should I invest in another property

[agencydude]

Details are

Age: 41
Spouse’s/Partner's age:42

Annual gross income from employment or profession:€90k
Annual gross income spouse:€20k -currently job sharing normally €40 k/yr

Type of employment: I'm an IT contractor self employed company director. Partner is public servant

Expenditure pattern: saving more than we spend
Rough estimate of value of home:€850k
Mortgage on home €200k
Mortgage provider:bank
Type of mortgage: interest only ecb tracker
We plan knocking off lumps off interest only mortgage when we have money to do it. Paid off €16k this year already.


Other borrowings – none

Do you pay off your full credit card balance each month? yes


Savings and investments:various deposit accounts total €30k in savings

Do you have a pension scheme? yes
I have prsa .
Pay in €2k /month
partner has public servant pension

Do you own any investment or other property? yes
Approx value:€400k outstanding mortgage €18k
rental income €1200/month

Ages of children: one 4yr old

Life insurance: partner and I have life cover on the mortgages


So the question I have is, should I use the equity in the investment property to get another one and rent it out? I'd get interest only mortgages evenly spread over both properties.
Is this an opportunity too good to miss out on or should I stay safe and do nothing with the current property market cooling down?

Future risks I see happenning is I could be out of work every now and then as I do contract work in IT sector so having another income from rental properties sounds like a good idea.

Other things I could do are: pay off the ppr mortgage more quickly or put more money in pension scheme or get a self administered pension scheme?


Any suggestions welcome.
thanks

 

[ClubMan]

Why do you think that concentrating even more of your overall wealth/net worth (and in fact on a leveraged basis) in a single asset class, risk/reward profile and geographic region (i.e. Irish domestic property) is a good idea especially compared to diversifying over a wider range of asset classes, risk/reward profiles and geographic regions?

 

[Howitzer]

I may be mistaken, but I don't think you can spread your mortgages between your new property and your old property, which is virtually paid for, in order to reduce your tax liability from rental income. Are your tax liabilities covered?

What opportunity is too good to miss out on?

Interest only on a PPR never makes any sense to me, though I know as a contractor your income can tend to be lumpy.

 

[Purple]

I agree with ClubMan. Why not buy shares or a medium term investment product with a low to medium risk? There are loads of threads in the Savings and investment section about the pros and cons of different products. I am in the “invest in a fund/product that charges low fees” camp (again agreeing with ClubMan) but do your own research.

The reasons for buying another property are:
1) It is a leveraged investment and can offer rental income and capital appreciation.
2) You know the ropes and should be able to buy the right property.

The reasons not to buy another property are:
1) It is a leveraged investment and can leave you in negative equity if the market goes the wrong way.
2) It is an illiquid asset.
3) Entry and exit costs are high.
4) You will be putting all you eggs in one basket.
5) Yields are very low (in most cases they are below the rate of inflation).
6) The hassle of being a landlord when there are problems with tenants can be huge and very expensive.

I’m sure there are plenty of other things that can be added to the lists above but as a former small scale property investor my advice would be to stay away at the moment.
That said I don’t see the point in putting more money into your pension at this stage, why not move to a repayment mortgage and still take the lump sums off?
The idea of rental income in nice but reduced repayments on your mortgage should amount to the same thing.

 

[Bronte]

No need to put the mortgage over both investment properties as you will be granted full rental income tax relief on both even if most of the mortgage is on one property.

Can't tell you whether to buy or not. But I'd have my PPR mortgage at the level to which it gets the maximum income tax relief.

 

[ClubMan]

No need to put the mortgage over both investment properties as you will be granted full rental income tax relief on both even if most of the mortgage is on one property.

In case it's relevant is it not the case that of any loan secured on either/both properties it is interest on the amount actually used to buy a specific property that is tax deductible against rental income from that property? If this is the case then it could mean that some interest is not tax deductible if the rental income is not sufficient from the relevant property?

But I'd have my PPR mortgage at the level to which it gets the maximum income tax relief.

Personally I would not necessarily agree with this since in the greater scheme of things owner occupier mortgage interest relief is really marginal. Personally I would generally prioritise reducing the PPR mortgage to a "comfortable" level. But what's appropriate really depends on the individual and their specific circumstances.

 

[Recam]

25% of gross income for which tax relief is available for pension contributions is available for you as you fall into the 40-49 age bracked.
Careful that you don't exceed this limit.
This might seem like a crazy idea to some (sorry in advance Clubman), but have you considered selling your investment property, clearing your PPR mortgage and then looking at purchasing a similar investment property but in this case you will have a much larger mortgage and therefore interest relief.
The positives, you save on interest currently being paid (interest only basis) on your PPR, new mortgage interest allowable in full against your CASE V income (rental income), your exposure is unchanged !!!! You could still decide to purchase another investment property in the future.
The negitives..... fees on purchase & sale of property and I'm sure lots more, Would welcome others views.

 

[Howitzer]

The negitives..... fees on purchase & sale of property and I'm sure lots more, Would welcome others views.

+ CGT at 20% of the profit. This idea would probably have made a lot of sense before Rollover relief was abolished and before property values became so inflated that very ordinary investment properties started attracting penal rates of stamp duty.

The stamp duty on properties, and rental income less than the interest paid for the mortgage, now would result in being in a negative financial position for anything up to 20 years. (Source: Irish Central Bank Spring 2007)

 

[Recam]

Ah yes CGT, would be good to hear from the OP how much his propery has appreciated.
Also assumption is based on CGT rates of 20%, the day might come when we revert to the old 40%.
I also always view investment properties as something that will eventually be disposed and attract CGT at some stage in the future.

 

[gobig]

You seem to have done pretty well in terms of investments to date with your low loan to values.

I think you could do worse than take a half an hour out to speak to someone in private banking in one of the big banks. They have 2/5-10 year commercial projects handpicked and based on an interest only may be a manageable way to benefit from your equity.

Again I think a quick chat with them would prove interesting and if you thought an investment suited you could be of benefit

 

[ang1170]

Just to throw an idea into the pot:

Why not take your profit on your current investment property, use it to pay off your mortgage and re-invest the balance in whatever you choose?

 

[Brendan Burgess]

1) You are making a taxable rental profit or around €12k a year on your existing property. I am open to correction, but you can set off the rental loss on another property against that profit in the same year.

So say you buy a property for €400k and pay €20k interest and receive €12k rent. You will make a loss of €8k.

Your tax liability on both properties would be €4k@ 41% + prsi.

Double check this before making any decision.

2) You should pay off any mortgage on your home before paying off the mortgage on your investment.

3) From a tax point of view, investing in another property makes sense.

4) From a financial point of view, diversification into another class is important e.g. shares.

5) There is nothing to stop you remortgaging your home or your investment property to buy shares. You won't be able to write off the interest you pay as an expense for tax purposes.

6) If you do buy shares, you should buy them directly rather than through a unit-linked fund. If you make a loss on them, you would be able to write the loss off against the Capital Gain on the property when you sell it.

7) If you do buy property, I would not be hugely worried about negative equity. You should borrow the full price of the property to maximize interest relief.

Strategic issues
What is your financial objective? You are comfortable financially. Borrowing more to invest increases the risk. You can handle the risk well, but is there much advantage in taking that risk? What will you do with the extra income?

Maybe your strategy should be to reduce risk. If so, then don't borrow too much to invest. Also, buy shares rather than property.

What is your life objective? Have you plenty of time to manage another property? Some people love the hassle of property management and tenants. Personally, I prefer investing in shares which require a lot less work.

Brendan

 

[Bronte]

Do you own any investment or other property? yes
Approx value:€400k outstanding mortgage €18k
rental income €1200/month
________________

Mortgage interest relief on rented properties.

You are paying very little in interest on this mortgage of 18K. Therefore you must be paying tax on the circa 14K annual rent. Maybe at the higher rate of tax.

If you buy another investment property, you might then have no liability to the tax as you offset all the mortgage interest on the new property against rent from both properties. I'm open to correction on this.

You'll have to do the math on this to see if it's worthwhile. But if you're in a situation of purchasing another asset where the only cost is the deposit stamp duty & legal fees and the property pays for itself via the rent and the reduction on the tax on the first property it might be a cheap way of acquiring a property. Maybe there's a formula for this.