Assessment of Financial Goals with €2m property and 955k Debt

RedOnion said:
I'd tend to agree with @Gordon Gekko

Even stress testing your scenario (sadly I've played around with a few scenarios over the weekend to see when it becomes worrying);
if you convert these to P&I mortgage over 20 years, interest rates increase to 6.5% and a 20% drop in Rent, they're still cash flow positive (after tax). They're the kind of scenarios you need to be looking at so you're not forced into a sale if you can't meet repayments.

But that doesn't get away from the fact that you are highly concentrated in a single asset class.
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I think the OP needs to bear in mind that Irish house prices can fall a lot, but they can only fall so fast. Even at worst it was never really more than 15% per annum. The same goes for rents.

The OP will have plenty of warning if he is going to face cash-flow issues. That said, selling with tenants in situ means a big discount, and giving them notice of termination if you want to sell is now up to six months for long-standing tenancies. The CGT situation is also pertinent.



Personally I think the level of leverage is probably right for the portfolio overall. If I had this amount of net wealth I would diversify I bit though.
 
Rental income: 125k

Interest: 43k


Question: how much time do you allocate weekly or monthly to managing this portfolio?


And when you said you only increase rent when tenants move.... Is that policy to keep them happy?
 
NoRegretsCoyote said:
I think the OP needs to bear in mind that Irish house prices can fall a lot, but they can only fall so fast. Even at worst it was never really more than 15% per annum. The same goes for rents.

The OP will have plenty of warning if he is going to face cash-flow issues. That said, selling with tenants in situ means a big discount, and giving them notice of termination if you want to sell is now up to six months for long-standing tenancies. The CGT situation is also pertinent.



Personally I think the level of leverage is probably right for the portfolio overall. If I had this amount of net wealth I would diversify I bit though.
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I hope your right.
Its not a requirement yet/ confirmed that you have to sell with tenants in situ. I do think if this is enforced someone will dispute this in court.
 
Looking at this afresh, I think if I was in the OP's shoes I would do the following:-
  1. I would sell two of the rentals and bring the aggregate LTV on the rental portfolio as a whole down to 50%. That would have a positive impact on the overall blended cost of credit and would materially reduce the risk profile of the portfolio;
  2. I would keep at least €25k on deposit at all times as a reserve fund to address any unexpected repairs, voids, etc.; and
  3. I would maximise all tax-relieved pension contributions and would the invest the lot in a global equity fund for the time being.
fonduster said:
I have set my pension scheme to 50pc passive equity fund along with another 40pc in a moderate growth fund which also has 50pc equity with a mix of bonds, alternatives etc balancing out the moderate fund. The remaining 10pc is split between actively managed high risk fund and bonds.
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There's really not much point investing in bonds with low yields while carrying debt (effectively a "negative bond") at a much higher interest rate. Also, remember that paying down debt is highly efficient from a tax perspective - there's no point using up valuable tax advantaged space in a pension vehicle when you can achieve a better result elsewhere.
fonduster said:
I would be hoping to refinance my existing portfolio along with saving of circa 160k to buy this final home without selling any of them including my current PPR
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I don't think it's a good idea to re-finance your existing rental portfolio to buy a family home. Just sell your existing home and, if necessary, take out a (low LTV) PPR mortgage to meet the balance.
 
moneymakeover said:
Rental income: 125k

Interest: 43k


Question: how much time do you allocate weekly or monthly to managing this portfolio?


And when you said you only increase rent when tenants move.... Is that policy to keep them happy?
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Its in swings and roundabouts, The only job that is consistent is i log onto my banking app regularly to check if i receive rental income coupled with reviewing expenses etc. One month, i could have a lot of work if a tenant moves out or if something major comes up and other months, i wont have a single call from them.

I have learned through experience that if you charge the absolute top market rate, tenants are more likely to move on quicker. Normally i charge just under market rate so hopefully tenants that are up in the air about moving will stay that bit longer. On top of it the devil you know is better that the devil you dont. As long as i have a good relationship with the tenant, im more reluctant to increase rent. I have increased it for good tenants in the past however as it was too much below market rate however im much slower to do it. On the opposite end of the spectrum, if i have a bad relationship with a tenant or he is calling too much for small things , i have increased to market rate to pay for the extra work they causes and/or hopefully moving them on.


Dust is only starting to settle in 2019 for the quantity of work i have done on my rentals. I dont break my properties down individually like this unless i feel like too much maintenance is being done on one. It might be laziness on my part to not break it down that much as you can more easily identify marigins however all i do is put all current expenses and capital allowances together vs all income.

Bear in mind the figures i present below are subject to change particularly maintenance as i have done a lot over the past 2 years and my rents have increased since last year.

My PAYE tax is already deducted at source through the company i work for, and since my wage is borderline the higher tax bracket, virtually all of my rental income is at the higher rate. My tax bill that i will pay in October is circa 20k. I will also pay another prelim of about 20k for 2019. I always just go for 100pc of previous year. I expect my maintenance costs to go down substantially this year so my tax bill may go up when i review my tax bill for 2019 in 2020.

Costs that are going to be set for me will be mortgage interest circa 42k and block management fees of circa 10k along with tax.
 
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Sarenco said:
Looking at this afresh, I think if I was in the OP's shoes I would do the following:-
  1. I would sell two of the rentals and bring the aggregate LTV on the rental portfolio as a whole down to 50%. That would have a positive impact on the overall blended cost of credit and would materially reduce the risk profile of the portfolio;
  2. I would keep at least €25k on deposit at all times as a reserve fund to address any unexpected repairs, voids, etc.; and
  3. I would maximise all tax-relieved pension contributions and would the invest the lot in a global equity fund for the time being.

There's really not much point investing in bonds with low yields while carrying debt (effectively a "negative bond") at a much higher interest rate. Also, remember that paying down debt is highly efficient from a tax perspective - there's no point using up valuable tax advantaged space in a pension vehicle when you can achieve a better result elsewhere.

I don't think it's a good idea to re-finance your existing rental portfolio to buy a family home. Just sell your existing home and, if necessary, take out a (low LTV) PPR mortgage to meet the balance.
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1. Right now my entire portfolio is less than 50pc gearing including my PPR. Taking the PPR out of it i am around 80k away from 50pc and i will over pay one rental this year by 30k leaving 7 Rentals at 50pc and 1 at 70-80pc ltv. I dont really see the major difference in terms of gearing if i sell other than the fact i will have circa 200k liquid cash.
2. Yes this is something i intend to do after the 30k over payment.
3.Fair point, currently i divided my pension into a few different areas for diversification but personally i think a passive world equity fund would be better. Interested to see other peoples thoughts on this

How can i achieve better results by over paying btl mortgage vs pension. Anything i pay on the mortgage is only costing me 50pc. Are you saying i should stop contributing to pension and divert funds to BTL mortgage?
 
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Do you have a good accountant?

20k tax seems about right amount.

If you pay down the capital the tax could rise and how would you feel giving the taxman more 20k each year?
 
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moneymakeover said:
Do you have a good accountant?

20k tax seems about right tax.

If you pay down the capital the tax could rise and how would you feel giving the taxman more 20k each year?
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Hes fine.

Like everyone, i prefer keeping as much of it for myself as possible. If i pay down the 30k capital, it gives me an extra cashflow of 150 pm. The taxman will get 75, i get 75. Its a net saving of 4.5k over years so i think i will do it. Have not done the calculation for the other rental however i dont think i am in a position to do that given my goals.
 
Is there an optimum debt that creates tax deduction?

It's a question I ask myself

Perhaps in retirement when income low the debt can be cleared
 
fonduster said:
1. Right now my entire portfolio is less than 50pc gearing including my PPR.
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Your PPR is your home, whereas your rental portfolio is your business. I don't think it's wise to confuse the two.

If you sell a couple of rentals you will:-
  1. Reduce the blended cost of credit applicable to your entire rental business;
  2. Reduce the interest rate risk associated with that business;
  3. Give you an appropriate cash reserve to meet any unexpected expenses related to that business; and
  4. Put yourself in a position to buy your "forever house" once you liquidate your home equity.
    fonduster said:
    Are you saying i should stop contributing to pension and divert funds to BTL mortgage?
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    No. I'm saying if I was in your position I would invest the entirety of your pension in global equity fund for the time being. There's no point holding a debt instrument that pays less than 1%, while simultaneously carrying debt that costs over 4%.
That's what I would do in your shoes - you will obviously have to take your own view.
 
My advice to OP is

Pay Capital and Interest, I don't think it's important to focus on the two properties that are more than 50% LTV, could focus on paying down the one that costs the most in interest. No need to sell anything, I'd try to get a better deal with the interest rates by shopping around. If he'd borrowed on one of the properties as his PPR he might have got a better rate there. House drops don't affect him. Interest rates really do though. But he's equity is currently 50% which is excellent. He should stress test himself on C&I of say 2%. Should see which of the properties is performing best versus one that is not to see if it should be offloaded, but I suspect not. Needs to build up a good sum for all rental issues (major work/repairs/voids). I agree with the rental below market strategy. It works. Keep the properties in good nick.

Should pay as much pension in work as possible. He'll be glad he did in decades to come.
 
Marriage

OP didn't ask. But a pre nup might be advisable, unfortunately, or fortunately, in Ireland it's not worth the paper it's written on.
 
fonduster said:
All of these are residential. I had looked into commercial at the time however with the money involved and i had no experience in that area, i decided against it. It took me long enough to understand the legal aspect of residential as well and commercial would take me a long time to get up to speed with.

If the s*** hit the fan similar to the last recession, as a last resort, i could sell my ppr and move into one of my rentals. It wouldnt be my first move however it is there as a backup plan. During the bad times, my current PPR was worth 200k so would be give me circa 3 years cushion.

I do have liability insurance for all of them. i have had to use my solicitor before for them so know i need to protect myself from that aspect. I am not an LTD so the bank can go after all my assets.

Sorry, did quite understand this comment "If there is a significant downward market adjustment on CMVs, are you at risk of invalidating any existing banking covenants such as <50% LTV ratios that currently qualify you for a lower rate for your cost of funds."- do you mind explaining in layman terms.
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My apologies for only getting to respond now...
CMV = Current Market Value.
The question I was asking relates to the interest rate deal you have negotiated with your lending institution and whether the interest rate is based on an LTV threshold that is dependent on market value of each property. If the value of a property was to drop by 50%, does this adversely impact the LTV threshold and give the bank grounds to revise the interest rate being charged.

I would suggest you do not conflate your PPR with your business. They should continue to be treated as mutually exclusive endeavors.

Would you consider putting the question of service income threshold to your accountant to ensure you are not liable for VAT on your rental portfolio. Given the size of the rent roll, it may be deemed by Revenue to be your primary source of income.

My own personal experience with a similar portfolio in terms of value (but not as healthy a rent roll as yours), was that after 20 years with BTLs, we decided last year to exit the Irish BTL market as government policy is too volatile. In my view, BTL is a long term business, but with the volume, severity and impact of regulatory, legal and tax changes over recent years, its impossible to measure the return long term with such a high degree of short term volatility. For us, it simply introduced too much of different types of risk into the BTL business model in Ireland. My view is that a dribble of cash form BLT investors exiting the market has already started to leave Ireland for investment abroad and this will continue to increase to chase less risky yield.
 
Sarenco said:
Your PPR is your home, whereas your rental portfolio is your business. I don't think it's wise to confuse the two.

If you sell a couple of rentals you will:-
  1. Reduce the blended cost of credit applicable to your entire rental business;
  2. Reduce the interest rate risk associated with that business;
  3. Give you an appropriate cash reserve to meet any unexpected expenses related to that business; and
  4. Put yourself in a position to buy your "forever house" once you liquidate your home equity.No. I'm saying if I was in your position I would invest the entirety of your pension in global equity fund for the time being. There's no point holding a debt instrument that pays less than 1%, while simultaneously carrying debt that costs over 4%.
That's what I would do in your shoes - you will obviously have to take your own view.
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I think i include my PPR in the total, as it gives me the ability to leverage this coupled with the fact that banks can put a lean on the property so it is part of my business even if only used for personal use.

These are the two funds that currently have 90pc of the fund. In terms of what they offer, they hold several of the same stuff. The moderate fund is safer with 40pc more alternatives. If you were in my situation with circa 30 years left on the pension, would you just go 50/50 with two of these or focus more on the passive equities fund.

https://www.ilim.com/fund-fact-shee...Fund_Fact_Sheets/+++-Moderate_Growth_Fund.pdf

https://www.ilim.com/fund-fact-shee...+++-Indexed_All_Country_World_Equity_Fund.pdf

Dont quite understand this:
"
There's no point holding a debt instrument that pays less than 1%, while simultaneously carrying debt that costs over 4%.
"
Do you mind explaining this further. What is my debt instrument with a yeild of 1pc.
 
Bronte said:
My advice to OP is

Pay Capital and Interest, I don't think it's important to focus on the two properties that are more than 50% LTV, could focus on paying down the one that costs the most in interest. No need to sell anything, I'd try to get a better deal with the interest rates by shopping around. If he'd borrowed on one of the properties as his PPR he might have got a better rate there. House drops don't affect him. Interest rates really do though. But he's equity is currently 50% which is excellent. He should stress test himself on C&I of say 2%. Should see which of the properties is performing best versus one that is not to see if it should be offloaded, but I suspect not. Needs to build up a good sum for all rental issues (major work/repairs/voids). I agree with the rental below market strategy. It works. Keep the properties in good nick.

Should pay as much pension in work as possible. He'll be glad he did in decades to come.
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I dont think it would have been better to borrow against my PPR. Yes the interest rate on my PPR would be circa 3pc however when you account for the fact that i expense BTl rates, it is really only costing me half the rate they are charging so about 2.4pc at my current highest rate.
 
Alistair said:
My apologies for only getting to respond now...
CMV = Current Market Value.
The question I was asking relates to the interest rate deal you have negotiated with your lending institution and whether the interest rate is based on an LTV threshold that is dependent on market value of each property. If the value of a property was to drop by 50%, does this adversely impact the LTV threshold and give the bank grounds to revise the interest rate being charged.

I would suggest you do not conflate your PPR with your business. They should continue to be treated as mutually exclusive endeavors.

Would you consider putting the question of service income threshold to your accountant to ensure you are not liable for VAT on your rental portfolio. Given the size of the rent roll, it may be deemed by Revenue to be your primary source of income.

My own personal experience with a similar portfolio in terms of value (but not as healthy a rent roll as yours), was that after 20 years with BTLs, we decided last year to exit the Irish BTL market as government policy is too volatile. In my view, BTL is a long term business, but with the volume, severity and impact of regulatory, legal and tax changes over recent years, its impossible to measure the return long term with such a high degree of short term volatility. For us, it simply introduced too much of different types of risk into the BTL business model in Ireland. My view is that a dribble of cash form BLT investors exiting the market has already started to leave Ireland for investment abroad and this will continue to increase to chase less risky yield.
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Alistair said:
My apologies for only getting to respond now...
CMV = Current Market Value.
The question I was asking relates to the interest rate deal you have negotiated with your lending institution and whether the interest rate is based on an LTV threshold that is dependent on market value of each property. If the value of a property was to drop by 50%, does this adversely impact the LTV threshold and give the bank grounds to revise the interest rate being charged.

I would suggest you do not conflate your PPR with your business. They should continue to be treated as mutually exclusive endeavors.

Would you consider putting the question of service income threshold to your accountant to ensure you are not liable for VAT on your rental portfolio. Given the size of the rent roll, it may be deemed by Revenue to be your primary source of income.

My own personal experience with a similar portfolio in terms of value (but not as healthy a rent roll as yours), was that after 20 years with BTLs, we decided last year to exit the Irish BTL market as government policy is too volatile. In my view, BTL is a long term business, but with the volume, severity and impact of regulatory, legal and tax changes over recent years, its impossible to measure the return long term with such a high degree of short term volatility. For us, it simply introduced too much of different types of risk into the BTL business model in Ireland. My view is that a dribble of cash form BLT investors exiting the market has already started to leave Ireland for investment abroad and this will continue to increase to chase less risky yield.
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LTV is per property, not portfolio. In theory, they could revalue the property and increase the interest rate again however i have not heard of banks doing this. Normally once you have the rate at a certain rate and your paying your bills. the bank is happy.

Good questions in relations to service income threshold. Rental income is unreckonable unearned income so i would have thought this would fall outside the realms of service/goods. I will reach their threshold this year if it is however this in effect would mean ill pay another 17k in tax before i even make it to paying 50pc in tax. Edit: just found the following from revenue: "The letting of a property is exempt from Value-Added Tax (VAT)"

Your right, i have already noticed this. On the other end of the spectrum, i have noticed that rental prices are still continuing to increase even though houses prices have plateaued.
 
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fonduster said:
LTV is per property, not portfolio. In theory, they could revalue the property and increase the interest rate again however i have not heard of banks doing this.
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Its common in commercial mortgages. In fact you'll often see covenants that could put you in default if they are breached. Probably not on RIPs.

fonduster said:
Hmm interesting, that is something i didnt think of. Has this been done before and is it allowable?
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Yep.
This is why you need a good accountant...
fonduster said:
Hes fine.

Like everyone, i prefer keeping as much of it for myself as possible.
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"For interest to be deductible under section 97, it is not necessary for the loan to be
secured on the premises in question. For example, in the case of interest on a loan
that is secured on an individual’s principal private residence and used for the
purchase, improvement or repair of a rented premises, the interest is deductible
under section 97 in the normal manner. "
https://www.revenue.ie/en/tax-profe...ains-tax-corporation-tax/part-04/04-08-06.pdf
 
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