Monthly expenses too much - should I sell my rental property

Thanks again for the replies.
To be honest, I was a bit disheartened with the advice to sell up and take the profit.
If I sell the house now, there is absolutely no possibility of buying again in a few years time.
If I sell it, then that's it - i.e. the end of my property speculation for the foreseeable future.

This thread has definitely helped to clarify my thoughts on my financial situation.
I have always thought of my property as a long term investment, and I wasn't going to sell it unless absolutely forced to.
So, I'm going to go with Brendan's advice i.e. keep the house for the moment, run down my 10k savings,
and reassess the situation in 6 months time.

I'm not 100% sure it's the right option but it's the one with which I feel most comfortable at the moment.

Thanks again to everyone who responded.

James

PS - To Aileen2 (who suggested cutting down on my monthly expenses), I'm afraid that's not really possible.
We rarely go out, don't spend money on clothes, holidays, restaurants, drink etc. On top of our loans, it's just
the rising cost of living that squeezes us i.e. food, gas, Esb, car maintenance, etc.

You're biggest exposure here is that almost all of your assets are in the Irish Residential Property sector which is NOT stable right now.

You are also highly leveraged meaning that a high percentage of the value of these properties is being financed by borrowing.

From what I can deduce above, your properties are worth between 800 - 900 K and your loans are 550 - 600. In a hypothetical situation of the market dropping 30%, you are wiped out (no equity whatsoever)

In a different time period I would agree with Brendan that to borrow to fund a short poeriod of low income is perfectly ok. In this stage of the Irish property market life cycle I would advise you to sell up your investment property as soon as possible.

I dont know if the property market will rise or fall. Nobody really can tell you that. All I can tell you is that the RISK is high and you should make some effort to reduce the risk.

I hope this helps

Brendan said:

Property is a long term investment and temporary cash-flow difficulties should not be given excessive weight. You can't just sell now and buy back again in two years when your temporary problems are over.

Click to expand...

It's not the temporary cashflow difficulties that are the problem so much as the abysmal yield on his investment. Why would you make such an extreme sacrifice as to obliterate your entire savings for an investment with such a poor return? Nor is the OP in a comfortable enough financial position to be able to handle a sustained period of vacancy, difficult tenants, major repairs, increased interest rates, dropping rents etc. He's barely keeping his head above water as it stands.

If I was leveraged to an historically underperforming (as measured against the asset class of shares) illiquid asset, which was returning just over 2% gross yield and costing me money every month to the extent that I was considering running down my life savings to meet the carrying costs for the next six months, I would be thankful if I could still get out with my shirt intact, nevermind at a profit.

But that's just me. Sell while you can, not when you have to - that's my advice.

Brendan said:

I don't think that the three previous posts should be so categorical.

Property is a long term investment and temporary cash-flow difficulties should not be given excessive weight. ...

Click to expand...

If you assume its a temporary problem. I don't see low yield (in the current market) being a temporary problem, and creche fees and cost of children isn't a temporary cost either. Unless theres a good expectation of income rising substantially, (above increases in costs/expenses childcare etc) There is a shortfall that isn't going to be met by anything. Especially with a young family it would be prudent to have some reserves. Expect the unexpected.

That said you could put all your eggs in the one basket (property) and hope it comes off. How long would you have to "get by" for though? 5 yrs 10yrs?

Here we have

a) High level of leverage
b) Single asset class ( irish residential property)
c) low savings, low cash cushion
d) Illiquid assets ( it could take 6 months to liquidate)
d) Assumption that banks will always lend against residential property

If Irish property market goes south then risk management at banks may make things alot tougher to get equity out.

I think this OP is probably in better position than most but it shows how much a single asset class has been a leveraged gamble. Provided job secutiry is good and rental prospects good then keeping should work.

Property is a long term investment which is another way of saying you only pay back interest the first 5 years so long term job security is important

I would be in agreement with Maine here. Investment is all about spreading your risk. Investment is about using your head and not your heart. And while I can see Brendan's point, indicators on the Irish property market don't look good in the short to medium term.
Of course none of us can predict the future. Only thing I'd say is go with your head. €60k in the bank is going to earn you more interest than your current yield.

James

Will you edit your original post and give the full information. I am guessing that it is something like this:

Home: €500
Mortgage: €250
Equity: €250

Investment property: €220k
Loan: €140k
Equity: €80k

rental income before interest and tax: ?
Interest on loan: c. 11k

No one knows what will happen to property prices. There is, of course, a risk that propery may fall by 30%. In time, property will rise again.

Let's assume that you don't sell, and that property falls by 30%. That will be irrelevant to you as long as you don't have to sell. If your income is sufficient when your wife returns to salaried employment, then you won't have to sell.

Is 390k borrowing against property of 720k too highly leveraged? Probably not given that you will have two salaries coming in.

If you had a family home worth €500k with a €250k mortgage would I advise you to buy an investment property now? No, I would not. But I would not advise that you should change your long term financial strategy now because of a short-term, planned for, cash-flow deficit.

brendan

That assumes nothing unexpected happens in the meanwhile requiring funds, and there isn't a fall in income for either party in the future.

[

quote=James123;463969]Thanks again for the replies.
To be honest, I was a bit disheartened with the advice to sell up and take the profit.
If I sell the house now, there is absolutely no possibility of buying again in a few years time.
If I sell it, then that's it - i.e. the end of my property speculation for the foreseeable future.

Click to expand...

My advice to you James is to think where financially you will be in say 10 years. As you know property prices go up in value and down in value. If you can ride out the storm using some of the good advice giving in this tread then i would recommend keeping the property investment.

Property investment should always be looked at as a 20 year investment IMO

Brendan said:

James

No one knows what will happen to property prices. There is, of course, a risk that propery may fall by 30%. In time, property will rise again.

Click to expand...

Re: the above - it seems to me absurd to use as an argument that in the long run things will be rosie. How can you stipulate with such certainty that property will rise again without expressing your opinion on what will be the inflation adjusted rise? Never mind how long before it does rise?

The fact is the OP is over-exposed, has severe cash flow problems, and even with a return to work of his wife is sailing very close to the abyss.

I think the OP is being a bit casual with the reality of his situation.

I'm with Brendan on this one. Keep the rental property. You have to look at the bigger/long term picture. Ride out the storm.
I appreciate that you feel your monthly budget is at it's lowest -we don't go out, buy clothes, holiday etc, You can I'm sure still save some money.
Ensure all lights/appliances are switched off when not in use -teach the kids to turn things off, switch to energy efficient bulbs, bring lunches to work, refill water from the tap instead of buying bottled water, stop buying newspapers, don't buy processed foods as they are more expensive, etc etc the list is endless, but savings can always be made.
Good luck with it all.

James, You said in your original post that your wife was a teacher. I know it is very hard work looking after two small children but perhaps it would be possible for her to give grinds to help with the cash flow. My daughter has a grind and it costs €35 euros per hour. Just a suggestion.
Summer

James,
Do not assume that you will easily refinance your mortgages when the fixed term ends or that any lender will allow you to top up your mortgage to pay off your loans. Lenders are becoming more risk adverse. You already have had the experience of your bank manager saying no. Because of the problems in the US the whole mortgage securitisation business is slowing. The pension funds etc that used to buy this stuff are now much less willing. This means the banks have to keep it on their own books which will lead to much stricter lending criteria.
Make sure and check what your payments will be when the fixed term ends. No one knows where IR will be but for safety I would factor in another half point rise.
If a real credit squeeze develops the only thing that will count will be your ability to service your existing loans. The equity in your property will count for nothing.
I side with those who advise selling and clearing your loans
Best wishes

BTW " temporary cash-flow difficulties" are usual cause of foreclosure.

I have edited my original post (see end of post) with more detailed information on my mortgages.

Thanks again to everybody for responding. I also appreciate the cost cutting advice.

James

James123 said:

Investment property: €210k
Loan: €130k
Equity: €80k

rental income before interest and tax: 10k p.a.
Interest on loan: (not sure what this means; however, the interest paid in 2006 on my investment mortgage was €5300)

Click to expand...

This investment is paying its way at the moment. You are getting a rental yield of 5% which is as good as you would get if you put the money in a financial institution on deposit. Or it's what you would save by selling it and paying off your mortgage.

Put it another way, if you sold the property and paid the €60k off your mortgage, you would be no better off in cash flow terms.

You would have less exposure to the property market which means than you would not lose out by any fall, or gain from any rise, in property prices.

It surprises me that you were refused a remortgage. Go back to the bank a few months ahead of when your fixed rate period ends. If they don't give you a remortgage, go to a mortgage broker.

Brendan

you don't say what you work at, if you can't survive on one wage now what would happen if you were jobless? in this climate its not an unrealistic notion I think you either have to drastically assess your lifestyle or give up the rental property having made a nice profit, because children only get more expensive as they go on and you would seem to be just firefighting every time something happens to threaten your income, like a childs illness, crashed car etc.

Hi James,

You have rec'd some lots of good arguments on the pros and cons. Personally I feel that property is a long term investment, 10 years plus and if you look at the history of housing in Ireland, the trend has always been upwards, not to mention that you are increasing your equity every year. That aside, have you approached your bank about a moratorium either on your personal dwelling house or your invesment property? I used to work in a bank some years ago (ptsb actually which I think you mentioned as being one of your lenders) and from what I can remember (although don't quote me on it, I am open to correction), you can take a moratorium, even if your mortgage is fixed. This would mean that you don't pay the monthly instalment or the interest (there used to be a minimum payment of Eur1 each month, this may still be the case), but you would naturally have to maintain your insurances. You say that your bank manager is very supportive of your request for the extra 30k so he could add weight to your request for a payment break for 12 months (which I think is the max. period). You should explain your situtation in detail by letter, that your wife has taken a career break to care for your small children but will be returning within the year. From experience it sounds like one of the most likely cases in which a payment break would be granted. You would want to bear in mind though, that the repayments including interest which you should have been making will be capitalised on the outstanding balance of your mortage at the end of the term of your moratorium.
Best of luck with your decision

Thanks again for everybody's comments. As I already mentioned, I am going to try and hold onto the property. I see it as a long term investment also. I will approach one or both banks in the near future, and try and persuade them to help me out until my wife returns to work.
In case anybody is interested in how it all works out, I will update this thread at some point in the future.

James

James123 said:

In case anybody is interested in how it all works out, I will update this thread at some point in the future.

Click to expand...

The very best of luck, I hope everything works out for the better. Yes, if it is not inconvenient do please provide updates with how you're getting on.

Have you considered selling Irish property and buying property in fast growing area abroad eg: Berlin, Poland, China? You could sell Irish property - clear exisiting mortgage and buy rental property abroad. This not only clears your mortgage payments on Irish property but would also provide a rental income (albeit maybe not that much) as the new property would have no mortgage.

Just one more option!