Tax Treatment of Landlords has to be Revisited

[Leo]

Not really - the Irish Times first reported the RPZ proposals on 13 December 2016 - it became effective 11 days later and landlords had no ability to react.

RPZs is just the name given to the areas where rent controls were to be implemented. That they restricted controls to certain areas or gave them a particular name does not mean rent controls had not been discussed in the previous years.

 

[Sarenco]

RPZ increases were limited to 4% at a time from 2016 to 2021 in RPZs, and at no point was inflation ever higher than that.

Yes, but 4% of what?

Bear in mind that we were in the middle of a two-year “rent freeze” at the time. That wouldn’t have been put in place if Kelly’s proposal had succeeded.

And the current 2% annual increase limit is obviously way below general inflation.

 

[Sarenco]

RPZs is just the name given to the areas where rent controls were to be implemented. That they restricted controls to certain areas or gave them a particular name does not mean rent controls had not been discussed in the previous years.

Yes but all indications prior to December 2016 were that Fine Gael was not planning to introduce rent controls.

 

[NoRegretsCoyote]

Yes but all indications prior to December 2016 were that Fine Gael was not planning to introduce rent controls.

This is true. Legislation was rushed through on purpose to prevent strategic increased by landlords in advance.

Yes, but 4% of what?

I don't follow.

As a general point I think we both agree that capping rents well below market levels has bad results in the long run. The details of how it's done don't undermine the general principle!

 

[T McGibney]

This is true. Legislation was rushed through on purpose to prevent strategic increased by landlords in advance.

If in any walk of life you find yourself having to do something in a rush, you're more likely than not to make a mess of it. Especially something complicated with unpredictable downstream consequences.

 

[RonnieShinbal88]

Very true, but at this time, what do do you consider a lower risk opportunity with similar or greater yield?

Well specific to me, in terms of sales proceeds I might buy a beach front property in another country I have family ties in, mixed personal and short term rental use.

A better yield would be to max out our pension AVC's and drip feed sale proceeds into those while investing the rest in a mixed portfolio heavily weighted in fixed income, some equities and possibly a long term green energy project or two (solar farm in Africa etc.).

Irish property capital returns are still negative following the last crash in real terms, it isn't a great inflation beating investment and rent increases are capped way below inflation at the moment, who knows how long we will have inflation above 2%. At some point the lag behind inflation will be crystallised in a lower property value if and when selling with tenants in situe comes in. That's, what another 20% risk, on top of 42% non-paying tenant risk, on top of 50% irish house price risk........

It's a junk grade investment at this point, I'd want a serious yield to stay in.

 

[NoRegretsCoyote]

Irish property capital returns are still negative following the last crash in real terms,

Apartments in Waterford give double-digit gross yields and have doubled in price over the last decade.

Global equities are down 20% year on year.

Of course these kinds of comparisons are completely sensitive to the choice of starting point.

 

[RonnieShinbal88]

Apartments in Waterford give double-digit gross yields and have doubled in price over the last decade.

Global equities are down 20% year on year.

Of course these kinds of comparisons are completely sensitive to the choice of starting point.

Agreed, you need to look long term, if you set the chart to 'MAX' below, it give you 18 years or so but ideally you'd want to go further back:

Ireland Residential Property Prices - December 2022 Data - 2005-2021 Historical

Housing Index in Ireland increased to 168.40 points in October from 167.80 points in September of 2022. Housing Index in Ireland averaged 121.42 points from 2005 until 2022, reaching an all time high of 168.40 points in October of 2022 and a record low of 73.40 points in March of 2013. This page...

tradingeconomics.com

That isn't inflation adjusted either, I think inflation adjusted prices would reflect a small negative return since 2005, that's after 18 years.

Maybe 2008 was once in a lifetime, and the price risk is much lower now, but you still have all the other risks.

Buying 10 years ago was a great opportunity, I bought my rental in 2003 the price is up maybe 35% since then so probably hasn't beaten inflation over 20 years, I think anyone buying now is more likely to be near a peak rather than 2013 value, they won't be getting 100% return over the next 10 years.

From where I am it isn't looking at all appealing, but I can see there is plenty of scope there for more optimistic views.

 

[RonnieShinbal88]

Very true, but at this time, what do do you consider a lower risk opportunity with similar or greater yield?

So here are the figures on my rental.

LTV: 30% approx
Rent: ~6.7% of property value/ 10% of the equity invested

Capital appreciation over 20 years: 35%/20, round up to 2%

Rental yield net of income tax, service charge, mortgage interest, maintenance and management fee:
Under 2% of property value/ ~2.5% of my equity invested (in a year with no major repairs or redecoration)

This together with some money that I need to add to the rent to cover expenses is paying down the mortgage and is subject to CGT on selling.

Total estimated annual investment return on investment/equity before CGT and selling/legal fees etc. is 4.5% (2+2.5%)
Government guaranteed deposit account return on raisin.ie: 3%

So I'm getting a 1.5% risk premium on potentially losing 3 years of rent on unpaying tenants, conservatively 30% of my equity on a house price crash, similar amount on regulatory risk impact on value etc. and on the general hassle around dealing with an illiquid asset.

It also looks likely with new regulations I would lose the option to let my kids use the place which was always one justification for putting up with the low yield.

 

[Leo]

It's a junk grade investment at this point, I'd want a serious yield to stay in.

And in that case we can agree no minor tweaking of taxation will solve the problem. So the focus should be on increasing supply leading to more competition and lower rents.

So I'm getting a 1.5% risk premium on potentially losing 3 years of rent on unpaying tenants, conservatively 30% of my equity on a house price crash,

That is a very real risk alright, but occurrences are low. When planning risk strategies, you model the projected cost of an issues against the likelihood of occurrence. If an issue will cost you €50k, but the chances of that occurring are 1 in 1,000, then your annual loss exposure is €50. A 1.5% risk premium for an event as rare as 3 years of arrears building up sounds pretty good on a large scale, but of course is pretty devastating on an individual basis. Then, you could have invested in Tesla, Anglo, Enron, etc....

 

[T McGibney]

That is a very real risk alright, but occurrences are low. When planning risk strategies, you model the projected cost of an issues against the likelihood of occurrence. If an issue will cost you €50k, but the chances of that occurring are 1 in 1,000, then your annual loss exposure is €50. A 1.5% risk premium for an event as rare as 3 years of arrears building up sounds pretty good on a large scale, but of course is pretty devastating on an individual basis. Then, you could have invested in Tesla, Anglo, Enron, etc....

A 1 in 1,000 chance of a house price crash?

Outside the tycoon class, no rational person invests the price of a house in a single share like Tesla, Anglo, Enron, or any other of that ilk.

 

[Leo]

A 1 in 1,000 chance of a house price crash?

Not what I said.

Outside the tycoon class, no rational person invests the price of a house in a single share like Tesla, Anglo, Enron, or any other of that ilk.

Some of the posts on here would seem to suggest no rational person would invest in residential property.

 

[T McGibney]

Not what I said.

Ok I must have misread it, but you did say "but occurrences are low." Which tends not to be the case whenever the Irish housing market crashes.

Some of the posts on here would seem to suggest no rational person would invest in residential property.

That's certainly true in the current environment. And it's borne out by the absolute collapse in new individual buy-to-let activity.

 

[Leo]

Ok I must have misread it, but you did say "but occurrences are low." Which tends not to be the case whenever the Irish housing market crashes.

Yeah, I was talking specifically about the scenario that Ronnie referenced of 3+ years of rent arrears. I don't know how often that happens, but would think it's closer to 1 in 1,000 than 1 in 100.

 

[RonnieShinbal88]

Yeah, I was talking specifically about the scenario that Ronnie referenced of 3+ years of rent arrears. I don't know how often that happens, but would think it's closer to 1 in 1,000 than 1 in 100.

Well it depends on how you measure risk, taking the approach you outline makes sense for a diversified investor, if you have 1,000 rentals and it's 1 in a thousand then you can multiply the 1/1000 probability by the loss. With a single property it isn't rational to take that approach, you are never going to have a 50 euro loss it's either a huge loss or no loss, it never gets averaged.

Whatever approach you take I think most would agree that 1.5% risk premium is too small given the risks in Irish property, so there is something wrong (mostly on the risk side which they won't change so that leaves the yield).

Your view is that there is no point in trying to incentivise small landlords, supply will come to the rescue so we don't need them.

w.r.t focus the government, they can and should focus on multiple approaches, not just one.

You are saying that taxation won't make a difference but if income tax were reduced to 25% instead of 50% my yield would go from 4.5% to around 5.6% and I would probably give that serious consideration in terms of staying in, depending on how the wind blew on property rights referendum etc. and combined with the tax deduction on the fridge of course...

I don't think a 5.6% yield is crazy for Irish property given the risks.

 

[RonnieShinbal88]

Replying to Leo again here (I haven't mastered the quoting on here):

In terms of the comment 'Some of the posts on here would seem to suggest no rational person would invest in residential property.'

I've outlined my yield honestly, I don't think it would be rational for a small investor to invest given the risks I also outlined, I mentioned alternatives that are more attractive, if it was a click of a button on a broker app I'd have gone before Christmas but property is not that liquid.

People outside Dublin seem to get much higher yield on lower cost properties so that might be a different kettle of fish, but you need local knowledge, the risks are huge if only buying a property or two.

You were referring to people 'creaming it' I can only assume your view is based around people who bought around 2013 - you can't bias your entire market view on the return that people who bought at a low after a possibly one in a lifetime crash are getting.

 

[Always Learning]

People outside Dublin seem to get much higher yield on lower cost properties so that might be a different kettle of fish, but you need local knowledge, the risks are huge if only buying a property or two.

This is true, it appears to be a very different story outside Dublin and the risks are not huge at all. I get a 10% ROI on my properties. All outside Dublin. All were bought in the past 6 years, so I'm not benefitting from 2013 prices.

Don't buy in a RPZ zone, only buy houses which were previously owner occupied so you can set the new rent, screen the tenants yourself and if fortunate enough, don't borrow (much). Follow the above and a 10% ROI (8% after expenses) is achievable in a lot of the country with very little hassle to go through for the return. There aren't many other investments around offering that kind of return.

Of course, I might be fortunate in my circumstances and where I'm based etc. but my point is it's all relative. It can still be quite lucrative to be a landlord in Ireland in 2023 if you invest in the right area and follow some simple guidelines.

 

[RonnieShinbal88]

This is true, it appears to be a very different story outside Dublin and the risks are not huge at all. I get a 10% ROI on my properties. All outside Dublin. All were bought in the past 6 years, so I'm not benefitting from 2013 prices.

Don't buy in a RPZ zone, only buy houses which were previously owner occupied so you can set the new rent, screen the tenants yourself and if fortunate enough, don't borrow (much). Follow the above and a 10% ROI (8% after expenses) is achievable in a lot of the country with very little hassle to go through for the return. There aren't many other investments around offering that kind of return.

Of course, I might be fortunate in my circumstances and where I'm based etc. but my point is it's all relative. It can still be quite lucrative to be a landlord in Ireland in 2023 if you invest in the right area and follow some simple guidelines.

I'm assuming you are referring to 10% as your rent as a percentage of the property value. Then the rent excluding expenses, with little or no mortgage, you are treating as income, so quoting the yield as 8% net of expenses makes sense for comparison with other income generating investments.

If you are paying higher rate of tax on the 8% it becomes 4%, but any income generating asset would be treated the same so from that perspective it makes sense to say the yield is 8%.

But for someone looking to invest for capital growth, who maybe has a mortgage, rather than to get income, like in my case, I think the effective yield is more like 4%.

That's because in my case I don't have net income, I add income to the investment to pay a mortgage.
So treating the full yield before income tax as the return doesn't make any sense because I get no income, the profits go in to pay down the mortgage. I think it's effectively a different type of investment when you have a mortgage.

I treat the increase in equity contributed by the rent less expenses, combined with the price growth, as the investment yield and use the income tax as a cost of investing (one that e.g. a REIT doesn't have). The reason for that is that I treat the whole thing as an investment to compare with alternatives that are capital growth rather than income generating investments (because for me it isn't income generating).

So I think property may be good yield-wise for investors where it is used as an income generating asset to pay income/pension, where you might even be on lower tax bands or over 65 tax bands etc. and where you have little or no mortgage but it is not appealing where you are looking at growing your investment and are on the 52% tax rate. The yield by location and outside RPZ does seem significant too but I think it's the income tax aspect that's the main drag, especially if you get no income from it because the rent goes in to the mortgage.

Maybe they could look at a tax break on that portion of rent that is invested in the rental property via the mortgage as well as the mortgage interest relief, it would level the treatment a bit versus REITS. It also avoids the argument that income is income and should be taxed like any other investment, because in this case it isn't income it's actually capital investment in the asset that generates the rent. And we want to encourage investment in rental units!

 

[PebbleBeach2020]

This is true, it appears to be a very different story outside Dublin and the risks are not huge at all. I get a 10% ROI on my properties. All outside Dublin. All were bought in the past 6 years, so I'm not benefitting from 2013 prices.

Don't buy in a RPZ zone, only buy houses which were previously owner occupied so you can set the new rent, screen the tenants yourself and if fortunate enough, don't borrow (much). Follow the above and a 10% ROI (8% after expenses) is achievable in a lot of the country with very little hassle to go through for the return. There aren't many other investments around offering that kind of return.

Of course, I might be fortunate in my circumstances and where I'm based etc. but my point is it's all relative. It can still be quite lucrative to be a landlord in Ireland in 2023 if you invest in the right area and follow some simple guidelines.

Are you Limerick or Waterford?

 

[Always Learning]

I'm assuming you are referring to 10% as your rent as a percentage of the property value. Then the rent excluding expenses, with little or no mortgage, you are treating as income, so quoting the yield as 8% net of expenses makes sense for comparison with other income generating investments.

If you are paying higher rate of tax on the 8% it becomes 4%, but any income generating asset would be treated the same so from that perspective it makes sense to say the yield is 8%.

But for someone looking to invest for capital growth, who maybe has a mortgage, rather than to get income, like in my case, I think the effective yield is more like 4%.

That's because in my case I don't have net income, I add income to the investment to pay a mortgage.
So treating the full yield before income tax as the return doesn't make any sense because I get no income, the profits go in to pay down the mortgage. I think it's effectively a different type of investment when you have a mortgage.

I treat the increase in equity contributed by the rent less expenses, combined with the price growth, as the investment yield and use the income tax as a cost of investing (one that e.g. a REIT doesn't have). The reason for that is that I treat the whole thing as an investment to compare with alternatives that are capital growth rather than income generating investments (because for me it isn't income generating).

So I think property may be good yield-wise for investors where it is used as an income generating asset to pay income/pension, where you might even be on lower tax bands or over 65 tax bands etc. and where you have little or no mortgage but it is not appealing where you are looking at growing your investment and are on the 52% tax rate. The yield by location and outside RPZ does seem significant too but I think it's the income tax aspect that's the main drag, especially if you get no income from it because the rent goes in to the mortgage.

Maybe they could look at a tax break on that portion of rent that is invested in the rental property via the mortgage as well as the mortgage interest relief, it would level the treatment a bit versus REITS. It also avoids the argument that income is income and should be taxed like any other investment, because in this case it isn't income it's actually capital investment in the asset that generates the rent. And we want to encourage investment in rental units!

Yeah you summed that up exactly right. For me, in my circumstances it's quite an attractive investment in order to create income. I use it in order to create a "relatively" passive income (I know passive is a debated topic here, but for me it's relatively passive). This year I'll be getting into the stock market for the first time and I will be using that in order to try and achieve capital growth over time. So for me my investments are pretty much split into property for an income and the market for capital growth.

Are you Limerick or Waterford?

They aren't the only options though, I have friends who advise me there is also good value to be had around Galway and Cork too.