I've a rented house that's 10 years into a 35 year mortgage. Cheap tracker of 1.1%. Owe 170k and house worth about 165k. Current rental income of 12k per annum. Income tax and expenses etc of on average 4k per year. I'm wondering does it make more financial sense to sell the property or continue to rent it as an investment. Thanks.
Sell an investment property with a cheap tracker?
- Thread starter cjoy2011
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On the basis of what you state here you have a nett 3% return approximately on the value of the house. You have a cheap tracker. House value may go up or down. Have you another need for the money.
What is your appetite for being a landlord.
Your tax and expenses appear quite low at 4K.
I am also assuming your Mortgage interest is not included in the 4k.
What is your appetite for being a landlord.
Your tax and expenses appear quite low at 4K.
I am also assuming your Mortgage interest is not included in the 4k.
If you have a good tenant and the house is in a good letting area I would on balance say to keep it. You have a very good tracker and you are getting very poor rates for deposits and this is likely to be the case for the next couple of years at least.
The tracker is what makes it profitable otherwise I would say sell it.
Other posters may think different. I am no expert on equities as an alternative.
Have you another property?.
A lot will depend on yourself and your circumstances.
The tracker is what makes it profitable otherwise I would say sell it.
Other posters may think different. I am no expert on equities as an alternative.
Have you another property?.
A lot will depend on yourself and your circumstances.
Brendan Burgess
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If you sell the property now, you will owe €5,000.
If you keep it, you will make a net profit after tax of around €4,000 a year.
The question for you is whether the amount of work you are doing makes it worth €4,000 a year net. You also have to take a view on whether the property is likely to rise or fall in value. I presume you paid more than €165k for it? Therefore any increase in value up to the price you paid for it will be free of Capital Gains Tax. So it's quite a tax-efficient investment.
With a Loan to Value of 57%, you should not be paying 4% on your home loan. You should be switching to a cheaper lender or you should ask your lender for a better rate.
A few other considerations although I don't think that they really affect the underlying decision.
1) Which lender is it with? It's unlikely but possible that at some stage in the future the loan might be bought by a venture fund who might offer you a deal for early repayment.
2) Did you buy it as an investment property or was it your family home at any stage? If it was your family home, it's possible that your lender might allow you to move your mortgage to a new home if you have any plans for trading up from your current home. I think it's unlikely, but possible.
3) If you have plans to trade up, then you would be better off selling the rental property to reduce your overall lending.
4) At the moment you are paying around €5,000 a year in capital off the rental mortgage. If you sell it, you could use this money to pay down your home loan.
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I'd sell.
On Brendan's figures, the rental is producing a net, after tax, return of around 2.5% per annum (€4k/€165k) and is cash-flow negative to the tune of around €4,400 per annum ((€700 x 12) - €4k). Applying that €4,400 against the mortgage on your PPR would give you a net, after tax return of 4% per annum.
Of course that ignores any possible (tax free) capital appreciation and you definitely shouldn't be paying 4% on your PPR mortgage at an LTV of less than 60%.
On Brendan's figures, the rental is producing a net, after tax, return of around 2.5% per annum (€4k/€165k) and is cash-flow negative to the tune of around €4,400 per annum ((€700 x 12) - €4k). Applying that €4,400 against the mortgage on your PPR would give you a net, after tax return of 4% per annum.
Of course that ignores any possible (tax free) capital appreciation and you definitely shouldn't be paying 4% on your PPR mortgage at an LTV of less than 60%.
That does ignore capital appreciation.
Addressing the potential for capital appreciation in a decision like this is difficult, after all no one can tell the future.
However just because it is difficult does not mean it is not important. It is entirely possible that house will put on €30,000 over the next year. It probably did increase in value by about that much in 2014.
The OPs view on that question should really be the basis for the decision. The rental return while positive is marginal.
Addressing the potential for capital appreciation in a decision like this is difficult, after all no one can tell the future.
However just because it is difficult does not mean it is not important. It is entirely possible that house will put on €30,000 over the next year. It probably did increase in value by about that much in 2014.
The OPs view on that question should really be the basis for the decision. The rental return while positive is marginal.
True, but it is also possible that the value of the house will drop in value over the coming years.
We know that, over the very long-term, property value increases simply match inflation plus a modest margin and when you allow for the capital expenditure required to maintain the value of a property it's pretty much a wash. That's why I think a long-term property investor should always focus on the rental yield that a property can produce, rather than speculating on future property values.
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Sarenco, do you have a source for the long term trend in property value. My impression was that the long term increase in property values is inflation plus 4%. Unfortunately I don't remember the source of that. I don't think that includes the cost of upkeep which I would see as a more appropriate as a cost against the rental income
Hi Cremeegg
The most famous research is the Herengracht house index, which tracked real property prices on an upmarket residential street along an Amsterdam canal from 1628-2008 (I did say long term!).
Here's a link to a fun video that shows urban house prices in the US (Case Shiller Index) from 1890-2010. It shows that real US house prices rose at an annualised rate of 1% per annum over that period, which I would suggest roughly equates to the annualised capital cost of maintaining a property.
https://m.youtube.com/watch?v=jzaRznPSENk
The most famous research is the Herengracht house index, which tracked real property prices on an upmarket residential street along an Amsterdam canal from 1628-2008 (I did say long term!).
Here's a link to a fun video that shows urban house prices in the US (Case Shiller Index) from 1890-2010. It shows that real US house prices rose at an annualised rate of 1% per annum over that period, which I would suggest roughly equates to the annualised capital cost of maintaining a property.
https://m.youtube.com/watch?v=jzaRznPSENk
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Thanks Sarenco for the reference. I have just looked at a report on that Herengracht house price index. It very impressive in one way. That the price on a single street can be tracked over such a long period.
However I can't help wondering if it actually means anything.
If I bought a house for &100k and sold it 10 years later for &150k that is a profit of 50%. If inflation was 30% over the period, then that is a 20% profit. Here I am using & adjusted for inflation over 10 years as my unit of measurement. That is fairly meaningful.
With a 350 year time span, there is no meaningful unit of measure. I haven't read the actual Herengracht paper, just a report on it (rural broadband, it might be downloaded by tomorrow) but it seems to me that a fixed house on a fixed street might itself be a more meaningful unit of measure than any monetary unit.
My 3 bed semi provided the same living accommodation in 1970 as 1990 as 2010 as I expect it will in 2030. So perhaps the roller coaster price changes tell us more about the change in the value of money than they do about the change in the value of property.
However I can't help wondering if it actually means anything.
If I bought a house for &100k and sold it 10 years later for &150k that is a profit of 50%. If inflation was 30% over the period, then that is a 20% profit. Here I am using & adjusted for inflation over 10 years as my unit of measurement. That is fairly meaningful.
With a 350 year time span, there is no meaningful unit of measure. I haven't read the actual Herengracht paper, just a report on it (rural broadband, it might be downloaded by tomorrow) but it seems to me that a fixed house on a fixed street might itself be a more meaningful unit of measure than any monetary unit.
My 3 bed semi provided the same living accommodation in 1970 as 1990 as 2010 as I expect it will in 2030. So perhaps the roller coaster price changes tell us more about the change in the value of money than they do about the change in the value of property.
Here's a set of slides from Ronan Lyons that references the Herengracht index and includes some useful Irish data that illustrates the same basic point re house price inflation:
http://www.ronanlyons.com/wp-conten...Market-–-Ronan-Lyons-EU-Conference-Galway.pdf
Take a look at the graph showing real Irish house prices between 1975-1995 - they basically went nowhere! It's absolutely true that owning your 3-bed semi saved you having to pay a lot of rent but I'm guessing you had to pay a substantial amount of interest on your mortgage (or at least had to forego interest that you could otherwise have earned if the purchase price had been kept on deposit).
As things turned out, inflation was unusually high between 1975-1995 and this reduced the real value of debt very dramatically over that period. However, nobody expects to see a repeat of that sort of inflation rate in any developed economy in the near term.
http://www.ronanlyons.com/wp-conten...Market-–-Ronan-Lyons-EU-Conference-Galway.pdf
Take a look at the graph showing real Irish house prices between 1975-1995 - they basically went nowhere! It's absolutely true that owning your 3-bed semi saved you having to pay a lot of rent but I'm guessing you had to pay a substantial amount of interest on your mortgage (or at least had to forego interest that you could otherwise have earned if the purchase price had been kept on deposit).
As things turned out, inflation was unusually high between 1975-1995 and this reduced the real value of debt very dramatically over that period. However, nobody expects to see a repeat of that sort of inflation rate in any developed economy in the near term.
My own impression is the same. I've one property that went from it's original price 25 years ago to 8 times it's cost at the absolutely height of the madness and is now over 4 times original price and rising.
I counter my stupidity in not selling with a solicitors advice that he was in the same situation but his wife said if he'd sold he'd only have done some more stupid investing and would be in a worse situation. Anyway you can't always call it right and I'm very glad to have it now to pay for big expenses later in life if necessary.
The OP might do well to think on that.
Yup. I seriously considered selling in 2007, and I would almost certainly have bought bank shares, cause I wouldn't have wanted anything risky.
Yup. I seriously considered selling in 2007, and I would almost certainly have bought bank shares, cause I wouldn't have wanted anything risky.
You made my day. Thanks.
As I was watching from afar and travelling back regularly I used to think where had we gone wrong as everybody seemed to be becoming millionaires overnight. I even had one brother in law tell they would be multi millionaires in a couple of years, they had five cars of varying descriptions for two of them, a business, two properties and it was all built on sand.