How to evaluate whether to keep an investment property

[poolfanabc]

Note from Brendan
I have copied this case study from another thread as Sarenco and I have different approaches to answering such questions. The point of this particular thread is to see how we approach the same problem.



in summary, I have a tracker mortgage on a house, however now hoping to purchase a 2nd house to cater for family with separate mortgage (already approved in principle without need to sell 1st property).
What I hope to do is rent out the current property for a few years, hopefully until out of negative equity and then sell on to reduce property exposure. The figures on current property are as follows:

Current property value = 230000
Remaining mortgage = 247000
Expected rental income per annum = 14400
Mortgage interest per annum = 3200
Estimated housing expenses (30% of rental income) = 4320
Taxable income = 14000-3200*0.75-4320 = 7680
Tax to be paid on income (52%) = 3994
Annual mortgage payments = 13032

Based on the above, (assuming 100% tenancy)

• From other threads, I see calc for yield is 14400/230000 = 6.3%. Don't understand relevance of this value to my situation really. Anyone care to explain?
• My net spend on property would be €6945 (13032+3994+4320-14400), however the mortgage amount is reduced by 13032-3200 =€9832, which is a form of saving.
  • If I could continue for 2years, I could consider to sell without any negative equity shortfall to make up.
  • However for only a net property value gain of €2887 (9832-6945) per year, I leave myself open to additional risk of 2nd mortgage during this time.

Can someone please comment on interpretations that can be made on above figures.

 

[poolfanabc]

Thanks for the feedback guys.

Gross combined salary ~140k.

Brendan - can you explain the 183k net equity value you have in table, as don't follow what this refers to.

In relation to whether we could pay for both mortgages, worst case to worst - I think we could get by yes, however far from ideal
Cheers.

 

[poolfanabc]

Thanks Sarenco.

Yeah, based on comments from you both here today, I've already contacted them back again and arranged for a meet with a mortgage advisor to reassess the situation.

Unfortunately, as circumstances would have it, we have found a house we like, so if we wanted to move forward with that, we would have to go with 2nd mortgage option, as seller not interested in chain, wants a quick sale.

I'm trying to fully explore the difference in monthly cash outlays with both options to see which makes more sense.
1) If mover tracker, then €417k mortgage (i.e. 400k new mortgage with 17k negative equity) at tracker +1% rate for 5 years = 2.3%. For a 25yr mortgage = 1829/month. = 22k per year.
2) If have 2 mortgages, then have [email protected]% = 1237/month, and [email protected]% (25yr mortgage) = 2067/month, total = 3300/month mortgage repayments, then allowing for ~300/month gain from rental, outlay is 3000/month = 36000/yr.

So cash flow difference is huge at €14k. If house prices stay the same as currently, only benefit in Option 2 id that I reduce the 1st mortgage principal by ~10k/annum, so ~4k worse off per year if I go with Option 2.

Does that seem like a correct analysis to you? If so, does shine a different light for me obviously.
would have to avoid a chain sale of houses and associated time delays. however if we are outbid for the house we like, then no harm in exploring BOI tracker mover in more detail.