Buying New House - To rent or sell existing House

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Rebelrebel

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Hi, Looking for some thoughts from anyone on the below.

My wife and I are in the process of buying a second Family home. We currently we live in a 3 bed semi-d in west Dublin. We are contemplating renting the three bed semi. Currently the mortgage is 225,000 and if the house were sold it would probably fetch 285,000. We are on a tracker on this and the monthly repayments are currently approx. 1,050. If we were to rent it, the rent would be 1,500 per month.

I’m familiar with the tax obligation we would incur. The house was recently renovated (new kitchen, tiling, flooring, converted attic etc.) and we would be able to write off a good amount against the 12.5% capital costs for 8 years. Having said that the house is in excellent condition and would probably attract a premium and perhaps some competing interested parties if we were to sell.

Given this information and the calculations below I’m looking for some thoughts on whether you think it makes more sense to rent out the house or to sell. The logic to rent it out would be that we could use it as part of our pension at the end or indeed sell before the 8 years of capital allowance depreciation comes to an end and the tax liability becomes larger. Of course I understand the downsides of renting – hassle, potential non-paying tenants, damage, repairs etc etc.

Note the interest rate on the new house would be approx. 3.60% and the mortgage on the new house would be 440,000 (if anyone would like to include that as part of their consideration)

I estimate the following would be how the finances work out and the approximate tax obligation. I’m open to any corrections to the below or factors that I have not yet considered.

Monthly RentAnnual
Rent1,50018,000
Expenses
EA Letting Fee1,5001,500
EA Mgmt Fee1501,800
Mortgage Interest2101,890
PRTB9090
Insurance500500
Mortgage Protection40480
Capital Costs45,0005,625
Repairs1,0001,000
Total Expenses-12,885
Net Profit-5,115
Tax liability (52%)-2,660
 
I don't think the attic conversion should be included in capital allowances, it should be allowed against CGT instead.
 
In my opinion, as you are not in negative equity, I'd sell and take the money. If you rent out the house you are unlikely to get the property back in the same state as at first. The PRTB's idea of normal wear and tear is, again, in my opinion, very much in the tenants' favour, not to mention all the other issues with renting. Consider why so many landlords trying to get out of renting.
 
A very interesting question, and particularly well laid out!

Which lender are you with? The main banks allow borrowers to move the tracker to their new home, with an additional 1%.

How much are you paying for the new house?

What is your total income?

Your taxable profit may be 5,115, but your real profit is much higher.

While you are writing off €45,000 against the tax, presumably this capital expenditure is reflected in the value of the house now, and will be reflected in it, if you sell it after 8 years.

(I don't know about capital allowances, but you seem to know what you are talking about.)

The mortgage protection is not a real cost either, in that you are getting a potential benefit from it. If you scrap it, it's unlikely that the lender would do very much about it.

Can you claim the mortgage protection insurance against the rental income?

Brendan
 
Most of the expenditure that the OP refers to would be enhancement and feed into the OP's CGT computation when relevant. So I'm not sure about the 12.5% capital allowances.
 
Thanks for the replies. Good points about enhancements versus capital costs. I'll investigate that further and may revise down the capital expenditure.

BB, in answer to your questions. We are with UB who don't offer moving tracker. My understanding is I would have to be selling my house at the time as buying anyway to avail of it and one of the reasons we could buy was that we didn't have to sell.

New house is 570k.
Joint gross income around 150k
You can write off mortgage protection against rental income.
 
Your letting fees estimate seems quite low
- an agent usually takes one months rent to get tenant

Plus 10-12.5% per month to manage the property

Or will you manage it yourself?

You also have to factor in that the property may be vacant between tenants - you can easily lose 3 months rent this way - one month vacant plus re letting fees plus another 1000 euro spent repainting / repairing

As mentioned your improvement refurbishment could not be claimed over 8 years - usually only fitting and fixtures painting etc - and I assume they date this from when you bought everything - ie if purchased in 2014 - you only have 6 more years to write everything off

On paper it seems like a good investment but you need to have some sort of idea of how long you plan to keep it - and the return on your investment per year

Will it cost you more to borrow money for the new house ?

Becoming an landlord is always more expensive that it looks on paper as additional expenses / interest rate rises always crop up
 
A few thoughts

Mortgage interest only 75% deductible unless opt for new scheme

Consider renting yourself rather than through EA ? You may care more re the property and what tenants to allow than possible an EA ?
Also consider renting by the room rather than as an entire house ? Rental void at any time is then only one room and may be easier to rent a room out than an entire house using remoter on daft.ie

LPT cashflow cost but not tax deductible (at present)

Letting fee may be an infrequent cost from EA if tenants stay

Fit out costs - beds,table, chairs etc

Depending on future price movements you could incur a CGT cost by renting out (may not be an issue if you plan to hold as your pension). Example to illustrate the point - buy in 2006 for 100k, current value 200k (option 1) sell in 2016 for 200k. (option 2) sell in 2026 for 200k Gain 100k in both cases. In option 1 all tax free. In option 2 only 11/20ths tax free (1o years in house plus last year deemed)
 
Thanks for those replies. Food for thought!!

In answer to some questions. I have estimate one months rent for letting agent securing tenants and 10% for managing the letting. I may decide to manage this after a year all going well. And realize if tenants stayed on I would incur the first charge once but conversely could end up losing a if.tenants were changing frequently.

I will definitely revise my capital expenditure and thanks for the CGT consideration as well.

I would rather rent as a house as opposed to per room but I understand the advantage you present. There is very good demand for rental property in this area so I should be able to secure good tenants. (Famous last words!)

If I sold for 285 I would make approx 60k and if I used that against my new property I would save approx 70k in interest and reduce a 25 year term to approx 20.

Appreciate the thoughtful and helpful replies.
 
You can move your tracker with Ulster Bank for 10 years at ECB +2%. Well, you take out a new mortgage, but they give you a reduced rate for 10 years.

http://digital.ulsterbank.ie/personal/mortgages/home-mover-2.html

"You cannot transfer your existing tracker rate to your new home, however you can choose our 10 year European Central Bank (ECB) tracker rate of ECB+2.00% (2.6% APRC variable) for loan amounts up to your current level of tracker borrowings."


So you need to factor into your calculations, that you will be borrowing €225k @3.6% instead of at 2.05%.

You are proposing to borrow €[email protected]% which will be €16,000

So let’s look at what happens if you sell your house and transfer your tracker

New house €570k

Mortgage: €380k ( €440k proposed less €60k equity)

Loan to Value: 67%

You might qualify for Ulster Bank’s rate of 3.35%, but let’s assume you pay 3.7%.

So your interest would be:
upload_2016-3-19_11-25-3.png

So, you are paying an additional interest bill of €6,000 if you keep your home.

When the 10 years is up, you will have a much lower Loan to Value and will be able to qualify for the best deal in the market at that time.

You will have borrowings of €665k if you keep your home. You will be very vulnerable to interest rate rises and property price falls.

In my view, this isn’t even close. Sell your home and try to transfer your tracker.
 
BB, thanks for your detailed response. I actually just saw that this morning about being able to get the UB ECB +2% on the outstanding balance of the existing mortgage for 10 years.

However, does anyone know if I can take out this kind of mortgage prior to selling the house? For example can I buy the new house with this type of UB ECB +2%. Get a new variable rate on the existing semi d and then sell it.

Basically I don't want the purchase of the new house to be dependent on the sale on the existing house.

I fully agree with your assessment though that if I could achieve this it would make sense to sell. Thanks for taking the time to reply.
 
In general, the order is as follows:
1) Get approval in principle for a tracker mover
2) Sell your existing property
3) Take out the new tracker rate mortgage

They might not allow you to do it in reverse order.

However, you should urgently go to UB and get Step 1 done.
You should also put your home on the market

I presume you have gone purchase agreed on the new property?
 
Thanks Brendan,

That's how I thought it worked. I need it to work the other way so will investigate with the bank on Monday.

Realistically I want to buy the new home and move in and then sell my old house, so not sure how the bank will view that.

Thanks for highlighting it, I will investigate and keep my fingers crossed.
 
So, It seems you have to sell your house first and discharge the mortgage on that house before you transfer the tracker mover to the new property you want to buy. So it's not really an option for us unfortunately.

Looking at the maths again though. The real savings you would make would be the difference between the 2% and the 3.7% over 10 years on 225k. So 1.7% which would be a saving of 19.8k.

So while it's significant, it's not massive. If I purchased the house and then sold my own and used the 60k to pay off the variable mortgage after 6 months I would save 75k and knock the repayment period from 25 to 20 years. So that's where the significant saving would be made. Ideally it would be great to make the savings on both but that's not an option.

I suppose it really comes down to whether I think the annual return on investment will be greater than the borrowing rate for the new house.
 
Why is it not an option? Can you not sell your home first? It is well worth the deal.

Even if you can't move the tracker, you probably should still sell. You should be paying a lot less than 3.7%. The €60k less borrowing will get you a better deal.

I would expect that in the coming months, rates below 3% will be available for LTVs <80%.

Brendan
 
Hi Brendan, The seller wants a buyer who isn't in a chain essentially. You may be right though that selling would be the best option anyway. We would save a lot in interest and have a much lower LTV with the option then to search for an even better rate. I too expect rates to decrease regardless. Actually the rate we are looking at is 3.55% at the moment.
 
Thanks Brendan. I guess it could be done but we have not yet gone sale agreed on the house that we are looking at and don't want to risk losing it by complicating matters. It is closer to the city and convenient for work, schools etc. and we have a very specific type of house that we want, very few of which crop up, so if we sell our own and then don't get this one we're in a worse situation.
 
That does not stop you putting your house on the market and trying to get a quick sale.

In fact, given that you have not got sale agreed, then you should do so immediately.

If you don't have your house sold by the deadline, then you buy the other house first.

With stamp duty at 1%, if you had someone willing to buy your house temporarily , it would be worth doing to qualify for the tracker mover product.

Brendan
 
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