Sell or Rent out property

S

socks1

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Hi, any advice much appreciated..

I own a house in North Co Dublin
I am hoping to make a move to the country side rural location as soon as possible.

I’m wondering do I keep my house and rent it out then rent somewhere in the country side for a few years to pay off mortgage.
Or should I sell now and buy in the countryside.

Around 15 years left on mortgage
Current Mortgage : €800 per month
Potential Rental Income: €2500 per month

Property value around 350k at present.

Thanks!
 

Key Post - Keep property as Rental or Sell?

Updated May 2020 The question regularly comes up on AAM whether somebody should keep an apartment that their family has outgrown as a rental or whether they should just sell up. Borrowers often run projections on the anticipated rental income from an apartment with a cheap tracker and conclude...
www.askaboutmoney.com
There are several other existing threads on this issue that may contain useful information. E.g.:

 
In the other threads, the question was for someone who could trade up and keep their existing home.

@socks1 I assume that you can't afford to buy a place in the country and keep your home as an investment?

The first question I would ask is how sure are you that you are going to settle in to the countryside and not return to Dublin?

If there is a risk that the new location or new job might not work out, then it would be safer to hold onto your home and rent until you see how things are working out.
 
If and when you are sure you are not moving back to Dublin, then you should sell your house in Dublin and buy a new one in the country.

Keeping and renting is a bad idea because:
  1. You will be taxed on the rent you receive - so probably €30,000 @50% = €15,000 and you will get only €1,000 rent tax credit for the rent you pay.
  2. As the home in Dublin will no longer be your Principal Private Residence, it will become liable to Capital Gains Tax after a year renting out.
  3. And all politicians are increasingly anti-landlord and it's a possibility that if you rent it and then try to sell it, you might have difficulty getting the tenant out or you might be obliged to sell it with the tenant in situ, which will greatly devalue it.
If you sell and buy a new home, it will be your PPR and so any gain will be exempt from CGT.

Brendan
 
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Brendan Burgess said:
€15,000 and you will get only €1,000 rent tax credit for the rent you pay.
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Agree, but you can write off expenses b4 calculating the tax you pay, like mortgage interest, insurance, any repairs on house, etc etc
In fairness, even if he does make 15k a year after paying tax, mortgage is 9600 a year, thats still a profit of 5,400 a year.. not bad eh, plus tenants paying off the mortgage :)

BUT a big concern of mine is potentially not being able to sell without tenants in situ.. if that comes in were done for!
Still havent decided whether Im gonna sell mine this year or not, based solely on the above..

I wonder if they do decide you to implement such a law, would you have time to sell before it comes into effect? or is this something that they could introduce overnight?
 
colin44 said:
Agree, but you can write off expenses b4 calculating the tax you pay, like mortgage interest, insurance, any repairs on house, etc etc
In fairness, even if he does make 15k a year after paying tax, mortgage is 9600 a year, thats still a profit of 5,400 a year.. not bad eh, plus tenants paying off the mortgage :)
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We don't have enough information but it looks as if he will not be making €15k a year after expenses and tax.

Rental income: €30k
Interest - we don't know, but let's say - €8k - if he has a €200k mortgage.
other expenses : €4k
Profit before tax €18k
Profit after tax €9k

But if he sells the house, he will have maybe €150k to reduce his new mortgage by, and will save about €6k interest.

So the profit after tax by keeping it is more like €3k.

Definitely not worth the risk.
 
Brendan Burgess said:
Profit after tax €9k
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Little confused, you say profit after tax is 9k, but then you say profit by keeping it is 3k? Which is it?
**Ah now I get it, 9-6 = 3 :)

You are also forgetting that he is also paying off the mortgage, at the end he will have an asset worth 350k..

So thats 9k each year, plus at the end he has an asset worth 350k! Not bad hey - makes sense.

If I sold mine now, Id be up for loosing about 60k or so in the next 10 years, assuming my tenants continue to pay, that no stupid law comes in that prevents me from selling etc :)
 
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colin44 said:
You are also forgetting that he is also paying off the mortgage, at the end he will have an asset worth 350k..
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That is not the right way to think about it but it is a very common mistake of confusing income and expenditure with capital repayments.

The right way is to compare the income and expenditure of one option with the income and expenditure of the other option.

An easier way to grasp this is to consider if both loans were interest only. Then you would not conclude that "at the end he will have an asset worth €350k"

Or another way of looking at it is that the capital he is repaying on his investment property by "paying off his mortgage" he could also pay off his home so he would end up owning his home earlier.
 
He will own his property quicker, but he will only have 1 property
If he didnt sell his property then at the end he would have 2?

In the long run (which is what investment is all about), he is way better off keeping rental?

Not sure what your point is, are you saying anybody with a rental property and primary residence (both with mortgages) is better of selling the rental to pay off primary mortgage? everyone renting out is just loosing money?

Am I missing something here?
 
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colin44 said:
Agree, but you can write off expenses b4 calculating the tax you pay, like mortgage interest, insurance, any repairs on house, etc etc
In fairness, even if he does make 15k a year after paying tax, mortgage is 9600 a year, thats still a profit of 5,400 a year.. not bad eh, plus tenants paying off the mortgage :)

BUT a big concern of mine is potentially not being able to sell without tenants in situ.. if that comes in were done for!
Still havent decided whether Im gonna sell mine this year or not, based solely on the above..

I wonder if they do decide you to implement such a law, would you have time to sell before it comes into effect? or is this something that they could introduce overnight?
Click to expand...
Sure you can write off expenses but you have to pay out expenses.
You pay out say 2k for repairs. You claim back the 2k and roughly get half your 2k back.
 
KOW said:
Sure you can write off expenses but you have to pay out expenses.
You pay out say 2k for repairs. You claim back the 2k and roughly get half your 2k back.
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Yes you do, but the bottom line is is he is still making a profit on the rental..
 
colin44 said:
Not sure what your point is
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I am just pointing out that your argument that he is better off keeping it because he will have a mortgage-free property at the end of it is incorrect reasoning. The capital repayments are simply not a factor

It's quite hard to explain but I will try by exaggerating the issues.

Case 1
Let's say that your bank offers you a 100% mortgage to buy an investment property.
So you borrow €300k to buy a property worth €300k.
You agree to repay capital of €30k each year for 10 years - just to keep it simple.
The interest rate is 20% or €60k in the first year.
The rent is €20k a year.

By your reasoning, this is a fine investment as he will own the property after 10 years!

Case 2
The bank gives you a €300k mortgage to buy a €300k property. This time it is interest only and so at the end of the 10 years, you still owe €300k.
The rent is €30k a year.
The interest is 3% so about €9k a year.

By your reasoning, this is a terrible investment, because he does not own the property at the end of 10 years.


Conclusion
The capital repayments should be ignored in deciding whether to keep or sell a property.
Look at the rental profit after tax - is it a profitable investment.
After that consider the other issues
  • The potential capital appreciation
  • The work involved in managing a property
  • The potential interference in the market by politicians
 
So back to the original question.

If he sells his current home and invests the net proceeds he may well have the equivalent of a property at the end of the term.
 
Brendan Burgess said:
I am just pointing out that your argument that he is better off keeping it because he will have a property at the end of it is incorrect reasoning.

It's quite hard to explain but I will try by exaggerating the issues.

Case 1
Let's say that your bank offers you a 100% mortgage to buy an investment property.
So you borrow €300k to buy a property worth €300k.
You agree to repay capital of €30k each year for 10 years - just to keep it simple.
The interest rate is 20% or €60k in the first year.
The rent is €20k a year.

By your reasoning, this is a fine investment as he will own the property after 10 years!

Case 2
The bank gives you a €300k mortgage to buy a €300k property. This time it is interest only and so at the end of the 10 years, you still owe €300k.
The rent is €30k a year.
The interest is 3% so about €9k a year.

By your reasoning, this is a terrible investment, because he does not own the property at the end of 10 years.
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Your assuming they are all investment properties and assuming 100% borrowed.
Most ppl with rental properties are just by chance, it was their PPR for years, they moved on and bought a new house and was able to keep the old as rental / investment - like myself
I have just realised that the OP has just the one property :)

Anyway, the above 2 options are not good.. but their are plenty of ppl out with the 2 properties with 2 mortgages that are way better off if they keep rental..
 
Brendan Burgess said:
Hi Colin

I am simply pointing out that including the capital repayments on the mortgage is irrelevant to the decision.

Brendan
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I still dont understand why, your missing out on a big nest egg when you retire, of course it should be a part of the decision.
If I sell mine now, Im missng out on 60k plus taking into consideration CGT, cost of selling etc..
I apprecaite in some circumstances it is not worth it, but it still has to be a consideration?
 
Brendan Burgess said:
This is simply wrong. I have tried to explain it three times. Maybe someone else can explain it better than I can.
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It MUST form part of the decision, taking everything into consideration you could make money on it, especially since property prices have been going up for years..
If sell now and get 250, or sell in 10 years and get 350, you cant go wrong.. I know thats simplistic and alot can go wrong, or extremely well...but the same could be said for any investment... therefore must be part of decision.
Completely ignoring it is wrong IMO
 
Let me try a different tack.

People will often argue that buying a home is better than renting because at the end of 20 years, you own the house with no mortgage.

It is usually correct to say that buying a home is better than renting but not for the reason given.

The reason is that renting money is usually cheaper than renting property.

Say the cost of renting a €300k house is €24k a year.
And the interest on a €300k mortgage would be €12k a year.

Buying a house is better than renting a house because €12k is less than €24k.

Some people took out interest only mortgages at the peak and they ended up owing the full mortgage after 20 years because they had not made any capital repayments. That did not mean that they were no better off buying than renting. They were still much better off.
 
colin44 said:
You are also forgetting that he is also paying off the mortgage, at the end he will have an asset worth 350k..
Click to expand...

So this is wrong.

If the bank switched it from a repayment mortgage to an interest-only mortgage, it wouldn't make it either a better or worse investment.

In fact, if the interest rates are similar, a person is much better off paying down their home loan than the loan on their investment property, because they get tax relief on the loan on the investment property.
 
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