Sorry, my spreadsheets are not the easiest to follow I'm afraid!
1) Your baseline assumption should be that house prices will remain constant
We have factored in a 2% yearly increase in house prices which might be optimistic I guess.
2) Even if house prices remain constant, there are transaction risks - you may overpay or undersell
We hadn't considered transactional risks, thanks for pointing that out, we just assumed that we would buy and sell at a fair market value for the property in question.
3) It can be very difficult and time consuming to sell a property - allow for it to take 6 months.
The length of time it takes to sell a property is something that we couldn't find much information online about. You can't really use Daft either given that ads are often removed and recreated (probably in an attempt to hide the fact that a property has been for sale a long period?). Would 6 months be the average time then to sell a property?
So what is the ongoing cost of buying a €222,500 property for two years?
Stamp duty 1% : €2,000
Legal fees on purchase: 1% €2,000
Legal fees on sale: 1% €2,000
Auctioneers' fees: 2% €4,000
Mortgage interest@4%: €20,000 (2.5 years @4%)
Foregone interest on deposit, immaterial: 0
Total costs: €30,000
Cost per annum: €15,000
My costs on a €222,500 property over 2 years are as follow:
Stamp Duty (1%): €2,225
Purchase Legal Fees (1%): €2,225
Sale Legal Fees (1%): €2,314.89 (Based on valuation of €231,489 when selling)
Auctioneer Fees (1%) €2,314.89 (So 2% would be a more realistic cost?)
Mortgage Interest: €9,904.08 (€412.67 per month)
Annual Property Service Charge (0.75%): €3,337.50 (€1,668.75 X 2, based on some examples for properties in similar areas we found online)
Repair & Maintenance Cost: €2,400 (€100 per month, fixing boilers, etc.)
Home Insurance: €482 (€241, based on a quote from AA)
Property Tax: €810 (€405 X 2)
Gross Total Cost: €26,013.36
Gross Cost Per Year: €13,006.68
Property Appreciation (2% Per Year): €8,989 (€226,950 after 1 year, €231,489 after year 2)
Net Total Cost: €17,024.36
Net Cost Per Year: €8,512.18
Total Renting Cost (2% Increase Per Year):
€32,118 (Similar property with current rent of €1,325, average of €15,900 in year 1, €16,218 in year 2)
Renting Cost Per Year (2% Increase Per Year): €16,059 (Average of €15,900 in year 1, €16,218 in year 2)
We should probably still include the cost of interest lost on the deposit and the cost of life assurance / mortgage payment protection in the cost of buying but we'll just leave them out for now. If we compare the gross cost of buying with the cost of renting, the saving is just over €6k over the 2 years, not really worth it considering the risk involved. However if we're to include a 2% yearly increase on the property value, the saving increases to just over €15k, and it becomes a bit more appealing. Now we know the 2% yearly increase is a gamble, and to be honest it's probably this kind of attitude that got the economy in the state it is in.
It is highly unlikely that you will be able to move into an apartment in walk-in condition. So you will have to factor in some money for doing it up. Maybe you can do this yourself, so it would only be the materials.
We would be hoping to find a property that is in a good liveable condition and that wouldn't require too much redecoration. We haven't factored in much for this, it would be coming out of the repair and maintenance budget, we should probably allow some more expenditure for this. I have a brother who is a carpenter who owes me lots of favours and my parents have a few rental properties so they always have some spare furniture lying around so we would be hoping to take advantage of this.
The risk.
You have to factor in the possibility that your selling price may be 10% less than your purchase price. So you are facing a loss of €22,000. As this is the full amount of your deposit, the risk is simply too high.
The future is not predictable. I have allowed for a fall of 10%. It could be more and you would be trapped in negative equity.
We could take a loss of up €28,500 (€22,500 deposit and ~€6k saved against renting) and still walk away from it all at the end. This would allow for just under a 13% decrease in house prices over the next 2 years.
Other reasons not to do it
I assume you are first time buyers? If you buy an apartment, you will lose any advantages there are for first-time buyers. Currently a loan to value of 90% over 80% for subsequent buyers. The Labour Party is talking about bringing in some sort of subsidy for first-time buyers. If they do, there will probably be a claw-back if sold again soon after purchasing.
If the only benefit for first time buyers is a 90% LTV ratio, then we wouldn't be too bothered about losing that benefit. I will still have money left in my portfolio after the deposit is taken and it will probably be at least another 3 years down the road before we buy another property after we would sell this one. We're confident that we would have a 20% deposit by then even if we lost all of our deposit on this property. Labour's first-time buyer subsidy could have an impact on our decision alright depending on what it would be, but what are the odds of this being available by the end of this year? We would be hoping to buy by the end of this year, if we haven't done so by then we won't be able to hang on to the property for at least 1.5 - 2 years so it will be too late.
When you decide to go abroad, you may do so in a hurry e.g. in response to a job offer. You will be able to time this to the end of your lease or do a sub-let or do a deal with your landlord. If you have a house to sell, it takes a lot of time and could be hard to do from abroad.
Yes we had considered that when we do decide to move abroad we will be in a messy situation. There will be 3 variables that we will have little control over and that we will not be able to sync up time wise; selling the property, my partner getting a job and getting a job myself. We came to the conclusion that we would just have to wait until either of us got a job offer abroad, then just go and sell the property from abroad. We could probably buy ourselves 6 weeks or so from when either of us get a job offer to when we actually have to move abroad, so this would give us time to get the property up for sale ASAP. So you think trying to sell the property from abroad would be difficult?
When you go abroad, it would be great to have the comfort of €22k in your back pocket. It will tide you over until you get a job or your first pay. It will allow you pay the deposit on your new rental. If that €22k is tied up in an apartment back in Dublin, you will be a lot less flexible.
I would not be to put out by not having the €22.5k available to us when we do move abroad, I'll have money in my portfolio after the deposit is taken and we'll have saved some more money 2 years from now.
I don't know how you are doing this calculation. The only figure of relevance is the interest paid. €200@4% = €8,000 per annum = €666 per month.
I've included 5% interest that I would be losing on my deposit could I be investing it.
While this is immaterial to the overall calculations, you can't get 5% deposit interest at present in Ireland. This suggests to me that some of your other calculations may be unrealistic as well.
Brendan
I calculated the mortgage interest payments using the calculator on Mortgages.ie and I verified the figured using one of the recommended calculators on the forum here, LoanClc.com, the figures are more or less the same. It is based on a 30 year term and an A.P.R. of 4.18%. Have I made a mistake with these? I just included the total repayment including capital as a reference figure.
True, you can't get anywhere close to 5% deposit interest in Ireland. I'm basing this figure on the performance of my portfolio over the past 3 years (that's as far back as it goes). I've got a split of around 55% equities to 45% fixed income; equities are generating an annual return of around 17% (inclusive of all broker fees, currency conversion and stamp duty but exclusive of CGT) and fixed income is generating a net annual return of just over 2%.
Talk to the thousands of people who bought apartments for 2-3 years and who still have them. See what their opinions are.
A mortgage is a long term commitment. Buying it with a short term goal with the intention of flipping it carries massive risks. It may work, it may not.
I notice on your spread sheet you have run scenarios where the rent covers your costs. What about doing it the other way, where you have to subsidise the payments every month. Then if you go abroad and have to send money home, you will have to factor in foreign exchange fluctuations.
I know if I was living abroad, I wouldn't want to have to service debt on an apartment in Ireland.
Steven
www.bluewaterfp.ie
Yes there are many people who were probably thinking the same way I am and bought a property with the aim of offloading after a few years but who still have it. I agree totally that there are risks involved with this, but you have to take risks to achieve greater returns. I'm young, perhaps too young to risk getting trapped in a property but young enough that I'm prepared to accept risk on my investment for a greater return.
Now that you mention it, the absolute worst case scenario is that when the time comes to sell the value has fallen significantly so we decide to let it out instead. However the rent received is not enough to cover the cost of it and we end up servicing a debt on a property in Ireland from abroad. This certainly would be bad situation to be in alright, I guess if I'm not prepared to accept the possibility of this then maybe this whole idea just isn't worth it.
Daniel
