Trading up, should I keep my existing property?

[NoRegretsCoyote]

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.

@charlie_45

If you want to earn a return from Irish property you should:

• Take advise above and seek something with a high yield, apartments in unfashionable locations for example
• Buy two or three apartments to spread the risk of a non-paying tenant
• Borrow up to an LTV of about 50% over the portfolio to take advantage of tax relief

I know it's easy because you already own it, but holding on to your home purely as an investment doesn't make much financial sense.

 

[Sarenco]

You’re now shifting between gross and net to suit the argument

No Gordon, I'm not.

I'm simply making the point that the gross yield on the OP's property @6.5% is no great shakes in the current environment. Nor is the effective funding rate particularly attractive particularly attractive at 2.2%.

The potential return on the OP's property as a rental is sufficiently marginal that I would consider it a no brainer to sell while carrying a mortgage on his PPR

I don't think you have come anywhere close to demonstrating that the OP's property is worth retaining as a rental.

 

[charlie_45]

Thanks for all the advice and discussion here, I really appreciate the time and it's been very interesting to read.

@NoRegretsCoyote you're right, the only reason for keeping is because we already own it. We wouldn't take a 450k loan to buy the house as a rental, even if we could still borrow at 2.2%. The CGT shelter was one of the main reasons for keeping it, but that reduces over time, and if we keep it as a long term investment that becomes less of a benefit.

We're pretty reluctant at the idea of becoming landlords, as we know the work it entails. We were leaning towards selling, mainly to keep our debt low and reduce exposure to property market, but wanted to get some outside perspective on our reasoning.

We're planning to buy before we sell, and hoping to do so this year. Once we close on our new property, we'll put our current home up for sale, and then pay off a lump sum on the mortgage. We're now exploring holding back some of the proceeds and looking for other investment options that require a smaller investment (100k instead of 450k), get us a similar yield and don't have the landlord hassle. We'll also increase our AVCs this year. We've a lot to research, and have been reading a many of the discussions and advice on AAM to uplevel our knowledge in this space. Thanks again!

 

[Bronte]

We live in uncertain times.

There is no risk to the OP in being a landlord as he owns the house outright. But he would be better off selling to 'bank' the CGT gain.

I think he could get a far better return if he put the money in a different rental property. Something that is a split building or two apartments side by side. (as per NRC's idea). More tenants is more difficult but it makes it unlikely you'd have defaulters all at the same time. The talk of risks to landlords on here sometimes makes me wonder why my family, who are landlords, haven't had more problems. (fingers crossed when I write that of course, but you manage to learn from mistakes).

What they OP has not asked, is now a good time to sell. Will property prices fall, and ditto for rents. I have my own opinion on that.

 

[Bronte]

Thanks for the responses so far, here is our situation:

What is your combined salary? - 180k combined
How secure are your jobs? - private sector, but quite secure
What is the price of the house you are trading up to? - budget 850k
How much of a deposit do you have? - 250k savings for deposit
Where are you getting your mortgage and what is the interest rate? - Approved for UB 5yr fixed 2.2% (I estimated at a slightly higher rate to account for future fluctuations or shorter term)
Do you have other investments? - no
How well funded is your pension scheme? - private pension, 15% contribution from one salary (125k), pension paused for second salary (55k). Combined pensions are currently at ~80k.
What are your ages? - 34 and 36. No kids yet, but planning

30% equity then. That's good. How much would your mortage be? How secure are you jobs. At least you have the fall back of the current home if necessary.

Children cost a lot of money. Creches in Ireland are very expensive. Age is an issue (not asked but important to point this out and it makes is more difficult to spread the timing out)

Why was the second pension paused? Odd.

 

[Bronte]

@Gordon Gekko


We are long overdue a revaluation for LPT purposes.

Even if they doubled it, which they won't it's not a significant amount. Also the politicians are terrified of this. Especially after the water debacle.

Yes the OP needs to factor in the costs to make the calculations. Bu most costs are deductable for tax purposes.

No poster has said what he should do with the 450K if he takes it and doesn't put it off his new mortage. Especially something that would get him a better return, in my view he'd get a better return with a different rental property.

 

[Brendan Burgess]

There is no risk to the OP in being a landlord as he owns the house outright.

Are you suggesting that if if, today, he owned a property worth €850k and had a mortgage of €150k, he could borrow €450k to buy an investment property and there would be no risk?

Brendan

 

[Sarenco]

Even if they doubled it, which they won't it's not a significant amount

It's a significant enough non-deductible expense in the context of a rental that is only marginally profitable.

No poster has said what he should do with the 450K if he takes it and doesn't put it off his new mortage. Especially something that would get him a better return, in my view he'd get a better return with a different rental property.

You clearly haven't read the thread if that's your conclusion.

 

[Bronte]

Are you suggesting that if if, today, he owned a property worth €850k and had a mortgage of €150k, he could borrow €450k to buy an investment property and there would be no risk?

Brendan

My point was solely about the property being a rental. If property collapses in value and he has zero rent he doesn't have a bank breathing down his neck and can ride it out. Those are the two most significant risks a landlord faces.

The home purchase I put in a different category. He needs to figure out if putting in equity of around 30% is good enough, on a property worth 850K, whether their jobs are secure, think about if one of them lost a job, is the montly payments doable, especially if childcare is added, which is akin to a mortgage itself in an Irish situation.

I suppose I see it as two separate issues. Possible because I've always taken each property transaction that way when I was buying.

And of course the bank would come after the rental if he defaulted on the home. Things would have to get pretty bad for him with the 30% cushion he has though. (and I do think things are going to get pretty bad so I might actually think now was a time to wait actually). And he had negate this with a fixed rate. For such a large sum I think he should go for a 10 year fixed rate. And he should see if the mortage term is not too long or if he can make it long but massively overpay currently. (I think some of the fixes allow that but I can't be certain as I'm not keeping up to date with current offers).

 

[Bronte]

It's a significant enough non-deductible expense in the context of a rental that is only marginally profitable.

You clearly haven't read the thread if that's your conclusion.

I don't think LPT OF 855 on an rental income of 30K and an earned income of 180K is important. I see he'd have to pay 1485 on the new property.

My conclusions are my opinion, same as you have yours. The OP wants different viewpoints. My bias is to property. As long as the OP knows that, which presumably a reader of here has figred us out would, then from those views he can help to forumlate his own views. Even if all of us disagree, which we do frequently.

 

[Bronte]

Are you suggesting that if if, today, he owned a property worth €850k and had a mortgage of €150k, he could borrow €450k to buy an investment property and there would be no risk?

Brendan

Back on this point, I can only respond to the given situation. That scenario you outline is not what the OP asked.

 

[Sarenco]

I don't think LPT OF 855 on an rental income of 30K and an earned income of 180K is important

The projected, after tax, net income on the property, over and above the projected interest saving from paying down the PPR mortgage with the sales proceeds of that property, is a couple of grand. In that context, a non-deductible expense of several hundred Euro is clearly material.

That scenario you outline is not what the OP asked

It's not but it would actually make more sense from a financial perspective. All Brendan has done is shift mortgage debt from the PPR to a rental property (where the interest is deductible). The net debt position remains the same.

 

[Gordon Gekko]

The projected, after tax, net income on the property, over and above the projected interest saving from paying down the PPR mortgage with the sales proceeds of that property, is a couple of grand. In that context, a non-deductible expense of several hundred Euro is clearly material.

It's not but it would actually make more sense from a financial perspective. All Brendan has done is shift mortgage debt from the PPR to a rental property (where the interest is deductible). The net debt position remains the same.

In Year 1, it’s a couple of grand. And it’s Year 2 it’s a little bit more and so on as the jaws widen (i.e. the home mortgage decreases).

I think that some of the stuff yesterday was very misleading as the comparisons are not valid.

The OP can effectively fund the purchase of a an investment property at 2.2% and 100% LTV with a CGT shelter attaching.

The ‘point in time’ ‘couple of grand’ analysis is flawed.

And the risks being highlighted (both perceived and real) are less pertinent for someone with a 46%.

Yes this is Askaboutmoney, but it should also be focussed on wealth creation rather than hiding under the bed and preparing for the worst.

As people might have guessed, I would hold onto this property.

 

[Brendan Burgess]

My point was solely about the property being a rental. If property collapses in value and he has zero rent he doesn't have a bank breathing down his neck and can ride it out. Those are the two most significant risks a landlord faces.

Hi Bronte

It's very clearly a risky investment. You seem to think that the only risk is defaulting on a bank loan?

If he pays down his mortgage instead, he reduces the risks of bad things happening

1. an interest rate rise
2. Falling rents or a bad tenant
3. A long term fall in the value of his investment

I agree with you, that he can handle these risks better than most people, but they are still risks.

Brendan