Buy 2nd house as rental or pay off mortgage?

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flyingfolly

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We have 25 years left on our mortgage (175k) and are in a position to potential pay it off in full next year when we are out of our fixed rate. Between us we earn around 120k and have a 3 year old toddler. Saving around 30k-40k per year currently.

However, an opportunity has come up to buy a 2nd house at the moment for 185k and we could get it if we take a loan for 30k out now and use our 145k we have in cash.

There are two options here:

1. Pay off our current mortgage in full next year but never have access to that money (approx 175k) again without selling our home or remortgaging
2. Buy 2nd property using current cash reserves and get a 5 year loan for 30k. Rental income would be 1100 per month which would cover 200% of monthly the repayments on 5 year loan. After 5 years we would have asset worth 185k which also pays out around 13k before tax and expenses (I understand a lot will come out of this in costs/taxes/expenses)

Its obviously more risky to purchase a second house, but I have good earnings and savings levels and personally I'd rather have an asset in 5 years that could be sold at a later date.

A few other points:
- The house is in a great location (close to hospital, schools, city) and very good value at 185k (furnished to a very high level)
- I am 34 and have 150k in executive pension fund with additional 20k-50k paid in each year
- Our existing mortgage repayments are 870 per month at 3.85%. Next year we can renew at lower fixed rate to get payments to around 800 per month.
- Wife is unemployed/stay at home mother so could look after all rental issues

Curious what people think?
 
Paying off the PPR mortgage would save you €6,738 in interest (€175k @3.85%).

You are projecting a gross rental income of €13,200. Less expenses of, say, €2,000 gives you a net rental profit of €11,200. Taxed at 52%, that leaves you with €5,376.

Paying off the PPR mortgage will give you a higher annual return.
 
Pay off the homeloan and become debt free.

If you continue to earn a good income in the years to come, you can invest at will, but if something goes badly wrong and you lose your income, the family home is protected.

BTLs are not a good investment option at this stage, IMHO. High capital cost, yields are low and potential for loss of income if a tenant leaves, heavy tax burden, and there is likely to be work involved in maintaining the BTL, getting new tenants from time to time etc.
 
MrEarl said:
but if something goes badly wrong and you lose your income, the family home is protected.
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Unless the family home is given as security for a BTL loan, there is no additional chance t lose it. That is not the case under the OPs suggestion.

MrEarl said:
BTLs are not a good investment option at this stage, IMHO. High capital cost, yields are low and potential for loss of income if a tenant leaves, heavy tax burden, and there is likely to be work involved in maintaining the BTL, getting new tenants from time to time etc.
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Yields are much higher than from almost any other investment, and high by historical comparisons.

The tax burden is the same as in any other investment,( except the non deductibility of the Property Tax, but that is not a major item)
 
[QUOTE
There are two options here:

1. Pay off our current mortgage in full next year but never have access to that money (approx 175k) again without selling our home or remortgaging
[/QUOTE]

If you are saving 30-40 k a year, you will have that money back in six years or kess?.
 
Currently selling an apartment we rented out for a few years, I would not get into property again unless doing it fully managed (which means little to no additional cash flow from it, just paying off the mortgage and building an asset) or as a part time job and buying 5+ properties. Ours was modern, in good condition, tenants were great and I’m into DIY so no problem doing bits that came up.

It’s just not worth the work and risk (of bad tenants etc) for the small bit more you might make compared to sticking the money in the stock market imho.
 
Sarenco said:
Would you be comfortable buying the rental in your wife's name alone?

If she has no other income, the net rental profit would be largely tax-free.
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How is this? I presume they are jointly assessed (if not) they are losing money every year. So I don't see how putting it in the wife's sole name facilitates that.
 
Sarenco said:
Would you be comfortable buying the rental in your wife's name alone?

If she has no other income, the net rental profit would be largely tax-free.
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Does it have to be in her name alone? Can they not just decide, that she gets the rental income?
 
Sarenco said:
Paying off the PPR mortgage would save you €6,738 in interest (€175k @3.85%).

You are projecting a gross rental income of €13,200. Less expenses of, say, €2,000 gives you a net rental profit of €11,200. Taxed at 52%, that leaves you with €5,376.

Paying off the PPR mortgage will give you a higher annual return.
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Bolding mine!

5,376/175000 = 3%, i.e. buying house better if you get PPR at less than 3%

You are not allowing anything for potential of capital appreciation/inflation on the asset?
 
audioflaps said:
We have 25 years left on our mortgage (175k) and are in a position to potential pay it off in full next year when we are out of our fixed rate. Between us we earn around 120k and have a 3 year old toddler. Saving around 30k-40k per year currently.

However, an opportunity has come up to buy a 2nd house at the moment for 185k and we could get it if we take a loan for 30k out now and use our 145k we have in cash.

There are two options here:

1. Pay off our current mortgage in full next year but never have access to that money (approx 175k) again without selling our home or remortgaging
2. Buy 2nd property using current cash reserves and get a 5 year loan for 30k. Rental income would be 1100 per month which would cover 200% of monthly the repayments on 5 year loan. After 5 years we would have asset worth 185k which also pays out around 13k before tax and expenses (I understand a lot will come out of this in costs/taxes/expenses)

Its obviously more risky to purchase a second house, but I have good earnings and savings levels and personally I'd rather have an asset in 5 years that could be sold at a later date.

A few other points:
- The house is in a great location (close to hospital, schools, city) and very good value at 185k (furnished to a very high level)
- I am 34 and have 150k in executive pension fund with additional 20k-50k paid in each year
- Our existing mortgage repayments are 870 per month at 3.85%. Next year we can renew at lower fixed rate to get payments to around 800 per month.
- Wife is unemployed/stay at home mother so could look after all rental issues

Curious what people think?
Click to expand...

Assuming the outlook for your future earning potentia stays goodl, and your ability to find another job at that pay (if you lost your job), then this doesn't sound very high risk for you. Worst case you have a terrible tenant, who doesn't pay, doesn't leave and wrecks the house. But you will have enough cash in a few years to pay off the mortgage.

If you buy with a loan, I assume it will be a high rate, and rather than waiting 5 years, you should just pay it off with your next years savings.
 
SPC100 said:
5,376/175000 = 3%, i.e. buying house better if you get PPR at less than 3%
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Would the difference adequately compensate the OP for all the risk and hassle involved with running the property rental business?
SPC100 said:
You are not allowing anything for potential of capital appreciation/inflation on the asset?
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That's correct.

Equally, I'm ignoring potential capital losses.
 
Thanks for the replies everyone. To answer some questions

1. Yes this would be in my wife's name so rental income would be taxed at lowest band, resulting in relatively low taxed income
2. My wife has plenty of time on her hands so could handle rental issues (I understand its not super simple, but she would have time). I'm also self employed (as sole trader and ltd company) and flexible on my hours so time isn't an issue (to an extent)
3. Yes we would have another 180k available in a few years time if we continued saving at current rates, but the previous 180k invested would be not available, unless we sold our family home. If we purchased a rental property, if we needed that money, we could simply sell it access to money.
4. Yes the loan for 30k would be relatively high interest, but we'd have enough money each year to pay it off a lot quicker.
5. I'm fairly sure that my income will remain the same. I have 5 different income streams from a range of different businesses and industries and have the artists exemption scheme which gives me my first 50k of income tax free which is very valuable too

I guess my thoughts on it are that once money goes into the mortgage, it never becomes available again. Money put into a rental property does become available again further down the line, for example retiring in 20 years time.

Based on the above, if you were in this position, what would you do?
 
Sarenco said:
Would the difference adequately compensate the OP for all the risk and hassle involved with running the property rental business?

That's correct.

Equally, I'm ignoring potential capital losses.
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Hard to say, I will let you know in 20 years!
 
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