Sell home in negative equity or rent it out.

sceach

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Hello
We have a house (home) in negative equity – owe €357k, worth €300k SVR 3.9%, 23 years remaining.
We own a site with planning permission, and plan to start building in May.
Mortgage on the new house is <60% LTV.
If I rent out our house in Dublin, I would expect a gross rent per month of c.€1,400 versus mortgage payment of €1,900
I am estimating that after expenses and other deductions I would end up adding about €8k per year to this mortgage.
What are your thoughts about keeping this property and renting it or selling and transferring the NE to the new house?
Having paid 7 years of mortgage payments it would hurt a little to sell it at a loss.
I have read the key post but would appreciate any specific advice.
Thanks for any advice.
 
A monthly rent of €1,400 on a property with a fair market value of €300k implies a gross yield of 5.6% (which was exactly the national average at the end of October 2014 per Ronan Lyons). Allowing a deduction of 25% of the expected rent for all costs (actual and imputed) of holding the rental, other than financing costs and income tax, leaves a net yield of 4.2%.

By keeping the rental, you are effectively paying interest on a loan at a rate of 3.9% to buy an asset with an income stream of 4.2%. However, when you account for the fact that 25% of your interest payments and the full amount of your LPT are non-deductible for income tax purposes, you are actually losing money on an after tax basis.

Would transferring the NE to your new house impact the rate on your new loan? I assume it would no longer be a 60% LTV mortgage so that may be a relevant consideration.
 
You would have to crunch the numbers but you might find that, on an after-tax basis, you would lose less by retaining the rental than you would by no longer falling within the 60% LTV. The lesser of two evils if you like!

If it's a close call, I would be inclined to sell the rental - there's no point taking on the unnecessary risk of holding a rental unless there is a clear benefit to doing so.
 
Having paid 7 years of mortgage payments it would hurt a little to sell it at a loss.

This should not be a consideration. The only issues which matter are the current values and the current mortgage.

We have a house (home) in negative equity – owe €357k, worth €300k SVR 3.9%

Which lender is charging 3.9% SVR? Is it a former Irish Nationwide loan?


If it's a close call, I would be inclined to sell the rental - there's no point taking on the unnecessary risk of holding a rental unless there is a clear benefit to doing so.

I am with Sarenco on this and he articulates the answer very well. Sell unless there is a clear benefit not to.


Would transferring the NE to your new house impact the rate on your new loan? I assume it would no longer be a 60% LTV mortgage so that may be a relevant consideration.

That is a very interesting point which I had not considered before. And this might be a good reason for holding onto your first property. But if is, then pay down the mortgage as quickly as possible and sell as soon as you can.
 
Thanks Brendan. My existing mortgage is with BOI.
There is a further variable to add, and I know there was a recent thread on this but I guess the bank could try to change my 3.9% to investment rate if I rent it out.
 
Are you sure you are on 3.9% SVR?

Is this one of the Irish Nationwide mortgages taken over by BoI?

People talk about paying a higher rate for renting out a former home, but I have never actually seen a case of it.

Brendan
 
Thanks Brendan. My existing mortgage is with BOI.
There is a further variable to add, and I know there was a recent thread on this but I guess the bank could try to change my 3.9% to investment rate if I rent it out.

That's certainly possible but I think it's unlikely - I don't believe BoI has made any attempt to move people to investment rates in these circumstances.

I would suggest that you sit down and work out what your rental accounts would look like in Year 1 and figure out your after-tax position. That will give you a concrete basis for your decision. Don't forget that you cannot continue to claim MIR (if relevant) on your property if you rent it out.

I suspect selling the property will make sense but you really need to crunch the numbers to make an informed decision.
 
Are you sure you are on 3.9% SVR?

Is this one of the Irish Nationwide mortgages taken over by BoI?

People talk about paying a higher rate for renting out a former home, but I have never actually seen a case of it.

Brendan
Thanks Brendan, yes definitely 3.9%. It's not a former IN mortgage, I took it out directly with the bank in 2007. I even have it quoted in a recent email from the bank. I am a former bank staff member if that makes a difference. Having said that, when I left the bank all my accounts etc. were switched to "non-staff".
 
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That's certainly possible but I think it's unlikely - I don't believe BoI has made any attempt to move people to investment rates in these circumstances.

I would suggest that you sit down and work out what your rental accounts would look like in Year 1 and figure out your after-tax position. That will give you a concrete basis for your decision. Don't forget that you cannot continue to claim MIR (if relevant) on your property if you rent it out.

I suspect selling the property will make sense but you really need to crunch the numbers to make an informed decision.
Thanks Sarenco, yes I will be informing revenue to cancel TRS and will also switch insurance to rental. We will probably decide towards the end of this year what to do about renting or selling so we still have time to crunch the numbers.
 
Are you sure you are on 3.9% SVR?

Is this one of the Irish Nationwide mortgages taken over by BoI?

People talk about paying a higher rate for renting out a former home, but I have never actually seen a case of it.

Brendan
Hello Brendan , im wondering what you think of those mortgages taken over by mars capital from ibrc? My mortgage was sold late last year , a fully performing mortgage, no missed or late payments, but in negative equity ; it has been suggested to me that this may not be necessarily a bad thing as they may be open to cutting a deal , ive been holding off injecting cash into the mortgage for this reason , your opinion is of interest to me thanks brendan.
 
I would suggest that you sit down and work out what your rental accounts would look like in Year 1 and figure out your after-tax position. That will give you a concrete basis for your decision.

This is very good advice. Poster mentioned 8K needed annually. But no numbers to back it up.
 
This is very good advice. Poster mentioned 8K needed annually. But no numbers to back it up.
Thanks Bronte, I have roughly calculated numbers and am amateur at this so quite open to correction.
It seems worse than originally thought and I’ll actually need to add approx. €12k per year.
Rental Income: €16800
Mortgage interest 2016: €13072
75% Interest allowable: €9804
Expenses Estimate:
(Insurance, Assurance,
Accountant, repairs, PTRB) €3100
Taxable Income: €3896
Tax c.50%: €1948
Net Rental Income: €11,752
Annual Mortgage: €23,784

Shortfall: €12,032
 
Tax: does that include USC and PRSI.

Don't forget that paying down the capital part of the mortgage is a form of investment.
 
Thanks Bronte, I have roughly calculated numbers and am amateur at this so quite open to correction.
It seems worse than originally thought and I’ll actually need to add approx. €12k per year.
Rental Income: €16800
Mortgage interest 2016: €13072
75% Interest allowable: €9804
Expenses Estimate:
(Insurance, Assurance,
Accountant, repairs, PTRB) €3100
Taxable Income: €3896
Tax c.50%: €1948
Net Rental Income: €11,752
Annual Mortgage: €23,784

Shortfall: €12,032


A few thoughts:

Firstly, your projected expenses look too low to me. You need to account for all costs - both actual and imputed.

Your actual expenses would include house insurance premiums, mortgage protection premiums, property management fees, letting agent fees, advertising costs, OMC annual fees (if applicable), PRTB registration fees, LPT (which is currently non-deductible for income tax purposes), refuse charges (if paid by you), repairs and maintenance, cleaning, accounting and legal. Your imputed costs would include voids between tenancies, over holding periods (i.e. periods where a tenant stops paying rent but remains in occupation of the property) and your own time costs. Even if you manage and/or maintain the property yourself you should still account for your time (assuming you don't work for free!) but bear in mind that your time costs are not tax deductible. When you account for all costs, you should find that, on average, your cost of holding the rental will equate to at least 25% of your anticipated annual rental income (I personally prefer to use 33% to be conservative). Some years your costs will be lower or higher but over a prolonged holding period you should find that your holding costs average out at around 25% of the annual anticipated rental income.

Conversely, your effective tax rate looks very high. Unless you have very substantial income from other sources, your effective tax rate (including PRSI and USC) is likely to be a lot lower than 50%. Don't forget that rental profits are the same as any other form of income - not all of which is taxed at the marginal rate.

On the other side of the equation, could you indicate how much higher your interest costs would be if you moved your NE to the new property and no longer qualify for a 60% LTV mortgage?

I still suspect that selling your current house will be the better option but it would be interesting to see the figures.
 
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Conversely, your effective tax rate looks very high. Unless you have very substantial income from other sources, your effective tax rate (including PRSI and USC) is likely to be a lot lower than 50%. Don't forget that rental profits are the same as any other form of income - not all of which is taxed at the marginal rate.
Should the OP be thinking about effective rate here?

If the question were "Should I quit my job and become a fulltime landlord?", we would need to make an apples-to-apples comparison between two different income streams, and effective rate would definitely be correct.

But in the scenario where a single portion of OP's income is on the chopping block, isn't 50% the defacto effect on OP's bottom line? (Assuming the OP's taxable income post-sale would still be reaching the marginal rate)
 
Should the OP be thinking about effective rate here?

If the question were "Should I quit my job and become a fulltime landlord?", we would need to make an apples-to-apples comparison between two different income streams, and effective rate would definitely be correct.

But in the scenario where a single portion of OP's income is on the chopping block, isn't 50% the defacto effect on OP's bottom line? (Assuming the OP's taxable income post-sale would still be reaching the marginal rate)

Well, in general terms all taxable income is fungible - it doesn't really matter whether it is derived from a salary, dividends, rental profits, etc. You can treat the rental profits as representing whatever tranche of taxable income you like but that's really just mental accounting.
 
Your total mortgage payment is €23784. The interest is €13072. The amount of capital outstanding decreases by almost €11k.
So yes you're inputting €12k but you owe €11k less at the end of the year. Almost evens out. This is only good news is house prices are stable or rising though. It's bad news if property values fall.

On the effective tax rate - I always feel that if you are already in the higher tax bracket by salary alone, then the tax you pay on the rental income is effectively taxed at 50%.

I'm not really seeing a big plus to you keeping the rental property in the long term. The only reason I'd keep it is if I thought I'd erode the NE within a couple of years & then look to sell it.
 
On the effective tax rate - I always feel that if you are already in the higher tax bracket by salary alone, then the tax you pay on the rental income is effectively taxed at 50%.

A lot of people think like this but it's not technically correct. An individual employee would actually have to earn well over €250,000 per annum before they would come anywhere near having an effective tax rate of 50% (including USC and PRSI). This report by TASC is interesting in terms of the effective tax rate at different income levels.

http://www.tasc.ie/download/pdf/tasc_how_much_tax_do_people_pay_on_their_incomes.pdf
 
A lot of people think like this but it's not technically correct. An individual employee would actually have to earn well over €250,000 per annum before they would come anywhere near having an effective tax rate of 50% (including USC and PRSI). This report by TASC is interesting in terms of the effective tax rate at different income levels.

[broken link removed]

That is very interesting. I had just assumed marginal tax rate + USC + PRSI on the taxable rental income.

To answer Brendan's earlier question on the impact of the higher LTV:
60% is 4.0%
>60% is 4.3%
 
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