Trading up, should I keep my existing property?

[Gordon Gekko]

@Gordon GekkoAt best, the OP could earn a couple of grand by retaining the property as a rental over and above simply having a lower mortgage on the PPR.

So, I still maintain that this is a no brainer - it's a sell!

‘At best’?!

That’s hardly the best case scenario.

There is risk with everything, but the most likely trajectory is that this high-earning couple with their modest 46% LTV do very well by holding the property.

There is an additional flaw in the analysis; the investor is constantly derisking; we’re analysing it at it weakest point in time. In three years’ time, the person owes less but still has the asset and the income stream. For people who are already making pension contributions, what’s the plan when the home mortgage is paid off? One can never borrow at 2.2% to fund an investment property; and one with a CGT shelter built in.

 

[Brendan Burgess]

At best, the OP could earn a couple of grand by retaining the property as a rental over and above simply having a lower mortgage on the PPR.

That doesn't come anywhere close to compensating the OP for the very considerable risks inherent in the property rental business. Never mind the hassle.

I completely agree.

So, I still maintain that this is a no brainer - it's a sell!

But I take issue with describing it as a "no brainer.". It's clear to me but I can see why others would think that the risks are justified by their expectations of a long-term rise in property prices.

Brendan

 

[Gordon Gekko]

I completely agree.




But I take issue with describing it as a "no brainer.". It's clear to me but I can see why others would think that the risks are justified by their expectations of a long-term rise in property prices.

Brendan

Imagine if you could borrow to buy and hold an investment property that you were familiar with at 2.2% and any capital gains you made were partially relieved. In a world where everyone else’s rate has at least a ‘4’ in front of it and they pay 33% on everything.

 

[Sarenco]

There is risk with everything

Absolutely.

So then the question is whether the risk of holding the property as a rental will be reasonably compensated by the projected after-tax rental income (as opposed to the risk-free option of simply having a lower mortgage on the PPR).

I don't think it's even a close call - retaining the property as a rental is a very risky investment, with a marginal projected return.

To me that makes absolutely no sense and therefore I think it's a no brainer to sell.

Imagine if you could borrow to buy and hold an investment property that you were familiar with at 2.2%

What if the rate was 4.5%? Bear in mind that the 2.2% mortgage is not deductible.

 

[Brendan Burgess]

Hi Gordon

You are looking at a short term fixed rate.

The ten year fixed rate would be a better comparison and it's 2.95% to 3.25%,

Not sure about the CGT position. I have asked him that.

And prices could fall and he would end up paying CGT.

Brendan

 

[Sarenco]

For people who are already making pension contributions, what’s the plan when the home mortgage is paid off?

Keep increasing tax-relieved pension contributions up the age-related limits. Maintain a high equity content within the pension fund and save any after-tax income in tax-free State savings products.

I held rental properties for many years but ultimately concluded that our tax code is such that it rarely makes sense to make (or hold) after-tax investments while carrying a mortgage on your PPR. So, I exited the business and paid off my mortgage. Best decision I ever made.

 

[Gordon Gekko]

Commutable to Blackrock for under 450k

Hi all, I'm mortgage approved for 350k plus have a 70k deposit so total budget is 420k. Family of 4 with 2 young children. There must be good opportunities in the market now for picking up properties 20% under asking price. We are currently renting and paying huge rent so keen to still buy...

www.askaboutmoney.com

If it’s near Blackrock, you could always sell it to this poster!

 

[NoRegretsCoyote]

And it’s an asset with an element of PPR Relief built into it to partially shelter any future gains.

But it's also likely an accumulating CGT liability if they bought for anything less than what it is worth today.

Say they bought for 400k in 2010. If they sell in 2020 no CGT as it was a PPR the whole time, if they sell in 2021 after a year of letting it's 1/11*(€450k-€400k)*33%=€1500. If they sell in 2030 it's 10/20*(€450k-€400k)*33%=€8250. You can do other scenarios.

In economic terms they are losing a material (albeit decreasing) sum every year by standing still as the CGT liability builds up. I know this too well myself. We bought in 2013 a PPR which is now let out. Whenever I do my sums on whether it is still worth holding onto I make sure to include the accumulating CGT liability.

OP, you’re borrowing at 2.2% to hold an asset which you believe will generate an after-tax return of around 3.2%.

So a 1% net return for a medium-risk investment with substantial personal time and hassle involved, albeit with some (taxable) upside. You can still get 1.5% tax-free zero risk with State Savings! (admittedly no upside)

It would be a daft decision to hold on to the property in my view.

 

[Gordon Gekko]

I believe that the way in which you’re approaching the analysis is deeply flawed, NoRegretsCoyote.

 

[Sarenco]

One can never borrow at 2.2% to fund an investment property; and one with a CGT shelter built in.

ICS have a buy-to-let mortgage product @3.75%, for LTVs up to 70%. That's an effective rate of 1.8% when you allow for the fact that interest on a BTL mortgage is tax deductible - the 2.2% mortgage used to purchase the PPR is not deductible.

The partial CGT shelter (which diminishes over time) may be worthless - the property could fall in value between now and the future disposal date.

 

[Gordon Gekko]

ICS have a buy-to-let mortgage product @3.75%, for LTVs up to 70%. That's an effective rate of 1.8% when you allow for the fact that interest on a BTL mortgage is tax deductible - the 2.2% mortgage used to purchase the PPR is not deductible.

The partial CGT shelter (which diminishes over time) may be worthless - the property could fall in value between now and the future disposal date.

60%, not 70%.

The trend for real income-generating assets is for them to increase in value over time.

Yes, the investment could do poorly over a particular time-horizon. But it could also go very well.

 

[Sarenco]

60%, not 70%.

Yes, sorry, the ICS BTL rate for LTVs up to 70% is 3.95%.

Allowing for the fact that it would be deductible for tax purposes, that's an effective rate of 1.9% - still materially lower than the 2.2% funding rate that you said was unobtainable.

 

[Gordon Gekko]

Yes, sorry, the ICS BTL rate for LTVs up to 70% is 3.95%.

Allowing for the fact that it would be deductible for tax purposes, that's an effective rate of 1.9% - still materially lower than the 2.2% funding rate that you said was unobtainable.

Why do I get the sense that you scrambled around to find a rate to distract from the repeated fundamental errors that you have made within this thread (e.g.‘no brainer’, the Ulster Bank rate, the ICS rate, the LPT rate)?

At max 60% LTV it’s hardly relevant to this case where we’re effectively talking about 100% LTV.

 

[Brendan Burgess]

Guys

This is not a debating society. The OP is looking for advice. Can you make your arguments less personal.

Whatever way you crunch the numbers, this will be a marginal investment. If you assume a higher mortgage rate, it will be more marginal. If the rent falls, it will be even more marginal again. If those factors go the right way, it will become slightly profitable.

The key point for the OP is whether he is prepared to take all the hassle and all the risk for the very limited potential reward.

That will have to be his decision.

Brendan

 

[misemoi]

Are there other "soft" factors that might influence you decision? Would you be thinking ahead for college, inheritance, maybe you know of potential solid tenants. Is the house close to a non outsourceable employer like a hospital or a very permanent civil service centre? Consider the potential impact of future remote working policies on rental demands. If you decide to keep it, definitely review your options are least annually or once certain events trigger ie deterioration of income, change in interest rate or regulations.

 

[Sarenco]

@Gordon Gekko

You argued that the OP would not be able to fund an investment property in the current environment @2.2%. That is simply untrue.

The key point for the OP is whether he is prepared to take all the hassle and all the risk for the very limited potential reward.

Exactly.

A marginal potential return for a very significant degree of risk and hassle. That's not a good basis for any sensible investment.

I don't think it's even a close call. To me, it's a no brainer.

 

[Gordon Gekko]

@Gordon Gekko

You argued that the OP would not be able to fund an investment property in the current environment @2.2%. That is simply untrue.

Exactly.

A marginal potential return for a very significant degree of risk and hassle. That's not a good basis for any sensible investment.

I don't think it's even a close call. To me, it's a no brainer.

No Sarenco. I am here trying to help people to the best of my ability. Your contributions to this thread have been littered with factual errors and my sense is that you are projecting and seeking to validate what you did yourself with every person who looks for guidance on this topic.

We’re talking about someone whose LTV would be 46%. 46%! And you’re focussing purely on the risks. There are risks, but what about the potential upside? What about the fact that the risks should decrease as time passes?

With financial advice, it is not always a case of one-size-fits-all.

 

[NoRegretsCoyote]

I believe that the way in which you’re approaching the analysis is deeply flawed, NoRegretsCoyote.

I am happy to be challenged on any of my assumptions or conclusions.

 

[Sarenco]

Sorry Gordon but you did indeed say...

One can never borrow at 2.2% to fund an investment property

...when it would be open to the OP to fund an investment property at a materially lower effective rate.

It would also be open to the OP to purchase an investment property at a much higher yield - a gross yield of ~6.5% is really no great shakes in the current market.

So, that leave your CGT shelter - which is a marginal argument at best.

Brendan is bang on - this ultimately comes down a risk/reward analysis.

IMO the potential reward doesn't come anywhere close to compensating the OP for the very real risks inherent in this investment.

 

[Gordon Gekko]

Which one can’t. You’re now shifting between gross and net to suit the argument. If someone borrowed against their home at 2.2% and used to proceeds to buy an in

It’s also wrong to comment on the yield without knowing what it is or where it is.

Best to admit you were wrong and move on.

Far from a ‘no brainer’...