Rent or Sell PPR

[JamieO]

I would appreciate advice on whether to retain and rent existing PPR or whether to sell now as we have recently purchased a new family home.

Ages: 38 and 36

Annual gross income from employment or profession: €185K

Type of employment: Private sector; Public sector

Saving - €2,000 monthly jointly which we are using for deposit for recently purchased trade up

Existing PPR:
Rough estimate of value of home: €250K-€275K
Amount outstanding on your mortgage: €205K
Original Purchase Price: €250K
What interest rate are you paying? 3.1% Haven Variable, €500 monthly mortgage interest
Estimated Rent: €1600pm

New House:
Rough estimate of value of home: €750K
Amount outstanding on your mortgage: €600K
What interest rate are you paying? 2.7% fixed PTSB, €2335 monthly

Other borrowings – car loans/personal loans etc: 0
Do you pay off your full credit card balance each month? Yes
Savings: Investing everything into deposit for new purchase and using cashback for new furnishings
Do you have a pension scheme? Yes
Do you own any investment or other property? No
Ages of children: No kids yet - possibly in the future.
Life insurance: Yes

What specific question do you have or what issues are of concern to you?
We recently purchased a larger family home with a lot more space. The existing house will achieve €1600/month in rent and is in great area for renting long term. My original thinking was to retain the house due to strong potential for rental income and long term investment. But selling now will mean I am exempt from CGT on any potential gain. With the current market uncertainty, and from doing some research, I am more inclined to sell now vs my previous thinking of renting. If I decide to sell now, I will end up paying both mortgages for a period until close, a short-term hit that I didn’t anticipate but we could use the cashback from mortgage until the sale goes through. Appreciate any advice.

 

[Sarenco]

By keeping the property as a rental, I would estimate that you might net somewhere around €4,500pa, after all expenses and taxes.

By cashing out the equity (taking the higher valuation) and applying it against the (new) PPR mortgage, you would save €1,890 pa in interest.

Is the €2,600pa differential a sufficient return for all the risk and hassle involved with running a property rental business?

 

[JamieO]

Thanks Sarenco. The more I read about rental business the more I think selling is better option. Reviewing one of your other posts I did a quick calculation on net and I come out negative. See calculations below.
A few questions:
1. How did you calculate the €1,890 savings in interest?
2. As I signed up for fixed rate for 3 years on the new house, am I able to pay a lump sum or do I need to wait 3 years?
3. Assuming I can pay off a lump sum, would I not still be better putting the equity to use on stock market for higher return?

Annual Rental Income	19,200​
Annual Mortgage Payments	11,256​
Expenses	3,000​
Annual Costs	14,256​
Gross Profit	4,944​
Mortgage Interest	5,400​
Relief on Expenses	3,000​
Total Relief	8,400​
Taxable Rental Income	10,800​
Tax at 52%	5,616​
Total Costs inc Tax	19,872​
Net Profit	-672​

 

[Amygdala]

I am in a similar situation.
My interpretation of this is that this is your annual cash flow- which is negative.
For this, you are getting the principal on your mortgage reduced.
Depending on property prices, your equity in your home may increase/remain the same/decrease.
Therefore, it is a low "net yield" property investment, and you are exposed to property price fluctuations which can erode your equity.
I am open to correction on this.

 

[Sarenco]

As @Amygdala says you don't deduct mortgage principal repayments in calculating your taxable profit. Your calculation shows the cash flow position, which is negative.

1. How did you calculate the €1,890 savings in interest?
2. As I signed up for fixed rate for 3 years on the new house, am I able to pay a lump sum or do I need to wait 3 years?
3. Assuming I can pay off a lump sum, would I not still be better putting the equity to use on stock market for higher return?

1. €70k (i.e. €275k - €205k) @2.7%.
2. Most lenders allow for up to 10% of the principal balance to be paid off without incurring a break fee. I'm not sure about PTSB but in any event the break fee is unlikely to be material.
3. I take the view that it doesn't make sense to invest in equities, outside a pension wrapper, while carrying a mortgage. Our high tax rates skew the risk/reward analysis.

 

[JamieO]

Understood, thank you both. I have decided to sell while the market is still strong. It reduces our risk as combined mortgage of 2 houses is over 800K which makes me uncomfortable in the current economic environment. And it takes away the hassle of running a property rental. Now hoping for a quick sale to reduce impact of paying both mortgages.