275k remaining @ 3.1% over 28 yrs), no other borrowings, only other major expense is childcare @ €1,000 p/m.   90k in savings & liquid investments. We're considering moving to another house close by.

Want to explore some options, one of which is to keep and let our current house.  A neighbour did similarly and achieves a rent of €2,300 p/m on their identical house.  Would require a second mortgage of 500k for the new house, with payments of €2,300 p/m.

There's a lot of hassle with being a landlord, which is well documented on this forum, so I'd to focus on the financial side of this. 

Over 10 years, my calculations show a potential return of €150k, based on the following assumptions:

Income tax @52%
Interest relief @80%
CGT @33%

No other changes to reliefs available (eg: allowance of property tax)

Average rental increases of 2% p/a
Average expense increases of 2% p/a
Average property appreciation of 2% p/a
90% occupancy rate
The downside is that all capital is tied up and of course the risk that my assumptions turn out to be incorrect.

The alternatives would return the following:

Sell current house, use capital towards new house and over-pay the mortgage to a similar level as the second mortgage above = €100k in interest savings / additional capital, with no risk but illiquid capital
Sell current house, invest equivalent amount annually in a liquid investment portfolio with 4% ROI after taxes, charges & dividends = €100k with some stock market risk but liquid capital


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## Brendan Burgess (8 Jan 2017)

Hi moj

You are completely underestimating the risk of everything you do. For example. "a liquid investment portfolio with 4% ROI after taxes, charges & dividends = €100k with some stock market risk but liquid capital"  You would need about 10% return before taxes and charges. To get this you would have to take a punt on an individual share so you are more likely to lose all your money.

Pay down your mortgage immediately.  The sooner you start getting a tax free risk free return of 3.1% per annum, the better. 

Then sell your house and trade up with a smaller mortgage and a lower mortgage rate.

The only variation on this would be to use your €90k as the deposit on a new house.  Then when you have moved into the new house, sell your own and pay down your mortgage. 

Brendan


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## KOW (8 Jan 2017)

Tax free risk free return of 3.1%. In 2017 and the current climate. As Brendan thats the way I would play.


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## nest egg (8 Jan 2017)

Brendan Burgess said:


> Hi moj
> 
> The only variation on this would be to use your €90k as the deposit on a new house.  Then when you have moved into the new house, sell your own and pay down your mortgage.



Were I to do this, would I be liable for CGT on the gain made since I bought the old house, as it is no longer my primary residence at that point?


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## Gordon Gekko (8 Jan 2017)

No, PPR relief is time apportioned with an extra 12 months' grace on top.


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## Gordon Gekko (8 Jan 2017)

Sorry Brendan, but I disagree;

Hi mojoask,

- You can gross €27,600 per annum by renting out your house.
- Interest is €8,525 per annum.

By selling, you'll save €155,000 x 3.1% (assumed new mortgage rate) which is €4,805 per annum.

So what's the tax position on the proposed rental?
€27,600 less (€8,525 x 80%) less (say) €1,000 for capital allowances less (say) €1,000 for repairs.
That's €18,780. Total tax rate of 52% means tax of €9,766.

So cashflow-wise, €27,600 less interest less estimated repairs less property tax (say €500) less tax. You're left with €7,809.

€7,809 after-tax return from renting out your property vs €4,805 after-tax return from not borrowing €155,000 at 3.1%.

You should keep the property but review the position annually as you pay down the mortgage on the investment property.


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## Andarma (8 Jan 2017)

Gordon, are you assuming that the investment mortgage would be interest only? If it's not then the OP has to factor in the cost of full mortgage repayments, ie 12 X €1250.


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## nest egg (8 Jan 2017)

Andarma said:


> Gordon, are you assuming that the investment mortgage would be interest only? If it's not then the OP has to factor in the cost of full mortgage repayments, ie 12 X €1250.



Nice to see some difference in opinion   We haven't made any decision, I just want to tease this out and see where it goes.

Isn't the capital payment academic Andarma?
Were I to liquidate the investment after 12 months, what would the return be?

Any surplus (or deficit) after all costs and the mortgage had been paid (let's assume in this instance it's neutral, break-even)
The capital repayment which the mortgage covered (€6.3k)
The difference in the value of the house between selling it in 2017 vs selling it in 2018 (let's assume 2% gain = €8.6k less CGT @33% + €1.27k exemption giving approx €7k)


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## Gordon Gekko (8 Jan 2017)

Andarma said:


> Gordon, are you assuming that the investment mortgage would be interest only? If it's not then the OP has to factor in the cost of full mortgage repayments, ie 12 X €1250.



No they don't. That's just deferred savings. When comparing the various options, one ignores the capital element. It's only an issue from a cashflow perspective.


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## Gordon Gekko (8 Jan 2017)

mojoask said:


> Nice to see some difference in opinion   We haven't made any decision, I just want to tease this out and see where it goes.
> 
> Isn't the capital payment academic Andarma?
> Were I to liquidate the investment after 12 months, what would the return be?
> ...



What did the house cost you and when did you buy it?


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## nest egg (8 Jan 2017)

€365k, mid '14.  I perhaps see where you're going with this.  From when would the gain on CGT apply?


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## Andarma (8 Jan 2017)

I agree that it's a cash flow issue, but it's a pretty significant expense!


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## Gordon Gekko (8 Jan 2017)

Okay, it's worth €430k and it cost you €365k. You probably have total costs of around €12k in total for buying and selling. So a tax-free gain of (say) €53k if you sell today. That gain will be tax-free for 12 months after you move out. Thereafter, its tax-free nature starts to dilute. If you move out in mid-2017, by mid-2019 4/5ths of any gain will be tax-free. In mid-2020, it's 4/6ths, and so on.


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## nest egg (8 Jan 2017)

Gordon Gekko said:


> Okay, it's worth €430k and it cost you €365k. You probably have total costs of around €12k in total for buying and selling. So a tax-free gain of (say) €53k if you sell today. That gain will be tax-free for 12 months after you move out. Thereafter, its tax-free nature starts to dilute. If you move out in mid-2017, by mid-2019 4/5ths of any gain will be tax-free. In mid-2020, it's 4/6ths, and so on.



Thanks, that's clear.


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## PGF2016 (8 Jan 2017)

mojoask said:


> Here's our situation, married couple both 34, one baby.  Have a house which we like, but which is ultimately too small for our needs.   Net income of €7,600 p/m (excl. annual bonus), mortgage of €1,250 p/m (155k equity / €275k remaining @ 3.1% over 28 yrs), no other borrowings, only other major expense is childcare @ €1,000 p/m.   90k in savings & liquid investments. We're considering moving to another house close by.
> 
> Want to explore some options, one of which is to keep and let our current house.  A neighbour did similarly and achieves a rent of €2,300 p/m on their identical house.  Would require a second mortgage of 500k for the new house, with payments of €2,300 p/m.
> 
> ...



You've 275k of mortgage debt and you're looking to to add 500k? Too much debt in my opinion.


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## Brendan Burgess (8 Jan 2017)

Gordon Gekko said:


> Sorry Brendan, but I disagree;



Hi Gordon

Absolutely no need to apologize for disagreeing with me.  

Here are your figures in tabular form: 

Let's assume for the moment that they are correct. 

So that compares with saving €4,800 by selling and borrowing less. 

Is it really worth all the hassle and risk for €3,000 net a year?  I doubt it.  Mojask has a net income at present of €7,600 so my guess is that they have a fairly busy job. Do they have time to run a business of letting a house? 

In any event, I would challenge your figures.  There will be empty periods between lettings. The costs of maintenance and repairs will be much higher than €1,000. He will have to furnish the house.   If he gives it to a letting agent, they will charge around €3,000 a year. 

On the positive side, property prices may rise over his period of ownership, so he will get capital gains. 

On the negative side, property prices may fall.  Even if they do, he could end up with a CGT bill. 

But look at the posts in this thread: 
*Who wants to be a landlord?*

And since then, the whole attitude and treatment of landlords have changed for the worse. 

I think that the guaranteed, tax-free and risk-free and hassle-free return of 3.1% trumps the potential taxable gains of investing in property.

Brendan


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## Gordon Gekko (8 Jan 2017)

We shall have to agree to disagree. I would hang on to the property.

Prices could fall and rents could fall, but they could also increase. Supply is so short, I would be wary of dumping such a profitable investment.

Which I'm surprised to be saying in respect of a non-tracker mortgage.

I do accept the point regarding hassle though.

I just couldn't bring myself to give up a 5.1% yield (after tax) in the current low interest rate low return environment.


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## Sarenco (9 Jan 2017)

Gordon Gekko said:


> I just couldn't bring myself to give up a 5.1% yield (after tax) in the current low interest rate low return environment.



I couldn't either but I don't think your numbers are realistic.

In my experience, the expenses associated with managing and maintaining a rental property, on average, account for around 20% of the gross rental income. 

Typical costs include mortgage protection premiums; house insurance premiums; landlord insurance premiums; annual management fee (OMC); estate agent letting and/or management fee; repairs & maintenance; advertising costs; RTB registration fee; replacing white goods, furniture, etc.; cleaning; legal; refuse charges; travel; accounting.  Obviously you could self-manage the rental but you should still account for your time when assessing the viability of the property as an investment. 

It is also prudent to allow at least an additional 10% for the inevitable voids and over holding periods.


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## Brendan Burgess (9 Jan 2017)

Here are the revised figures using Sarenco's estimates. 


 It means you are taking all the risk and all the hassle for no current financial benefit. Although this might be compensated for by an increase in property prices over the holding period.

Brendan


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## Gordon Gekko (9 Jan 2017)

Brendan Burgess said:


> Here are the revised figures using Sarenco's estimates.
> 
> View attachment 1760
> It means you are taking all the risk and all the hassle for no current financial benefit. Although this might be compensated for by an increase in property prices over the holding period.
> ...



Gents, I think the 30% is overly conservative. I have one rental property and my parents have two. In the last four years, we have had seven tenants in total, and literally no void periods. Also, repairs have been minimal. For example, I've spent circa €500 in four years; that's negligible...circa €60 a year after tax.


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## Sarenco (9 Jan 2017)

Hi Gordon

A few thoughts:-

The 30% figure is a long-term average figure;
As a property ages the cost and frequency of repairs inevitably increases; 
There are a lot of costs associated with managing and maintaining a rental property over and above the cost of repairs (not all of which are tax deductible) - I've listed most of the main ones above;
It is important to account for your own time in assessing the costs associated with managing a rental (assuming you don't work for free!); and
It only takes one tenant to stop paying rent and/or seriously damage a property - it happens.


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## nest egg (18 May 2017)

An update on proceedings:

Combined net income up (moderately) to 7,700 (excl bonus).  However additionally I've been fortunate enough to come into a windfall of 35k which has pushed up available cash.

Current house value: 455k / Mortgage: 272k
Current cash/Investments: 140k

Plan is as before, move to a new house, let out current property.
New house value: 600k
New mortgage: 480k

I'm giving strong consideration to doing this, and reviewing the situation in 12 months' time.  Believe me, I have reservations about the amount of hassle I may be taking on, but I have to balance this with the potential reward, and that the new mortgage should be within the realms of affordability.


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## Brendan Burgess (18 May 2017)

mojoask said:


> reviewing the situation in 12 months' time. Believe me, I have reservations about the amount of hassle I may be taking on, but I have to balance this with the potential reward,



That really is the important issue. 

You are not making a decision with which you are stuck for the next 20 years. 

You should review it from time to time.  After a year being a Landlord, you might decide that you really enjoy it. Or you might decide that you have had enough. 

The only issue is that the house is probably in better condition and more saleable today that it would be after a tenant has been in it for a few years. 

Brendan


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## Sarenco (18 May 2017)

mojoask said:


> I'm giving strong consideration to doing this, and reviewing the situation in 12 months' time.  Believe me, I have reservations about the amount of hassle I may be taking on, but I have to balance this with the potential reward, and that the new mortgage should be within the realms of affordability.



I still think you are taking on an awful lot of risk for a very speculative return.

However, you are obviously going into this endeavour with your eyes wide open so I hope it works out for you.


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## ixus (18 May 2017)

If it was me, and I had I felt the need to own a second property, I would. Realise my CGT free returns on home, if any.

455 - 272=183k

Buy house at 600/400 mortgage.

183+140=323k-200 deposit =123k left

Use 80k to buy a 2 bed apt for 200k with 15yr mortgage (so 60/40).

Leverage and term of loan (so interest )brought well down plus 43k cash on hand.


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## SqueezedMiddle (19 May 2017)

Have you thought about the act now think about the consequences later policy of our government towards property investment.
In my view this is very likely to effect your sale value on a year or two.
I believe the next surprise coming down the line will even be to prevent investors selling their properties.


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## Firefly (19 May 2017)

mojoask said:


> Have a house which we like, but which is ultimately too small for our needs.



Hi mojoask,

Just a suggestion....would you consider getting the advise of a few architects? The reason for asking is that you clearly like the area you are living in if you are thinking of buying a bigger house close by. 100-150k might totally transform your house. You nearly have all the funds you need to do this. You could then easily make generous payments into a pension fund and build up your savings again.

Firefly.


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## nest egg (19 May 2017)

Thanks all for the feedback, really do value it.  Look we haven't walked into anything just yet, but also haven't dismissed the idea entirely either.

There are few themes you've raised in the thread, let me try to explain our thinking:

On extending. This was our starting postion to be honest, and we could fund it from cash, that's a real bonus.  But we've had two architects come and take a look.  There's a limited amount of space for us to extend, and as a result they both gave effectively the same advice.  Having considered the option, we feel ulitmately we won't be satisfied with the amount of space we have with the end result.  For that reason we've ruled it out.

On being a landlord.  It may not be for us, we have a family, and we have our careers, and these are more important.
Mitigating circumstances: 1) our current house is a "known quantity" 2) it's 3 years old which should mean lower maintenance in the first 7-10 years of its life, 3) we're considering renting it unfurnished, and will be living in the same area, thus reducing some of the time needed to maintain & monitor the investment

On the finances.  Certainly it's something which sits uneasily with me, I can't deny that.
Mitigating circumstances: well it's not possible to mitigate this risk straight away, that's the reality, we are putting most of our eggs in one basket.  The only mitigating circumstances are that we *should* have 20-30 years left in us to work, which gives us the opportunity to diversify into other investments over that time before we retire, and that we can sell the house within a year and keep the gain CGT free.


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## Firefly (19 May 2017)

mojoask said:


> On extending. This was our starting postion to be honest, and we could fund it from cash, that's a real bonus.  But we've had two architects come and take a look.  There's a limited amount of space for us to extend, and as a result they both gave effectively the same advice.  Having considered the option, we feel ulitmately we won't be satisfied with the amount of space we have with the end result.  For that reason we've ruled it out.



Good to rule that one out. 

I've toyed with buying something myself pretty recently and hassle factor (just one bad tenant) and constant interference in the market by the government has put me off to be honest...the return would want to be pretty significant.


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## Sarenco (19 May 2017)

mojoask said:


> our current house is a "known quantity"



Have you considered the possibility that you might be suffering from what behavioural psychologists call the "endowment effect"?

Look at it this way - if you didn't own your current home, would you buy it as a rental at its current price and at the current financing terms?


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## nest egg (23 May 2017)

Sarenco said:


> Have you considered the possibility that you might be suffering from what behavioural psychologists call the "endowment effect"?
> 
> Look at it this way - if you didn't own your current home, would you buy it as a rental at its current price and at the current financing terms?



Whether we're suffering from an emotional bias is by definition not an answer we can give impartially 
From our perspective, all of this may be premature, let's not rush and make the decision right now, we can continue to weigh up the pros and cons during the mortgage application, and the result may just answer the question for us.


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## Sarenco (23 May 2017)

mojoask said:


> Whether we're suffering from an emotional bias is by definition not an answer we can give impartially



Touché!

I think you get my point though - if you didn't own your home would you buy it today as a rental?  It's really just another way of framing the same question.


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## nest egg (7 Nov 2017)

Often you don't hear how these things worked out so thought I'd provide an update... 

We thought long and hard about it, but ultimately decided the cons of being a landlord outweighed the pros.  What did we do instead? We opted to buy a larger/better house that meets our immediate and future needs.  We got a little more for our old house than initially estimated, and we liquidated some assets.  Net result is that we have a mortgage of 450k over 30 years, on a house valued at 730k.  Whether this is the best decision to build wealth, we do not know, but we are happy with the decision and delighted with our new place.


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## Brendan Burgess (7 Nov 2017)

Hi mojask

Thanks for the update. You are right, a lot of people don't tell us their final decision and how it turned out. 



mojoask said:


> Net result is that we have a mortgage of 450k over 30 years, on a house valued at 730k.



This gives you an LTV of 62%.  Did you consider realising a few more assets to bring the LTV below 60% which is where the best deals usually are? 

I presume you were not moving a tracker? 

Which lender did you go for and what deal did you get? 

Keep all your paperwork as it's quite likely that you would benefit from switching to another lender in the next few months.

Brendan


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## nest egg (7 Nov 2017)

Brendan Burgess said:


> Hi mojask
> 
> Thanks for the update. You are right, a lot of people don't tell us their final decision and how it turned out.
> 
> ...



Yes we did, but as we're with BOI fixed for a year, the rate wouldn't have changed had we gone <60%. Will look at the market in 12 months' time and see what BOI can do, or what others can offer.


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## Brendan Burgess (7 Nov 2017)

Hi mojoask

No need to wait for a year. 

It is unlikely that there will be any break fee if you break out early.  

So if there is a better deal elsewhere, then go for it - obviously checking the break fee first. 

As a matter of interest, did BoI give you 2% cash back on the mortgage? 

Brendan


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## nest egg (7 Nov 2017)

Yes, was an influencing factor in going with them. Would have thought the breakage costs would be prohibitive?


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## Brendan Burgess (7 Nov 2017)

mojoask said:


> Would have thought the breakage costs would be prohibitive?



* It may be much cheaper than you think to break out of a fixed rate early...*


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## nest egg (7 Nov 2017)

Interesting, seems crazy at one level that banks operate cashback offers when breakage costs have been curtailed.


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## Firefly (7 Nov 2017)

mojoask said:


> Often you don't hear how these things worked out so thought I'd provide an update...
> 
> We thought long and hard about it, but ultimately decided the cons of being a landlord outweighed the pros.  What did we do instead? We opted to buy a larger/better house that meets our immediate and future needs.  We got a little more for our old house than initially estimated, and we liquidated some assets.  Net result is that we have a mortgage of 450k over 30 years, on a house valued at 730k.  Whether this is the best decision to build wealth, we do not know, but we are happy with the decision and delighted with our new place.



Good stuff. Being happy is more important than building wealth IMO. Enjoy the house now!!


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