rent out or sell up?

Ah I'm even more confused than I was before
Although it's great to get different opinions! Thanks to all contributors. We will just keep saving either way but maybe go into the bank & see what we are eligible for etc - No harm in checking
Watch this space!
 
That is a very good way of looking at it.

Would you take out a 100% mortgage at SVR to buy an investment property?

I think that most people would say no.

Brendan
 

Do you think if we hadn't had the crash, or the bubble, that the ratio would be better. Put another way, people who invested in property in the seventies/eighties rather than the ninties/noughties would reduce the disaster stories. I don't until the crash recall many people going bust/bankrupt. It seems like a pandemic really.
 
I don't think that people borrowed 100% for buying investment properties in the 70s and 80s. If the OP borrows 80%, it's fairly risky. Brendan
 
Brendan Burgess said:
That is a very good way of looking at it.

Would you take out a 100% mortgage at SVR to buy an investment property?

I think that most people would say no.

Brendan
Click to expand...

I don't think that's a fair comparison.

The question is, would you borrow at 3.1% to get an after-tax return of circa 6% when you've strong income and reasonable LTVs?
 
Hi Gordon

I really think your projected after-tax yield of 6% is overly optimistic. Using Brendan's figures, it looks more like a projected after-tax yield of ~4.5% to me.

Would you exchange a guaranteed yield of 3.5% for a risky yield of ~4.5%? I wouldn't.

I might be prepared to exchange a guaranteed yield of 3.1% for a risky yield of ~4.5% but only if:- (a) I had a significant cash reserve to address possible tenant defaults, etc.; and (b) I had sufficiently strong cash flow to comfortably fund my lifestyle and to make maximum use of all tax deferred pension vehicles.
 
Let's try and get a handle on the net yield;

- Gross rent is €1,500 a month, so €18,000.

- Vacant periods and bad tenants are a red herring unless one is in the rackman game; I canvassed 10 landlords today (including myself) and not one of us has ever had a bad tenant or a single vacant month within the last four years.

- Capital allowances for what will remain there furniture/equipment-wise: estimate €1,000 per year.

- Mortgage protection: estimate €300 per year.

- Repairs: estimate €1,000 a year (that's on the high side based on my family's experience with our properties).

- Interest: estimate €1,500 a year.

€18,000
(€ 4,000)

€14,000 taxable

So, €7,000 tax

€18,000 - €7,000 - €1,500 - €1,000 - €300 = €8,000

€8,000 / €140,000 = 6% after-tax yield

This is an extraordinarily good investment held by a financially strong couple; it should not be sold as there is sufficient free cash flow to fund pensions and build cash reserves. There is no return without risk and hiding under the proverbial bed is as much of a road to penury in the current environment as reckless investing.
 
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That is the clearest explanation so far (for me personally!)

Thanks a LOT Gordon. That is really helpful. I think we are leaning towards saving, saving, saving and building up that deposit so we can pay off a bigger deposit. That way, the next mortgage need not be ridiculous either. What I have learned from this thread is the importance of LTV etc. and keeping it small. I hope to keep it below 3.5, in fact if I have my way it will be between 2 and 3 and no more. It's a serious austerity measure in this house for the next 2 years and then we will see what we can do. Low risk, clever savings. If it was ever too risky we would be the first to jump ship. That's why we never took a huge mortgage to begin with, even though we were offered a lot more. Sincere thanks to all!!!!!
 
Hi Gordon

I was recently talking to an acquaintance whose tenant has been now been over-holding for almost 18 months following the (legal) termination of the tenancy, without her receiving a single cent in rent.

She is currently waiting for the Sheriff to execute on an eviction order that was granted around three months ago. The relevant property is in a "good" area and the tenant is a mid-level public servant.

It happens.

Bear in mind that we have had stretched supply and relatively low unemployment over last four years - in sharp contrast with the position over the previous four years. Naturally voids and over-holding periods tend to rise during recessions.

If you don't want to "reserve" for voids and/or over-holding periods that's fine - but you should then acknowledge that your projected yields are relatively optimistic.

I don't see any provision for letting or managing agent fees in your calculations. If you want to take on this job yourself that's obviously fine but you should still account for your time (unless you work for free).

I don't agree that €1,000 per annum is on the high side for maintenance and repairs on a €300k property.

LPT/RTB registration fees/house and landlord insurance premiums/travel/advertising/accounting? They all add up...

Wouldn't HollyHobby's marginal tax rate be 52%?

All of the above points might sound very nit-picky but I think Brendan's worked example (which gets you to a net, after-tax, yield of around 4.5%) looks far more realistic.

So, would you borrow at 3.1% for a yield of 4.5% - or even 6% - without a significant cash reserve to deal with an over-holding tenant (or some other unanticipated event)?

I wouldn't.
 
A landlord's "business" does not operate in a vacuum. HollyHobby should build up a cash reserve in any event to cover all manner of emergencies.

A bad tenancy can happen, but surely you're willing to concede that it's extremely rare? In addition, such risk can be mitigated in the current market by being extremely choosy; the last time I assisted with a vacancy, there were around 40 potential tenants, at least 15 of whom one could reasonably deem "zero risk".

One's own time is a complete red herring; someone who's choosing their own stocks doesn't stick down a few hours on a timesheet. But in any event, an agent's time would be tax deductible, and my guy charges me around €1,300 a year, so call it €650 if you like, which reduces the yield to 5.5%.

A PRTB fee is what, €90 and it's a one off; it is not worthy of mention.

LPT on a €300 property is miniscule.

And pointing out that the marginal rate might be 52% when I've deliberately used 50% is unnecessary nitpicking.

We're now at the point where my "dilemma" is to borrow at 3.1% for a virtually guaranteed return of 5% (at worst) with the potential for reasonable capital appreciation over time. I'd take that all day, but make sure to use my €30k a year of free cash flow to build up a cash reserve and maximise my pension contributions.
 
@HollyHobby

Trust me you don't need to feel too sorry for this particular lady - she is very well off!

My main point is really that the property rental business - like any other business - is risky.

We all have to take risks in life. But I choose to take the minimum amount of financial risk that I think I can get away with in order to reach my financial goals, without compromising my chosen lifestyle or values.

You only get one spin on this merry go 'round...
 
I do think that the sizeable equity in the property gives HollyHobby greater optionality. If, for whatever reason, the landlord gig doesn't work out, there is always the option to sell the property. If the LTV was 80-90%, the analysis would probably be diferent.
 
@Gordon Gekko

Yep, I agree that maintaining a sufficient cash reserve is critical in the property rental business. The problem is that HollyHobby will exhaust her cash reserves if she buys a new property without cashing out her home equity. That's unduly risky in my opinion.

No, unfortunately bad tenants are not "exceptionally rare". Uncommon, perhaps, but not exceptionally rare.

No such thing as a "zero risk" tenant - people (or their dependants) get sick, lose their jobs, etc. Sure the risk of getting a bad tenant can be mitigated with appropriate vetting but it can never be entirely discounted.

No, the RTB registration fee is not a one off. Yes, it is modest. So is LPT. So are insurance premiums. So are advertising costs. Etc., etc. But add them all up and they become material.

An additional 2% of tax? Well, I'd consider that material.

I notice you are still ignoring the costs of actually managing the property. That's typically 10% of the annual rent if you outsource the job or your own time costs if you decide to self-manage.

An annual net, after-tax return of 5% is not even remotely guaranteed! C'mon - guaranteed? Very possible certainly. Maybe even probable. But guaranteed?
 
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Sarenco,

You seem to delight in debating semantics and nitpicking...

- "Bad tenants are uncommon, not exceptionally rare." They are exceptionally rare, Sarenco. According to the PRTB, there are 325,000 tenancies in Ireland, with circa 3,000 where there's a problem. Less than 1% of all tenancies; i.e. 99% of all tenancies are fine. I think it's safe to say that bad tenants are "exceptionally rare" given the stats.

- With regard to risk, saying that it can never be entirely discounted is a truism; in a world where 30-50 people try to rent each vacant property and a landlord has his/her choice of tenant, the risks are minimal, especially against a backdrop where there's a 1/100 chance of getting a bad tenant.

- The PRTB fee of €45 (after tax) is a one-off in relation to a tenancy and is utterly immaterial. LPT on a €300k property is also immaterial.

- Nitpicking over whether the tax rate is 52% or 50% is quite frankly appalling in the context of a discussion such as this; it is immaterial and to suggest otherwise is bizarre. And in any event, the "€50k spouse" won't have a marginal rate of 52%, so your nitpicking isn't even accurate.

With regard to time input, one doesn't charge one's self for other services (e.g. doing a tax return or painting a shed). A share investor doesn't notionally bill himself or herself for time spent reading the FT or a broker report. You're just clutching at straws to reduce the yield and support a flawed argument.

Finally, I note that you are misrepresenting what I said in terms of any guarantee. I did not say it was "guaranteed"...I said it was "virtually guaranteed". Not an unfair description of a world where a landlord has his/her pick of 40 tenants, interest rates are on the floor, and rents are sky-high.
 
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Sorry Gordon but bad tenants are not exceptionally rare. Far from it.

There are any number of reports on this forum about bad tenants - here's a particulaly recent one -
https://www.askaboutmoney.com/threads/dilemma-with-tenant.203660/

Check out the adjudication reports on the RTB website if you think there's a self-selection bias on this forum.

Bad tenants may not be the norm but they are far from exceptionally rare.

The risk of getting a "bad" tenant can certainly be minimised or reduced (are you objecting to the word mitigated?) but cannot be prevented or checked entirely. A tenant can have a great job one day and lose hs job the next - it happens. To suggest otherwise seems odd to me.

Again, a series of modest (nit picky if you prefer) expenses, together with an additional 2% tax rate, in combination become material.

Sorry but what's a "€50k spouse"?

Why wouldn't you account for your time for doing a tax return relating a rental? Or painting a rental? Or otherwise maintaining or managing a rental property? You're a tax professional, do you not value your time? I know I certainly value my time.

I don't agree that I'm clutching at straws to justify anything. I just think your projections are overly optimistic and you are not properly accounting for all costs. You are obviously free to disagree.

Again, I wouldn't borrow @3.1% for a yield of 6% (your projected yield) without an appropriate cash reserve at the start of the tenancy.

I think it is too risky to do otherwise. That's my opinion. Again, you are free to take a different view..
 
Sorry I've just noticed the edits to your previous post.

To be frank, I wouldn't take RTB statistics as "proof" of the small proportion of bad tenants. In most cases that I am familiar with, landlords deal with bad tenants without going anywhere near the RTB.

And, no, I don't mean they send around the heavy squad!

In any event, I would note that the number of complaints to the RTB by landlords of rent arrears/over-holding increased by 50% in 2016. Do you think this will reduce in view of Minster Coceney's nutty rent control legislation?

http://www.irishtimes.com/news/soci...ing-to-vacate-homes-at-end-of-lease-1.3028790
 
- There are 335,000 tenancies and less than 1% of those are in dispute with the PRTB. Under 1% is "exceptionally rare" in anyone's book.

- The salaries in this case are €80k and €50k; the "€50k spouse" wouldn't have a marginal rate of 52% on the basis that the higher USC rate only kicks in at €70k. The marginal rate is not 52% in this case.

- Yes, given the dynamic in the rental market, I would borrow at 3.1% to earn an after-tax return of 5-6% (plus potential capital appreciation which carries a partial tax shelter).
 
- According to that linked IT article, there were 325,372 tenancies registered with the RTB at the end of 2016 with 4,837 dispute adjudications in 2016. By my maths that's more than than 1%. In any event, not all disputes between landlords and tenants are referred to the RTB - the majority aren't in my experience.

- Ah, I see. I assumed they would be assessed jointly.

- I would definitely borrow @3.1% for a risk-free, after-tax return of 5-6%. But this return is not risk-free. I might also borrow @3.1% for an expected, but not guaranteed, after-tax return of 5-6% if I had sufficient cash reserves to address any issues that might arise and I had a sufficiently strong cash-flow to maximise all tax-deferred pension contributions.
 
Hi Gordon

Are you not making one huge error in your calculations?

You are judging the property in isolation, so you are calculating the interest cost at €1,500.

If I could borrow €300k to buy a €300k property at €1,500 a year, I would do so.

By porting the mortgage to a new home, he will
Save €140k (equity) at 3.5%
and €160k (tracker) at 1.5% (The difference between 3.5% and 2% interest charged on the tracker ported)

So the true interest cost of holding this investment is €7,300 (€140k@3.5% and €160k @1.5%).

Which is why the table is a much better way of looking at these issues than discussing yield. So I have adjusted the table to reflect your figures, which are not that different from mine, especially after tax.



This property is costing him to keep it. The yield is negative.

In summary
Gross rent with no voids: €18,000
Less your estimate of costs: €2,300
Less additional interest:€8,900
Less tax paid: €8,500
= - €1,700


Brendan
 
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