Buying house for rental - use savings or mortgage?

Brendan Burgess said:
No! No! No! No!

I will have to do a Key Post on this issue as most people don't understand this at all. The asset cost is €100k in today's money. We can assess the profitability of the investment this year based on income and expenditure. He can make an assumption about the future price of property.

He should compare this to the risk/return on deposit accounts.

That is the only correct way to assess an investment proposition.
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As Mongt said I really wish you would do a key post. Then I might figure out if the decision I made to buy a very long time ago was a wise decision or not. :D

It would be interesting too, to understand when it is actually good to buy an investment property and become a landlord.
 
Bronte said:
dub_nerd said:
However, for myself I've decided that I wouldn't touch Irish property with a forty foot pole. Anything that is so highly incentivised by the government has got a major chance of going wrong.
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You are kidding me on property investment being incentivised, it's the exact opposite. If it were, there probably wouldn't be chaos in the Dublin rental market.
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Ironically I think I agree with you -- but we're talking about slightly different things. I take it you mean it is hard to make a profit from a buy-to-let business (I gather from your other posts that you're involved in one). I too have looked at the numbers several times and they just don't stack up. It is difficult to impossible to find Irish property with adequate rental yield. That is one reason why I wouldn't touch it.

So with that being the case, why is the OP here so enthusiastic? Well, maybe they have found a rare property with 10-15% gross yield, which is what I would consider the absolute bare minimum to cover the growing list of costs and compensate you for the headache of property management. Or more likely, as they hinted, they are seeing deposit rates plunging, and deposit income being taxed out of existence by the government, and on the other side seeing continuing tax breaks (income and CGT) on property purchase. That is what I see as the carrot and stick the government is using to entice money out into the open.

Well, the government plan is working. Cash is pouring into the market. Dublin property prices are rising against all expectations. Investors look at the last couple of years and see a tax free capital gain looming. They are not concerned with income or doing any better than keeping a mortgage ticking over. In short, they are not "investors". They are the same as last time we had people piling into a market that made absolutely zero sense from a rental yield point of view -- they are speculators.

(P.S. I am making no predictions as to the future of property prices, as per the rules here. I am just saying I wouldn't be caught dead getting involved).
 
dub_nerd said:
Well, maybe they have found a rare property with 10-15% gross yield, which is what I would consider the absolute bare minimum to cover the growing list of costs and compensate you for the headache of property management.
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There are properties around even now that will generate a decent net yield of 10-12%,you just have to look for them.Yes there is a deal of work associated with it but where else are you going to get a yield like that,sometimes it takes rolling up your sleeves and getting stuck in but its not an ongoing commitment if you choose the correct tenant.
 
dub_nerd said:
Investors look at the last couple of years and see a tax free capital gain looming. They are not concerned with income
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I suspect this is also true. Take the OP, he has x amount sitting in the bank doing diddly squat. Instead puts speculator hat on, been around the block a few time, knows what it to be a landlord, and says I might as well lob it into a house, and forget renting it, because the return doesn't justify the hassle or tax, and he'll leave it there for the time of the CGT exemption. Worth a punt, absolutely.
 
Maybe it is best if I re-phrase the original question posed in order to reach a clearer conclusion. As already explained, the plan is to buy property that I may retire to in approximately seven years’ time and can cover the purchase price with savings. I intend to rent it out in the meantime and am aware of the importance of location, yield and the responsibilities of being a landlord.
Many thanks for the helpful feedback given by previous posters and I realise that a decision to buy now will vary for each individual depending on life circumstances but for me (not having got caught up in boom time mania and who saved during this time) the property is in the right location, has real rental income potential.
Making the following assumptions – home owner with mortgage already paid off, in full-time permanent employment, DB pension and AVC contributions over 20 years and no dependents.
The question is - buy with cash now or borrow i.e. does it make more financial sense to take out an BTL mortgage for rental income tax-saving purposes i.e. 75% of 5.5% interest write-off on the rental income.
As already mentioned we can only plan based on information currently available to hand and I would prefer not to get into idle speculation. If government policies do change then I'm in a lucky position to have savings to cover the mortgage in full (i.e. if interest relief is reduced/or eliminated). At the minute, 75% of interest write-off of a BTL mortgage looks attractive in offsetting at least 52% tax (41% income tax, 4% PRSI, 7% USC etc). I’m also assuming that life assurance associated with the mortgage is also an allowable expense. The alternative is to purchase with savings - and pay full tax liability on any rental income.
Constructive feedback welcome!
Thanks.
 
75% of interest write-off of a BTL mortgage looks attractive in offsetting at least 52% tax (41% income tax, 4% PRSI, 7% USC etc). I’m also assuming that life assurance associated with the mortgage is also an allowable expense. The alternative is to purchase with savings - and pay full tax liability on any rental income.
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This is not proper reasoning. The advantage is illusory.

If you purchase with savings, you will pay tax on the rental income.

But if you purchase with a mortgage, and put your savings on deposit, you will pay tax on your deposit interest.
 
The upshot of all of this surely is that the rent is treated as Income and taxed at 52% nett.

Is there a scenario anywhere in which one can make a profit on such an investment ? Ultimately my situation is that each year I supposedly make a "profit" on which I pay Income Tax. This profit costs me €2000 a year in income tax. The rent just covers the mortgage. I have to pay out for washing machines, flooring, boiler service and any other failing the tenant points out.
The house is in my possession for 12 years and is valued at the same as when I bought it.

Moral of story: you must speculate to accumulate debt.
 
Yes indeed it is.

So hopefully after another 8 years when it's paid off fully the house will be worth at least twice what we paid for it. OR NOT.

even if it's worth twice, if we sold it we'd have to pay CGT At 40%??. or more by then.

the experience of letting is not one which I would recommend unless you've some creative accounting or tax break incentive.
 
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