Should we sell our former home on tracker or let it out?

Myself and my husband purchased a house jan 2014, It needed some work doing to it and as we were not sure if we would like the area we said we would keep our previous house for 1 year and rent it out until we were sure. The work was completed on house no. 2 and house no. 1 has been rented out for nearly a year. We are not sure whether to continue to rent out house 1 or sell it and pay money towards mortgage on house 2.

House 1: 86k balance, mortgage amount 644.32. Rate ecb + 1.25%. worth 175k rented for 550 per month.

House 2: 126k org term over 35 years. 580 per month. rate was 4.59% but been reduced to 4.2%

Any advice greatly appreciated!

In my opinion you should definitely sell House 1 and apply the net proceeds to pay down your mortgage on House 2.

A monthly rent of €550 (I assume that's the market rate) on a property with a fair market value of €175k equates to a gross yield of only 3.77%. If you allow 25% for all expenses related to holding the rental, actual and imputed, other than financing costs and income tax, that leaves you with net yield of 2.83%.

A net yield of 2.83% is obviously a lot lower than an interest cost of 4.2% so it's pretty clear cut that paying down the mortgage on House 2 makes sense. And that's before you take your (admittedly cheap) financing costs on House 1 and income tax on the rental profits into account.

The only logical reason for keeping House 1 as a rental would be a belief that its capital value will increase in real terms over the holding period at a rate that is higher than the difference between the net yield on House 1, less financing costs and income tax, and your mortgage rate on House 2. Contrary to popular belief, historically house prices have not actually increased at all in real (after inflation) terms over very long time periods.

Thank you for your reply Sarenco. Market rate on the rental has probably increased to 600/625. Even if we increased the rent it is still not a good investment.
Thanks again for your reply think it's time to sell

Thanks for coming back to us.

Yes, I think the decision to sell in your case is pretty clearly the right one.

copasetic said:

Market rate on the rental has probably increased to 600/625. Even if we increased the rent it is still not a good investment?

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I think not, for a couple of reasons.
625 per month gives a gross return of 4.2% (or 3.2% if you sensibly deduct Serenco's 25% for expenses). If I had 175k cash to invest, I'd be looking for a better rate of return. I definitely wouldn't be borrowing money to invest at that rate.

A large percentage of your net worth is tied up in property. Property carries inherent risks. Forget the macro-economic stuff for a minute: A single terrible neighbor, a single local planning decision, a single week of rain could put a huge hole in your pocket. By holding the deeds to two houses, you double your exposure to many of those risks.

If I were in your shoes I'd be delighted to get shot of house 1, and looking forward to getting the bank out of my pocket for good by 2020.

I think that yields, can be confusing, so let's look at hard cash.



So these figures confirm the earlier views.

Although it is highly unlikely you will be successful, ask the lender if they will transfer the tracker to your new home.

Assuming they refuse, as your mortgage will be down to €37k, they might reduce the interest rate. Again, unless you are with Ulster Bank, it's unlikely that they will do this. As the mortgage is only €37,000 a reduction of say .8% would save you just €300. Worth asking for, but not worth changing mortgage providers for, if they refuse.

Brendan

I'd love to know what the OP is supposed to do with the cash if she sells house 1. Where is it easy to get better returns.

Sure a bad tenant can mean a few months zero rent. But you have to look at this long term. As for rain causing damage, this is covered by house insurance.

In effect most of her repayment off House 1 is a method of saving.

Her home loan costs around 5K a year in interest. Not bad really and she's also acquiring an asset.

If she uses the money from House 1 to reduce the mortgage on House 2 she will be saving in interest, but then the monthly amount that she will now afford should go where exactly?

Hi Bronte

She is paying 4.2% interest on her home loan. By paying the proceeds off the home loan, she will be getting a risk free, tax free return of 4.2% on her money. This is a huge return and simply can't be beaten anywhere else.

If she uses the money from House 1 to reduce the mortgage on House 2 she will be saving in interest, but then the monthly amount that she will now afford should go where exactly?

She will still have a mortgage of €37k so she can pay that off. Or, if she is a high rate taxpayer, she can contribute to a pension fund.

Brendan

Thanks for the replies. Brendan the tables makes things a lot clearer. Both mortgages are with ptsb.

If she uses the money from House 1 to reduce the mortgage on House 2 she will be saving in interest, but then the monthly amount that she will now afford should go where exactly?

I have 3 kids eldest is 9 so I could do with saving for college for them.

Or, if she is a high rate taxpayer, she can contribute to a pension fund. I earn just over 33k so probably not worth doing and husband has a good pension with work.

Brendan Burgess said:

I think that yields, can be confusing, so let's look at hard cash.

View attachment 354

So these figures confirm the earlier views.

Although it is highly unlikely you will be successful, ask the lender if they will transfer the tracker to your new home.

Assuming they refuse, as your mortgage will be down to €37k, they might reduce the interest rate. Again, unless you are with Ulster Bank, it's unlikely that they will do this. As the mortgage is only €37,000 a reduction of say .8% would save you just €300. Worth asking for, but not worth changing mortgage providers for, if they refuse.

Brendan

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Thanks Brendan. I agree that a cash flow statement is probably a better way of demonstrating the point. Now, if only I could only figure out how to do those darn charts!

Your follow on points in relation to possibly re-negotiating the terms of the loan are also well made.

Bronte said:

If she uses the money from House 1 to reduce the mortgage on House 2 she will be saving in interest, but then the monthly amount that she will now afford should go where exactly?

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This seems like the absolute opposite of a problem.

Bronte said:

Where is it easy to get better returns.

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I think you'd be pretty hard pressed to find a balanced mutual fund that hasn't beaten 3.2% on average over a 10 year period (or over any 10 year period).
Yes, there will be risk. Pick a fund that isn't composed entirely of two Irish houses, and it will be less risky than OP's current strategy.