former home on a cheap tracker - should we sell it or continue to rent it out?

dingdong

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Hi All

I am sure asked before , but all scenerios different. I am looking for some thoughts on our situation. Wether to sell or rent our old house.

We have moved to a new family home in Dublin 4 in 2010 , with new mortgage of 430,000 Variable mortgage cost 2500 approx. per month over 25 years.

Our previous home in Dublin 4 - we had a tracker mortgage for lifetime of loan. Loan - 435,000 - Interest only - 1.35% - 500 euro per month. The market was so bad in 2010, we could,nt sell it so we rented the property tenants just moved out after 2 years. Rent was 1700 per month.

Just had the house valued by estate agent who says market has picked up and would sell house for 525,000.

Our incomes are 45,000 each and have a business.

So I am looking advice if you think I should sell and pay 90,000 of our new mortgage. Or keep rented property in the hope price will rise over 5-10 year period
 
Hi dingdong

Am I right in saying that the mortgage on your investment property is interest only for the life of the loan?

If so, I presume it's bank of Scotland.

You have an asset worth €525,000
You have a loan of €430,000
Your net asset is €95,000

You are getting rent after interest of €1,200 per month or €14,000 per year.
Assume around €6,000 of costs and taxes , this still leaves you with a net return of €8,000 per month on your investment of €95,000 - say 8%.

If you sell the property and pay off your home loan, you will save €95,000 @ 4.5% or €4,500 per year.

So you are better off by around €3,500 keeping the house as an investment.

We don't allow speculation about house prices on askaboutmoney, but from an income point of view, this is a good investment.

There is a small, but real chance, that Bank of Scotland will offer you a deal to sell the house and pay off the mortgage. Maybe not now, but they might do so at some time in the future.

In fact, you should approach them now, as long as you don't mind being refused.
 
There would also be Capital Gains on the profit if you sell the house. Not sure what the rate is.
 
Thanks Brendan , Annie

Your figures are good Brendan!

The question about capital gains is a good one. Can I still sell the property without capital gains.

We moved out in Jan 2011 after buying new house and rented old one.

Purchase price of old house was 400,00 euro + did 100,000 euros extension to house.

Can we still claim we did,nt sell because we could,nt and thus no CGT?
 
Your capital gain will be:

Sales proceeds: €525,000
Allowable cost: €500,000
Gain €25,000
You must apportion this for the period during which it was not your principal private residence.
Say you bought it 10 years ago, and it was an investment for 3 years.
The taxable gain will be 30% of €25,000 or €7,500
The tax will be 35%(?) of €6,000 or around €2,000.

Next year, it will be 4/11ths of the gain, and so on.

I don't think that these figures are a major factor in the decision.
 
Just for clarity,
Costs of sale are deductible.
The last 12 months of ownership count where PPR applies and there is a personal exemption of €1,270 per annum.
 
I think its slightly misleading to look at it as a straightforward investment/asset of €95K returning 8% p/a. This ignores the effect of the leverage (81%) on the returns. Leverage dramatically increases the volatility of returns.

e.g.

Compare owning an asset worth €95K financed entirely by equity (Investment 1) and owning an asset worth €525K, financed with €430K of debt and €95K of equity (Investment 2).

These investments are fundamentally different because of their sensitivity to changes in house prices.

e.g house prices fall by 20%

Investment 1 - asset value €95K * (100% - 20%) = €76K (Investor suffers 20% loss on equity)

Investment 2 - asset value €525K * (100% - 20%) = €420K, less debt of €430K (Investor suffers 110% loss on equity)

The above effect is occurs in reverse when prices rise, i.e. more leverage means equity rises faster than rise in price of asset.


I'm not suggesting you shouldn't keep and rent the house but be aware of the magnifying effect of leverage on risk

Obviously returns should be appropriate to the investment risk.
 
Hi tvman

An interesting point.

Investment is risky. Borrowing to invest magnifies the risk as you correctly point out.

I would normally point out in a situation like this that you have €860k of mortgages on around €1m of property. With an income of €90k, this is excessive exposure to one asset class property. And it is excessively overborrowed.

However, this case is very different in that it costs them so little to service the mortgage - €500 per month. Even if the property is empty for a long period of time, they will be able to well afford the repayments. We don't know how long is left to run on the mortgage, but even if there is drop in property prices over the next 5 years, the OP presumably has a further 5 or 10 years to recover.

Would I buy a family home in Dublin 4 with cash as an investment. No, I would not.
Would I buy a family home in Dublin 4 with an 80% SVR mortgage as an investment? Absolutely not!
Would I buy a family home in Dublin 4 with a tracker at 1.35% , interest only for the life of the loan? Yes, I would. I think that the risks are well compensated for by the potential return.
 
Brendan

I agree with above, the interest only tracker makes it very attractive - just pointing out th effects of leverage
 
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