Rent & Rent query with a twist

Hi I was thinking of renting out my 3 bed duplex in order to rent a new house which is in a area my family would like to live. However I'm looking at rental prices and it looks like I'd get a better rental yeild on a 2 bed apartment. So I am thinking of selling my 3 bed duplex and buying a 2 bed apartment to rent this out while renting somewhere else myself!

Value of my Duplex is €140,000, annual rent is €14,400, yeild 10%
Value of 2 bed apartment €85,000, annual rent is €10,800, yield 12.7%

I would also clear my negititive equity (currently owe €190,000 on mortgage) downgrading to the 2 bed apartment.

I know there are charges and hasstle with this however this appears to make sense to me. Appericate any thoughts. Thanks, Docker.

Sorry but Your plan is full of holes.

You own a 3 bed Duplex worth €140K with a mortgage of €190K. You want to sell it and buy an apartment work €85K.

Are you aware that in order to do this, you will have to clear the €50K neg equity in cash and reapply for a mortgage to buy the €85K apartment and have an 8/10% deposit?

huskerdu said:

Sorry but Your plan is full of holes.

You own a 3 bed Duplex worth €140K with a mortgage of €190K. You want to sell it and buy an apartment work €85K.

Are you aware that in order to do this, you will have to clear the €50K neg equity in cash and reapply for a mortgage to buy the €85K apartment and have an 8/10% deposit?

Click to expand...

BOI have offered me a negitive equity mortgage but this was originally for an upgrade on a house. I have €50,000 in savings I could use if needed. Also I could save for a new months for the deposit on the apartemnt if BOI don't offer the negitive equity mortage on a downgrade.

BOI will have to agree to give this neg equity mortgage for a downgrade to an apartment, instead of an upgrade to a house (When they offered it, was it for a PPR house, not an investment property ?)

You are moving away from my query - which was wheather it's a good idea instead of renting out my 3 bed to replace it with a 2 bed apartment because of the better rental yield? Appericate any advice on this query. Thanks,

No-one can guess the answer, as there is not enough information.

I dont think the percentage yield is a relevant piece of information at all in your situation. THe actual numbers of the mortgage debt, the monthly payment and the rent are the real numbers to focus on.

You need to work out the financial projections for both scenarios. Take into consideration the interest you currently earn on the €50k which you will lose if you use this money.

Scenario 1 :
Total mortgage debt = X
Monthly Mortgage payment = Y
Rent = 1200

Scenario 2 : you buy and rent a 2 bed apartment
Total mortgage debt = Z
Monthly Mortgage payment = W
Rent = 900

Other questions for you to think about,

Also, are 2 bed apartments in your area renting more or less strongly than the 3 bed. Which is more likely to attract tenants ?

Also,my last post is not off the point, The whole plan hinges on the BOI agreeing to it. The fact that they have agreed to a negf equity mortgage for you to move to a house, does not mean that they will approve a mortgage for this plan,

Hi docker

Let's untangle this a bit. I suspect that you feel that it would be wrong to do this,but can't figure out exactly why?

First question - should you rent out your existing duplex or sell it?
The value is €140k
The rent on this is €14,400
What is the interest rate? If you are on a tracker, you are paying around 2% interest or €3k on the €140k value of the property. This is hugely profitable and so you should rent it out.

Even if you are on SVR of 4.8%, the €140k is costing you around €7,000 a year, so it's still very profitable.

You probably have around €60k in CGT losses on this. That means that any increase in the value of the property from €140k to €200k will be free of CGT. A very valuable consideration.

You know the property, its strengths and weaknesses so that must be worth something.

But would you not be better selling it and buying a house where you want to live?
If the rental yield is 10%, you will be paying a very large amount of rent. You would be a lot better off buying the new place rather than renting it. Even if you have a tracker, this probably holds true.

You will pay less in interest than you will pay in rent for a similar property.
You won't have any of the hassles of being a tenant.
You won't have any of the hassles and risks of being a landlord.
Any increase in value in your principal private residence is free of CGT.

The switch to an apartment is a distraction
I doubt if BoI would give you the approval anyway.
It would not be just rental yields, but also the future direction of prices. Presumably you expect capital gains. These will be taxed at 35% on the apartment and nil on the first €60k on the house.

But the key question is whether you should buy a house or rent it. Focus on that and the rest of the questions will be easier to answer.

All in all, I think you should sell the duplex and buy a new property.

Am I right in thinking that the 3 bed duplex is your PPR? And that the bank approved a neg equity mortgage to trade up to another PPR ?
If so, how sure can you be that they will allow the purchase of an investment property, even at a lower price instead? Banks don't seem to be interested in this segment at present.

Hi, thanks for all the replies. More information as requested.

1. The 3 Bed duplex is my PPR on fixed 4.6% reverting to a variable end 2014.
2. 190K mortgage with current value of 140K, leaving 50K negative equity.
3. Cash savings 50K.
4. BOI have approved upgrade negative equity mortgage on a new house valued 200K. The new mortgage would be for 220K using my savings to clear the balance of negative equity (30K).
5. I can rent a much nicer house where I'd like to live than I can buy. For example a great house is renting for €1,200 monthly. The sale price of the same house is 250K.
6. I can rent my 3 duplex for the same rent, €1,200 monthly however it only has a sale value of 140K.

In summary my original plan was to sell and buy. However I can get a much better house if I rent. More importantly it seems I can get a very good rental return on my duplex given its value. Then I noticed a better rental return for a 2 bed apartment. However due to Brendan’s note on possible future capital gains tax I’m shying away from the 2 bed apartment option.

Please let me know any additional thoughts, thanks again.