Sell or continue renting investment property

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dave2015

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Hi
Hoping for some assistance or advice on a decision on whether to sell or continue renting an investment property. Like many people never planned on being a landlord but ended up as one through the property bust. I'll try outline as many of applicable facts as possible. I'm ignoring what I paid for property back in 2007 as part of decision, purely based on what its worth now, what I owe and the rental income.

House-3 bed end of terrace in Dublin commuter belt, currently valued in 230k-250k region.
Mortgage- 228k (tracker with AIB, 28 years left, monthly payment approx 840)
Rent- 1,000 p/m (if i decide to keep I can likely increase to 1,150 easily, held off any increase in last year until I decide as long standing good tenants)
Net Loss annually is roughly 3k (main expense is tax as very little interest to currently deduct from income and other expenses/capital deduction not huge.) If i increased rent to 1,150 this would come down to about 2k.

I'm in lucky position I can afford to cover annual loss and can continue to do so all things staying the same. If i was to sell and take mid value I will clear mortgage, cover expenses (legal, estate agent, basic renovations pre sale etc) and come out even or a couple of grand up. And if lucky to get high end all the better, could pay lump off home mortgage which is more recent and currently 4%. I had always thought once i got to that situation I would sell as its a bit of hassle having it. Also considering interest rates will eventually go up, might not always have good tenants, house getting to stage where will need some investment to modernise, appliances breaking etc. etc.

But part of me is now saying I should keep as investment. I have a good pension pot for my age but maybe no harm to have this as longer term investment. Even at annual loss of few grand, equity is increasing annually at faster rate as mortatge paid down and if factor in even gradual increases in price it seems to make more and more sense. So looking at annual loss more as annual investment I guess. I'm mid 30's can afford to take on some risk.

That was much longer post than planned, appreciate any advice offered, been going over and back on decision for few weeks now, conscious of compounding original error of buying at top of market.

Thanks
 
You are making a profit on this investment rather than a loss. Capital repayments on your mortgage should not be regarded as an expense. Element of expense is your interest which deducted from your rent (actual int rate not stated) should still leave you with ample surplus to cover other expenses from gross RI of 12k pa. Holding on to this property (if you can afford it) is a no brainer!!
 
Thanks Brendan. Take your point on the capital piece, I was probably coming at it from a cash flow stand point where more goes out than comes in on annual basis. Sell now and dont have to commit any more cash to it or hold and hope value holds/increases or RI goes up further to realize increased equity in future or keep as LT income stream.
 
If you sell now you will lose the benefit of the tracker mortgage. I.e. you are currently enjoying a very low cost of funding your property investment which due to this is giving you a reasonable return. The only logical reason to sell at this time would be if you are unable to meet the repayments! Alternatively you may take the view that the risk of a future reduction in the price of the property is high and would therefore close off this risk by selling the property now.
 

I wouldn't agree that holding on to the rental property in these circumstances is a "no brainer", I actually think it's a very close call either way.

Gross RI of 12k pa on a property with a value of 240k equates to a gross yield of 5%. Allowing 25% for all costs and expenses (actual and imputed), before financing costs and income tax, gives a net yield of 4%. You could buy shares in a REIT, which is a far more diversified and liquid investment, with a trailing dividend yield of 3.5% so the rental does not look like a screaming "hold" to me on a comparative basis.

I take the point that the tracker rate obviously means that the financing costs are low but you also have to take account of the fact that 25% of the interest payments on the rental, and the full amount of the LPT payable, are not tax deductible. This can be significant for a higher rate tax payer.

While you could certainly make an argument for retaining the rental property, if I was in the OP's position I would liquidate the investment and apply any equity and/or additional cash flow against the PDH mortgage for a guaranteed, commission and tax free return of 4%.
 
I agree with 44brendan that keeping it would be the smart move.

Selling up will result in you 'coming out even or a couple of grand up'. The suggestion above regarding a REIT would result in very little income on such a low investment.

If you had no mortgage, the figures quoted by Sarenco make sense - the yield would be too low to justify the effort involved. However, you have a tracker mortgage and capital invested (based on your current personal balance sheet) of only a few thousand. The return is significant when you look at it this way.

Consider if you sell the property invest the few thousand excess (say 3k) in a REIT and achieve an overall return of 10% p/a - which is being overly optimistic. Having this invested for the 28 year term remaining on your mortgage would result in an investment of about 40k.

Keeping the current investment property would result in you having to continue subsidising the 2k p/a but this would reduce as inflation results in rent increases over the years. At the end, you'd be left with a mortgage free house currently valued at 230k-250k (and likely a lot more at that time) as opposed to a 40k investment in a REIT.
 
Thanks folks.
Ronaldo agree with your assessment if just 3k initial sum invested in REIT but if I assume I will be committing 3k annually to the house (cover unoccupied periods, interest rate inceases etc.) and put that in a REIT returning 3.5% annually probably looking at closer to 150k lump sum after 28 years. Still short of what would hope house is valued at but much closer. Tax is a factor in that assessment I guess, presume i'd pay tax on any REIT (not sure, only other invesments held are pension) returns whereas I bought house for close to 300k so no CGT unless it appreciated above that level.
 
Your thinking is coming around to somewhere close to mine.

You mention that, by charging market rent, your shortfall would be 2k per year. This is likely to reduce to nothing after a few years and, eventually, you'd be making a profit after all expenses and tax (rent increases will come at some point over the 28 years - and probably sooner rather than later).

However, let's assume the 2k shortfall remains - your 3k initial lump sum and 2k per annum would increase to 95k after 28 years at an annual growth rate of 3.5%. 38k of this 95k would be growth, with the rest coming from contributions.

Of cource, the REIT may increase by more than 3.5% per year but, if this were to happen, one would expect a signficant increase in the investment property value too.

One added point - whilst I still think keeping the investment property is the correct move, if you sell it, you'll have 50k - 70k in CGT losses to carry forward against future gains so you should look at future investments bearing in mind the signficant allowances available to you.
 

I think the concepts of capital and cash-flow are getting confused.

The point I was making is that capital should be invested in whatever asset produces the highest risk-adjusted expected return, after tax and costs. On the figures above, it seems to me that using whatever capital is available (i.e. equity released from the rental property and freed up additional cash-flow) to pay down the mortgage on your PDH will produce the highest risk-adjusted, after-tax, net return on your capital.

I certainly agree that cheap leverage (i.e. your tracker) potentially means that retaining your rental property will indeed produce the best long term result. However, this is down to leverage - not because the underlying asset produces the best yield (after costs and tax). Leverage obviously juices capital gains but it also exaggerates capital losses. House prices could take another tumble but your loans will still need to be paid back. On the cash-flow side, interest rates and/or costs/taxes may rise while rents may stagnate or fall. Leverage, particularly cheap leverage, can be very seductive but there is no getting away from the fact that it sharply increases the risk inherent in any investment. Would you borrow money, however cheaply, to invest in the stock market?

My reason for bringing up the current yield on a REIT (or an index fund that tracks the return of multiple REITs) was simply to point out that a net yield of 4% (before financing costs and income tax) on a rental property is pretty unspectacular when you consider the highly concentrated and illiquid nature of a single rental property. Personally, I would want to achieve a gross yield of 6% at an absolute minimum before I would even consider investing in (or continuing to hold) any single rental property to adequately compensate for the additional risk over and above a more diversified and liquid investment.
 
dave2015 said:
Like many people never planned on being a landlord but ended up as one through the property bust.

currently valued in 230k-250k region.
Mortgage- 228k (tracker with AIB, 28 years left, monthly payment approx 840)
Click to expand...
Imagine the bank called in the morning and offered to double down: A 100% mortgage (same rate) on an identical buy-to-let house at the far end of the terrace.
What's your gut reaction?

While we're daydreaming, lets also imagine you get a 3k-after-tax raise. I don't want cash-flow considerations poisoning my lovely analogy.
 
Starting from scratch (and without leverage) the REIT strategy makes sense.

However, your funding cost in relation to the apartment make it an especially attractive proposition.
 
Trasneoir-definitely wouldn't take on more debt, have enough exposure to future interest rate hikes & property. Also been generally lucky with tenants, full occupancy, pay on time etc. lightening rarely strikes twice.

I'm going to keep for now, increased rent to 1,100 and ill sit tight and see how it fares. Tenants have indicated they'll likely move on in 2-3 years so might be good time to re-assess. If prices maintain even a gradual increase might be a good time to get out before serious modernisation/repair required. At least then ill potentially have a decent lump sum I can invest elsewhere or paydown home mortgage with.
The rationale of costing 2k to create 6k extra equity annually (at static prices) won me over.
Thanks for advice all.
 

Thanks for coming back to us and the very best of luck with your decision.

It sounds like you have made a realistic assessment of the potential rewards of continuing with your leveraged property investment and your ability to take on the risks involved.

Edited to add:

Incidentally, increasing the rent to €1,100 per month brings you very close to a 6% gross yield on a €230k valuation. I personally regard a 6% gross yield as the minimum where I would consider acquiring a rental property but given the fact that you have already eaten the acquisition costs you are probably at the same place in retaining the property.
 
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