Thinking of buying an investment property. Need some answers.

N

Nomansland

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Hi,
I currently have 20K cash to invest and am looking at investing it in a 3 bed semi costing 200k. Myself and my partner currently have a 157K mortgage outstanding on a house valued at 235K. If the investment property costs 200K, the stamp duty will be 8k, legal fees 2k, and the cost of kitting out the house would be 10K. All this would bring the aquisition price to 220K. I only have 20K to deposit. Will the bank give me a 100% mortgage, i.e 200K based on the positive equity on my primirary residence.

Based on the above figures and moderate house price inflation of 4% over the next 5 years, a 5 year 3.8% fixed mortgage rate payed over 30 years, rental income of 600 euro per month for 5 years, my calculations tell me that my 20K investment would yield a return approx 42K, i.e >100%. Is there something I am missing or is these figures right. I also belive that on a 200K house I would pay no CGT until the house was sold for >254K due to stamp duty, legal fees and furniture/decoration costs been included in the aquisition cost as well as the house price been indexed for inflation. Is this true?

Also could anyone tell me on where I could read up on section 23 (tax desiginated area)? The revenue website is still down.
 
Try the figures again with:

1) Not 100% rental, try the figures when the popery is left idea for 2-3 months a few times during the period

2) Test for the higher interest rate (as you are going over 5 years) i'd say at least 5% , and not just on the new house , but your own one as well

3) I can't see any figure for maintenance or repairs... I am sure at least one major applicance will blow in 5 years...

4) Tax on your rental income , you could be paying 42% of your rent....
 
Thanks jhegarty.
I'm new to this game so i probably have a few figures wrong. I am getting a 3.79% 5 year fixed quote from IIB homeloans. On a 200K mortgage over 30 years this amounts to 931 euro per month. I have factored in another 70 euro per month for house insurance and repair. Cost of maintaing the house per month is 1000 euro. I am interested in capital appreciation, not profit from rental income.

The following figures are based on a 200K mortgage on a house valued at 200K (100%loan)

Cost of aquisition of house (house, stamp duty, furniture/decor) -- 220K
My investment -- 20K
Banks money -- 200K.



5 year investment plan.

Cost of mortgage repmayments/repair maintenance over 5 years -- 60K
Rental income over 5 years (52 months) @ 600 per month -- 31.2K
Shortfall between repayments and rental -- 28.8K (480 euro per month, can afford)

House price inflation of 4% per year leaves value of house at 243.33K after 5 years.
After 5 years princiaple on mortgage = 180K
No CGT to be paid I think(see reasons on previous post)
Sale leaves me with 63.33K.
Initial investment = 20K
Monthly mortgage shortfall after 5 years = 28.8K
Total investment =48.8K
Profit 63.33 - 48.8 = 14.53K
% gain = 14.53/20 *100 = 72.65%

I know there is one major assumption here, i.e house price to appreciate by 4% per anum but I think this is attainable.
The other problem I have is that I know the bank will not give me 100% loan. However I have heard of ways around this. Also could I get 100% loan on the strength of having 78K positive equity on my primary residence.

Please don't be afraid to tell me that I am talking a load of rubbish. I need sound advice.

Thanks.
 
Nomansland said:
Please don't be afraid to tell me that I am talking a load of rubbish. I need sound advice.
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Not being smart but whatever about the feedback you get here you should also consider getting independent, professional advice on such a significant potential investment as well.

I'm new to this game so i probably have a few figures wrong.
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How have you decided that property, and not any other alternative investment, is the appropriate one for your situation?

I am getting a 3.79% 5 year fixed quote from IIB homeloans. On a 200K mortgage over 30 years this amounts to 931 euro per month.
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In many investment property cases it might make more sense to go for an interest only mortgage and repay the capital with the proceeds from the eventual resale or other means. Don't forget that investors can write off all mortgage interest (and other stuff) as allowable expenses against rental income.

I have factored in another 70 euro per month for house insurance and repair.
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Don't foget that owner occupier home insurance policies will not cover a rental situation and investor insurance may be higher and may require higher levels of public liability etc.

Cost of maintaing the house per month is 1000 euro.
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Have you included service and other ongoing charges payable by you and not the tenant?

Rental income over 5 years (52 months) @ 600 per month -- 31.2K
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What about income tax on rental income of have you calculated that you will not be liable for such tax?
 
Sorry - I added some more comments to my post after you acknowledged it just in case you didn't notice.
 
Repayments over 30 years @ 3.85% are 938 per month - less to pay back after 5 years
Interest only 641 - Full amount borrowed is repaid
Your income is 600pm you will have to make up the difference
As jhegarty said property can be left idle for a number of months per annum. Can you afford the repayments if the property is empty.

You can offset the interest (641 per month) against the rental income but not the full repayments (938 per month)
 
I find this a very interesting thread.

Nomansland is correct that he will pay no income tax (for at least 10 years) because he has a loss making investment (interest>rental) and that is before any potential nterest rate rises!

I agree with jhegarty that you need to consider some voids and all the potential costs (painting, replacement furniture, servicing the boiler...). These will all be significan since you will not be able to offset them against a tax bill as many others who have been in this business for a longer period can.

You can no longer index your purchase cost in your CGT calculation, and you also need to consider sales costs (auctioneer, legal...) in your numbers.

The interesting bit for me is who you think might buy your loss making investment at an even higher price!

John
 
Nomansland said:
House price inflation of 4% per year leaves value of house at 243.33K after 5 years.
After 5 years princiaple on mortgage = 180K
No CGT to be paid I think(see reasons on previous post)
Sale leaves me with 63.33K.
Initial investment = 20K
Monthly mortgage shortfall after 5 years = 28.8K
Total investment =48.8K
Profit 63.33 - 48.8 = 14.53K
% gain = 14.53/20 *100 = 72.65%
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I see nothing here for legal fees on the sale, and no auctioneers fees....

plus you are assuming the house will sell over night... don't forget you will still need to pay for everything while you are selling , as I presume you will be try to sell with vacant possession and not with tenants in place....

lets say a very quick sale takes 3 months (including legal stuff)

so

14.53k (profit) - 2000 (legal fees) - 2433 (1% auctioneer fees) - 3000 (cost for 3 months)

= 7k profit


when you are working out your profit % you need to include your 28.8k too , not just 20k becuase they are all part the money you are putting in....

so

28.8k + 20k = 48.8k

so profit % is now 14% over 5 years (or 2.8% per year) .... so would a rabo direct account at almost the same interest, but no risk/headaches/bad tennants be a better idea ?

 
Lot's of devils advocates here. In the last 6 months I have purchased a 3 bed semi (271K plus stamp duty + legal fees + furnishings) renting at €1,150 per month, interest only mortgage costing me €500 per month. This is netting €650 per month on a 12 month lease (had over 25 calls from would be tenants, so no fear of non-rental periods at the moment)

I have also purchased a Section 23. Purchased at €197,000, renting at €650pm, interest only mortgage costing approx €420pm, This will provide a sufficient tax shelter for me over the next 10 years.

This is a 10/15 year venture my target being a tax efficient monthly income and capital appreciation. I will never own the property, but the property is working for me, not me working for the property !!

Regarding Section 23 information, there aren't many resources on the web but I will dig up what I have found and post links.
 
Not Devil's Advocacy - just pointing out some of the issues that any prudent investor would consider in relation to any potential opportunity. Well done on your investment but past performance is meaningless to people attempting to evaluate a similar investment now.
 
Hi Niceone,

You are in a completely different situation to Nomansland. It appears from your numbers that you put about €200k (40%) equity into your purchases.

Your other numbers do raise some interesting questions about the S23 property though. How much do you think it will be worth when the tax benefits have been used up? and is the CGT based on the net cost or the gross cost? (ie. you can claim [half] of the cost back against income tax - can you use it again in your CGT calculation?)

John
 
Hi JohnG, Actually my situation is not much different to Nomansland, and Clubman, this is only in the last 6 months, so we're on the same playing field !

Nomansland potentially has 98K to use for deposits, stamp duty, legal fees and furnishing i.e. 20K that he already has plus release 78K from his and his partners property. This will increase his own mortgage somewhat but he needs to be sure he can cover the increase.

He buys the 200K property, secures 85% mortgage (as most banks will not give more for investment properties). Therefore 170K @ 3% interest only will cost 425pm. Work out your profits after that. If you're monthly rental income is > 1K (Dublin social welfare) then happy days.

With the money left over from 98K he should have enough to do the same again on a section 23. But, section 23 to cover 1 property is perhaps overkill, most people I know with section 23's have more more than 2 properties excluding the S23.

Regarding any capital gains on the S23, I'll pay the 42% like anyone else. The tax benefit allows me to earn in the region of 80K tax free rental income over the next 10 years. The other way of looking at it would be I got the apartment for 120K, and in 10 years time how much do you think a 900 square foot apartment with private parking will be worth ? I would hope in the region of 250K ?
 
niceone said:
and Clubman, this is only in the last 6 months, so we're on the same playing field !
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Doesn't matter. Past performance - no matter how recent - is no guide to future returns.
 
Hi Niceone,

Your total cost for the 2 apartments from your email is over €500k (including costs).

You state that your monthly nterest cost is €920, so assuming an average interest rate of 3.5% I work out roughly that you have loans of about €315k. I therefore assumed that the balance came from your own personal cash.

Nomansland has only sufficient cash to pay the stamp duty and fees and therefore I consider your position to be different.

On the CGT question - what I meant is do you use €197k or that less the tax benefit as your original cost when you calculate your CGT (at 20%) when you sell?

Thanks John
 
No one has yet mentioned your low low rental yield. At 600yoyo's pcm you're only getting a yield of 3.6%. Not being personal but are you totally and utterly mad:eek:


How on earth can you factor in capital growth into your figures? Have you really been taken in by all the spin? Past growth is not an indication of future growth.

When you did your research into the local rental market did you get the actual rental figures. In a saturated market you might advertise at 600 but only get 500.

TBH you should question a yield of less than 5%
 
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