Sell up or rent out apartment

[Brendan Burgess]

a) sell up, borrow about €200k and have a total budget to spend on a new house of €650k. This would get us, if not a forever home, a very nice home that would be suitable for 10-15 years in our 'perfect location'.
b) Hang onto the apartment & rent it out. Buy a cheaper home in a nice commuter town near one side of the family (so, longer commutes but handy family support) borrowing about €340k, using the apartment income to service some of the mortgage.

This is so clear that I am struggling to see how there can be any other view.

Forget the finances for a while.

1) You can afford to buy an almost forever home with very little commuting. Why wouldn't you
2) Zenith's post really hit the nail on the head

put the time/mind-share you’ll have to put into managing a rental property into your work and it will likely yield greater returns with much less risk.

Keep your life simple. Live near where you work. Don't be distracted by a part-time job when you are already well paid.

To extend Sarenco's thought experiment a bit further.
If you had a home worth €650k with a €200k mortgage , would you borrow an additional €380k on which you would not get tax relief to buy an apartment for €380k?

I hope it's clear that you should not do so.

As well as keeping things simple, you should also reduce or eliminate risk especially in the very uncertain times we live in. You will have a €650k exposure to the Dublin property market. Do you really think you should be increasing that to over €1m?

This is clear: Sell and buy where you want to live.

Brendan

 

[Thirsty]

"Later ....you can borrow and buy an investment."

Here's the thing though; you have no way of knowing what life will throw at you. For all sorts of reasons borrowing at some distant point in the future may not be possible.

When you have assets, you have options.

The OP has said whatever home they buy won't be the final one.

Rent it out for now; you can always change your mind later.

 

[eb_scoot]

Thanks everyone for your input, I appreciate your advice.

 

[_OkGo_]

When you have assets, you have options

Yes, bad options. The same argument can be used to justify not keeping the apartment. At some unknown point in the future, the OP may not be able to access credit to allow them trade up to their 'forever' home leaving them stuck in a PPR they never really wanted and a rental that is costing them money

Say the OP had a mortgage of €380K on his PPR and €380k of cash on deposit in the bank.

Would you advise the OP to buy a rental for cash that might produce a net, after-tax, rental income of €10k pa or to pay down the PPR mortgage if that saved €10k pa in interest?

Adding to Sarenco's example, would you advise the OP to continue living in the apartment and take out a 340k BTL investment mortgage on the 410k apartment next door (basically the same as option 2)....The asnswer is no. Very likely that the net rental income would not cover the interest on the mortgage so you end up covering that out of salary. Not to mention that a bank wouldn't even give you this type of BTL mortgage without a 30% deposit

Very simple, option 1 all the way. Live where you want in a house you was want with a very reasonable 200k mortgage.

 

[Thirsty]

... bank wouldn't even give you this type of BTL mortgage without a 30% deposit

Exactly my point. This is an unmortgaged property.

Having assets does not give you 'bad' options; unless you happen to be of a religious persuasion that believes all material goods and property are harmful?

 

[_OkGo_]

You are looking at the apartment as an unmortgaged property in isolation. That is not the OPs situation. They would have 790k value in two properties with a 340k mortgage on the PPR. The rental income would barely, if even, cover the interest on the PPR meaning it is a bad use of that capital. It doesn't matter that the debt is not attached to the apt they wouldn't have it if they didn't keep the apt so it's the same thing.

Whatever the religious reference is I don't know but having an asset that is doing nothing for you is a bad option. The OP has a very sensible and better use of that 380k right now by investing in the 650k property that they actually want to live in.

 

[Brendan Burgess]

It doesn't matter that the debt is not attached to the apt they wouldn't have it if they didn't keep the apt so it's the same thing.

This is a very important point which most people miss.

There is no difference between

A) Owning a property worth € 500k with a €400k mortgage on it and a mortgage free property of €400k
and
B) Owning a mortgage free property of €500k and a €400k property with a mortgage of €400k on it.

In both cases, the value of the property is €900k, the mortgage is €400k and the net assets are €500k

It will usually be better to sell the property and end up with a €500k property and no mortgage.

But people assign a mortgage to a property in their head and this leads to incorrect decisions.

I am sure that this is the reason so many people have a property worth €500k with a mortgage of €400k and €100k in the bank. The property and mortgage are in a separate part of their brain from the €100k deposit and they can't seem to get the overall picture.

Brendan

 

[Thirsty]

property worth €500k with a mortgage of €400k and €100k in the bank.

Totally get the point you are making.

But there is another aspect, if in your example here, I took my 100k in the bank and paid it off my mortgage of 400k, I now have a mortgage of 300k; sounds great.

But if you need that 100k in the future for, let's say education costs, you can't be certain that you will be able to borrow that money again.

Having been through a fair range of what life has to throw at a person; I'm inclined to hold rather than sell. It can always be revisited.

as an aside to @_OkGo_ - many Buddhists believe that ownership or desire for material goods/property is what leads to human suffering.

 

[Brendan Burgess]

OK Thirsty

To go back to Sarenco's endowment argument.

Let's say you own a €400k house with no mortgage.

Would you borrow €100k @ 3% to put it on deposit at 0% in case you might need it in the future?

I presume not.

But you could borrow it and invest it in a risky asset such as property or shares. Again, this means that you have it in case you need it.

But the problem is that you have to pay it off over time. And this diminishes your wealth. And you trade off the big risk of a fall in value of the asset against the opportunity of a gain.

If you have a specific need in the near future for spending the money, paying it off would be wrong. But keeping it in case you might need it and might not be able to borrow it is too remote to justify paying the extra.

In the current case, you are dealing with two well paid 36 year olds.
If they sell the investment property, they are going to have the house they want and a small mortgage.
They are savers so they will probably clear the mortgage well ahead of schedule.

What might go wrong? They separate after 5 years. One of them can't get a mortgage on their own salary. In that case, they would be glad that they had kept the apartment. It's easier to split two houses and a mortgage than one house with no mortgage.

Come to think of it, you might have a point...

Brendan

 

[ClubMan]

Another point to consider is that if you keep the apartment to rent out and buy your ideal 10-15 year home then your investment portfolio will be comprised of a single asset/risk class - domestic property in Dublin. In general this would be considered riskier and less advisable than holding a more diversified investment portfolio. Remember, your home is your home but it is also part (often the largest part) of your investment portfolio.

 

[Thirsty]

your investment portfolio will be comprised of a single asset/risk class - domestic property in Dublin

But if you sell appt and put all the proceeds into another house that will also be the case will it not?

 

[_OkGo_]

But there is another aspect, if in your example here, I took my 100k in the bank and paid it off my mortgage of 400k, I now have a mortgage of 300k; sounds great.

But if you need that 100k in the future for, let's say education costs, you can't be certain that you will be able to borrow that money again.

I agree with this statement, if you had teenagers about to go to 3rd level then it makes perfect sense to have cash on hand. But again, that is not the OP's situation. The cash analogy of your suggestion is for the OP to sell the apartment for 380k and keep all of that money on deposit and then go buy a second 410k property with a 340k mortgage. Effectively taking a 340k mortgage and paying interest just so that you can hold on to 380k cash.

The only way it would make sense for the OP to do this is if they had access to really cheap finance, e.g. a tracker mortgage. Then the apt would be turning a healthy profit and would make perfect sense to keep

many Buddhists believe that ownership or desire for material goods/property is what leads to human suffering.

Maybe they do but I think we are all advising OP to put his money into a 650K PPR

What might go wrong? They separate after 5 years. One of them can't get a mortgage on their own salary. In that case, they would be glad that they had kept the apartment. It's easier to split two houses and a mortgage than one house with no mortgage.

Hopefully we haven't driven the OP to consider this

 

[ClubMan]

But if you sell appt and put all the proceeds into another house that will also be the case will it not?

Yes, but if the apartment is retained then they'll be borrowing even more to invest than if they liquidate it. And borrowing to invest is generally inadvisable especially when there is an option available to reduce the need to borrow.

 

[Thirsty]

What might go wrong?

Don't know why this bounced back into my head today but it did.

It's not so much a question of what could 'go wrong' as simply life events that happen that can badly trip you up financially.

At the risk of throwing the OP on a complete downer, loss of loved ones, serious illness, businesses going bankrupt, redundancy etc., can all have a huge impact.

I think the focus here can sometimes be very short term; the OP has a long life to live.

Hold on to your assets.

 

[_OkGo_]

A blanket statement of 'hold on to your assets' really makes no sense.

Many of those life events you mention have financial stress and worry as contributing factors. You assume it is an asset because it is physical property but it can just as easily be a liability if it is not contributing to your wealth. Would you also tell them to hold on to their liabilities?

On the face of it, the OP has the potential to have a net gain of 9-10k from the apartment. This comes at the cost of the PPR mortgage interest, 340k x whatever interest rate they get. It will be marginally profitable if they can get a fixed rate below 2.5%. To really make it work for them, they need to heavily invest in their PPR equity in the next 3-5 years. It means they can't (or at least shouldn't) take on consumer debt for cars etc or else they are wasting their time. If they don't invest in the equity, they will coast along for 5 years and be no better off having had all the work/risk involved with renting.

Knowing how to make it a viable investment and the sacrifices/choices they need to make is much more important than just saying 'hold on to your assets'.

 

[presidenttttt]

The only way I would do it again is if I was getting into it full time with 5-10 properties or on a fully managed basis, but you lose most of the income this way.

People say this on a number of threads, but also tell the posters to sell. Most people don't accumulate 5-10 properties overnight, or maybe some cash buyers do later in life? To be fair, OP didn't give any indication that they might want to achieve such a portfolio, but genuine question would it change the advice of those saying sell over hold?

But people assign a mortgage to a property in their head and this leads to incorrect decisions.

Agree with this. If we did some work on spreadsheets in school instead of spending 18 years learning a language that is not used, this sort of logic might be more common. Sarcasm aside, self teaching myself on excel in recent years, and using it alot in recent weeks, and it really does help to construct even basic tables for thinking about these decisions.

 

[DublinHead54]

The op is in a unique position and I'm going to through out another option here.

To my knowledge you can't release equity from your PPR apart from far property enhancements. So once the cash is in its essentially locked up until you sell that home.

My option is that the Op sells the apartment for 300k and keeps 200k cash and gets a mortgage on their next home that is a manageable monthly cost.

The Op then looks to invest the 200k in businesses, there are a few business investment networks (HBAN). The average age of people investing is 50-60 because they've acquired lump sums over the yesr. Younger people don't tend to have these but the op does.

Obviously this depends if the Op is into this type of thing.

Another point if the OP sells up and gets a small mortgage, what is he going to do with all the cash he accumulates over the following years? Maybe he builds up 200k over 20 years and decides then 'oh I should invest in a business'

I get the point on behavioural bias in decision making but at times you can't always make a decision based on purely numbers.

 

[Purple]

I think the focus here can sometimes be very short term; the OP has a long life to live.

Hold on to your assets.

Or you could say the OP has a long life to live; get rid of your debts. The fewer debts you have to service the more options you have in life.

On a side note the OP and partner have over €7000 a month in income with no mortgage but are only saving €2000 of that. If they sell the apartment and buy a house they will still be in a position to save a considerable amount of money if they stop having their groceries flown in by helicopter, cut back on the Grand Cru wines and sacked the maid and chauffeur.

 

[DublinHead54]

Or you could say the OP has a long life to live; get rid of your debts. The fewer debts you have to service the more options you have in life.

On a side note the OP and partner have over €7000 a month in income with no mortgage but are only saving €2000 of that. If they sell the apartment and buy a house they will still be in a position to save a considerable amount of money if they stop having their groceries flown in by helicopter, cut back on the Grand Cru wines and sacked the maid and chauffeur.

Its the 8 eur sandwiches in Lotts & Co that get me. The owner of that shop has made money hand over fist during lockdown.

 

[Purple]

Its the 8 eur sandwiches in Lotts & Co that get me. The owner of that shop has made money hand over fist during lockdown.

Sure if you can afford it why not? ANyway, it's mainly retirees have the money for places like that. All the wrinklies that usually keep the restaurants and Cafés in business are tripping over their accumulated cash. They have to spend it somewhere.