Considering selling an investment apartment....

1. Brendan, I hope this is the correct forum. Please move, if not.

2. I'm looking for opinions, NOT financial advice. I know where to get that. Thanks.

We have a principle private residence, which is where we live, and an apartment, which we let.

When we moved from the apartment (which had been our PPR) 10 years ago, into the house, we began letting the apartment immediately.

Having taken financial advice at the time, we split our STV mortgage into two for tax reasons.

We now owe (approximately) €60k on the apartment and €120k on our house.

The apartment makes €1100 per month. As of June this year, we could probably get €1200 for it.

We clear about €700-800 on this.

If we sold the apartment, it would probably make about €250k.

My feeling is that the market is a bit frothy, and now might be a good time to sell.

Obviously, there is Capital Gains Tax to consider. (I have posted about this elsewhere)

Any views?

Thanks.

D.

I don't understand the tax advice about splitting the mortgage ?

What does frothy mean? We can't discuss house prices, it's you who has to make up your mind that it's a good time or not.

The advice given at the time was that; since we would be paying tax on the rental income, and since there was still a mortgage outstanding on the apartment, it would be worth leaving some of that mortage in place to mitigate the rental income tax bill.

By frothy, I simply mean over-priced.

Thanks for the reply.

D.

Dinarius said:

2. I'm looking for opinions, NOT financial advice. I know where to get that. Thanks

Click to expand...

Opinions on what?? Only non-financial issue in your post is whether to sell apt now or wait until later. As per Bronte's response we cannot comment on house prices! Either way a decision when to sell is based on both your own circumstances and your perception of general house price movement. If history has taught us anything it should have taught us that there are no experts on future movements in house prices!!

I didn't ask for ANY opinion on house prices. On the contrary, I stated, quite categorically, what I expect our apartment to fetch.

I guess it's really a tax question, or a question about a scenario that many buy-to-let investors must have faced.

So, I suppose I'm looking for experiences more than opinions.

Thanks for the reply.

D.

I too thought you were asking whether it was a good time to sell. That I don't know. I'm aiming for the top of the market myself since I've failed spectacularly at that, like many another my advice would be pointless. Best time to sell is now for me, the best time that suits you. Having factored in everything.

Tell us more about the split mortgage. If you transferred some of the PPR mortgage, now your investment, onto your new PPR then the interest on that would be tax deductable for rental. But it would have been silly to put it in the new property as it would have been better to leave it as it was?

What are you going to do with the money you make? How about all the figures and ideas, you know the score by now ! If you've come up with any money making scheme that is better than rental I'm all ears.

Owing about €180k, as we do, if we made €250 on the apartment, and (worst case scenario) paid 33% CGT on all of it, we would all but clear our outstanding debt. But, factors such as its time as our PPR should reduce this further.

So, I guess it's still a tax question; if, for instance, I was to take the view that the value of the apartment was to remain unchanged for 5 years, and rental income was to remain the same, is it better to sell and clear the debt, or retain the status quo?

Thanks.

D.

You're really making this difficult, you didn't even tell us how much you bought it for !

Purchase price
Purchase costs
Sale price
Sale costs
= profit X 33% less personal deduction, is how much you're left with. BUT....

Subtract mortgage then and looks like not much I'm thinking.

Financially you have 2 factors to consider in making this decision:

1. Potential for a change in value of your core asset. In line with your own post on the basis of you being satisfied with nil change in value over the 5 year period this can be factored out of the decision. However it remains a risk factor and should be acknowledged as such in your final decision. You should also consider the risk of changes in CGT rates etc in that period.
2. Positives/negatives of continuing to rent out the property for 5 years. Exclude capital payments to the loan in making this decision and focus on your net RI from the property. If you are enjoying a good tracker rate on the mortgage then the net profits should be considerably better than an SVR loan. Also sustainability of tenants and rental income need to be factored in. Good tenants prepared for a long term stay with limited downward fluctuation in RI would be a positive factor. If your projection shows you coming out ahead in terms of a reasonable net income from the property over the 5 year period after factoring in the above issues then you should hold on to the property. Only tax issue to consider is that element you will pay on the net RI.

At a high level, it sounds like you're gross annual return is around 6% and your net annual return is around 4% (although that depends what you mean by "clearing €800 a month").

In isolation, I personally would not sell. But what interest rate applies to both mortgages? Clearing your home mortgage would generate a guaranteed return. Also, will you need to move house? And what other assets do you own? Your asset base is probably very concentrated (all Irish property).

To be honest, I thought twice about posting in this thread. Maybe something was lost in translation, but I found your opening post a little rude and dismissive.

I too am confused, but here is how I would approach the question.You will need to put in the right figures yourself



So you are making €5,000 on €190k - certainly not enough to justify the work and the risk involved. (Especially if you think that the market is frothy)

If you paid €50k for the apartment 20 years ago...
You have a gain of €200k
You used it as your PPR for 10 years, so
The gain subject to CGT is €100k
The CGT bill will be in the order of €30k

So you are getting a return of €5,000 on a net investment of €160k. Still not enough of a return to justify the risk.

For example, if you have a non-tracker mortgage on your house, you could get a return of around 3.5% by paying off that mortgage.

You already have an exposure to the property market in your family home, so by investing in another property, you are concentrating your risk, rather than diversifying it.

You should check the tax advice you got, as it's often wrong in these cases.

I don't understand what "We split our STV mortgage" means

You get tax relief on mortgage interest on the money borrowed to buy the investment. What it is secured on is not relevant.
If you had a mortgage of €200k and "split" some of it onto your family home, it would not matter. Although I don't know how you can split a mortgage.

You might specify exactly what you did and tell me what an "STV mortgage" is.

Brendan

Fully agree with Gordon's analysis - taken in isolation, the rental apartment is neither a screaming hold nor a screaming sell based on the very limited information provided. Beyond that it's impossible to offer any meaningful advice without knowing more details.

Thanks for all the great replies and the opinions - very much appreciated.

Firstly, on the issue of STV, I'm obviously suffering from a severe case of election-itis! Of course I meant SVR mortgage.

Secondly, we are paying the same 3.65% on both properties - reduced from 3.75% in December.

Thirdly, in the case of both properties, the outstanding loans would be considerably less than 50% of current market value.

In addition, the apartment always lets on first day of viewing - that's the kind of area it's in.

I guess, at the very least, we should be negotiating a better % rate?

Thanks again.

D.

In that case I think you should sell the rental and apply the net proceeds, less a provision for any CGT liability, to discharge (or substantially pay down) the mortgage on your PPR.

As things stand, again based on the limited details provided, you appear to be assuming a considerable investment risk for a negligible reward.