Sell v Wait- who said being a grown up is fun?? :)

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Mouse7

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Hi all,

All advise welcome please.

I bought a house in dublin in the boom. Now I'm married and rent in a town an hour from Dublin. The house I bought in Dublin is rented out. My husband and I are literally stuck as to what to do next. We never wanted to be landlords but well thanks to me we are :)

We are in a good position in that we don't need to sell as the house is a good house and we don't need money to buy again.

We are looking at selling for these reasons: nuisance of being a landlord, and if we buy ourselves we fear the bottom falling out and then we have two mortgages.

Here's the figures:

Paid: 350,000 (mortgage& cash)

Owe: 200,000

Worth: 230,000

Repayments: 1250pm

Potential rent: 1300pm

Some people have suggested to us that the market is kinda slow at the minute and might be more advisable not to sell just now. Finding it difficult to make the call as were so caught up in the decision. Probably a bit 'emotional' about it due to the loss of money and don't know if we're seeing the wood from the trees basically!

So as you can see we have taken a big hit so we really just want to make a good solid financial decision and are looking for your thoughts.
Thanks a million!
 
Personally, I see the house as a solid enough investment for now. Why not get an agent to look after the landlord duties for you ? They will charge about 6% of rent and this can be written off the tax liability. Takes all the hassle out of it.
 
The hit is simply not relevant.

You owe €200k on a house worth €230k. That's all that really matters.

If you have a cheap tracker, you should keep the house. If you have a non-tracker you should sell it.

Why you should sell it
It will be easier for you to buy a home when you are ready to do so. The existence of a mortgage will limit what you can buy.
It's a terrible nuisance being a landlord and regulation is making it worse.

Why you should keep it if you have a tracker
It's a very profitable investment
Depending on the lender, you will be able to move your tracker to the new house

Ignore your friends' comments on the market being slow
You can't time the market. Even if it is slow, you should still sell it. As if you want to buy another house, you will need to get rid of your existing house in a hurry.
 
Hi,

Thanks so much for your replies!

Curious as to why the hit isn't relevant Brendan?

I'm new to this site (as you can see from my last accidental reply) so maybe I'm misunderstanding something!

Anyway the update is:

1. I'm not on a tracker, I'm variable.

2. I don't need to sell the house to help me purchase another house for deposit or additional morgage reasons.

Any other opinions?? :)
 
Personally I would not be rushing to sell until you have figured out what you want to do yourself re own house.

Sounds like you can fund the house you are renting out for now and that its probably around breakeven (ie you are not losing much if any money) though you are probably having to fund some/all of the capital payments. Consider the funding of the capital payments savings for the moment. (How much of the 1,250 repayment is interest, how much capital?). (Guess'timating two thirds give or take is interest, if variable rate?)

Agree with Brendan, can't time the market. However, one thing you can do is buy and sell in the same market and therefore in effect have a reasonably strong hedge against price movements by selling your own house around the same time as you buy (reduce the risk and effect of house price movements on yourself). As you're not under immediate pressure to buy/sell you have the small 'luxury' of time on your side so no need to rush a decision.

Whether you get an agent or not I would be indifferent if I was you (you still have to be very happy with the tenant yourself, agent can help but still up to you). One thing you can do is get a local handyman to deal with a lot of the smaller type issues that arise that tend to cause most nuisances (washing machine breaks down, electrics don't work, etc). I find this much cheaper and better than having an agent.
 
You said in your post that you are renting an hour outside of Dublin. If you sell the house in Dublin, you should walk away with €30k before costs. I know you have said you don't need money to buy again, is that because you won't buy or don' t need to buy?. What difference would the €30k make to your life ?
?
I don't think you should look at this purely as a "what to do with the rented house" question. You should be looking at what you plan on doing for the next few years and where does the rented house fit into that
 
In my opinion, the OP should definitely sell the rental property - it's a poor investment given the financing rate and the equity would be better employed elsewhere.

A potential monthly rent of €1,300 on a property with a fair market value of €230k equates to a gross yield of less than 7%. Net of all costs (other than mortgage repayments and income tax) that corresponds to a net yield of around 5%, being financed at a variable rate of, presumably, around 4%. The rental must be cash-flow negative and is certainly very inefficient from a tax perspective given the fact that LPT and 25% of mortgage interest payments are non-deductible for income tax purposes.

The OP would be far better advised to realise whatever equity remains in the rental and using this to reduce the size of the mortgage on the new family home.
 
Sarenco said:
the OP should definitely sell the rental property - it's a poor investment given the financing rate and the equity would be better employed elsewhere.

gross yield of less than 7%. ......... a net yield of around 5% ....... very inefficient from a tax perspective

far better advised to realise whatever equity remains in the rental and using this to reduce the size of the mortgage on the new family home.
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wow, while I do like simplicity, are things really that black and white?? Most definitely not imo.

1 Current investment property not costing anything (marginal at best) in net cash loss terms so no need to panic (any contribution is against the capital so that is savings)
2 He needs to decide what he/wife want to do re sorting themselves out with a house
3 He bought at 350, current value 230. Down 120k or 35% in value vs what he paid. Needs to consider whether he really want to cash out that loss or if preferable to hold longer term as part of overall investment and pension planning. He says he doesn't need to sell to buy.
4 Poor investment with a gross return of 7% and net return of 5%?? Most people would love these returns.
5 Inefficient from a tax perspective? All pure speculation.

He needs to works out the specific numbers himself or have someone do this to allow a more informed decision here. But most definitely not a black and white decision when all relevant factors are taken into account.

My current view is that anyone who has managed to come through the last number of tough years, unless there is a compelling reason to sell or the numbers are really bad and there are genuine cash rental losses that are difficult to justify/maintain, then a sale now limits any longer term future upside.

Personally I would find it tough stomaching a 120k cash loss by selling now when I feel that the prospect of longer term upside is higher than downside risks (opinion only, each to their own!).
 
Gerard123 said:
wow, while I do like simplicity, are things really that black and white?? Most definitely not imo.

1 Current investment property not costing anything (marginal at best) in net cash loss terms so no need to panic (any contribution is against the capital so that is savings)
2 He needs to decide what he/wife want to do re sorting themselves out with a house
3 He bought at 350, current value 230. Down 120k or 35% in value vs what he paid. Needs to consider whether he really want to cash out that loss or if preferable to hold longer term as part of overall investment and pension planning. He says he doesn't need to sell to buy.
4 Poor investment with a gross return of 7% and net return of 5%?? Most people would love these returns.
5 Inefficient from a tax perspective? All pure speculation.
Click to expand...

Taking your 5 points in turn:-

1. Any experienced residential landlord will tell you that you should allow for at least 25% of your expected gross annual rents to cover costs, other than mortgage repayments, associated with owning and operating a rental property. This should cover voids, over-holding periods, maintenance and repairs, LPT, PRTB fees, letting/managing agent costs, insurance, refuse collection, advertising, legal, accounting, etc. Mortgage repayments do not reflect anything like the full cost of owning and operating a rental property.

2. Not sure what the OP's own accommodation needs have to do with assessing the rental property as an investment.

3. The capital loss to date has already been incurred. When the loss is liquidated is irrelevant to assessing whether or not the rental constitutes a good investment today. Retaining a rental property in the hope of capital appreciation is pure speculation - the property could just as easily fall in value.

4. A net yield of 5% on a risky asset is very poor if it is costing 4% to finance the purchase of that asset.

5. LPT and 25% of mortgage interest payments are non-deductible for income tax purposes. That's not speculation - that's simply the current tax position.

Brendan is absolutely correct when he says that the "hit" on the original purchase price is irrelevant to this analysis. All that matters is whether the numbers make sense today to justify retaining the rental property as an investment.

They clearly don't in this case.
 
Gerard123 said:
wow, while I do like simplicity, are things really that black and white?? Most definitely not imo.
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Hi Gerard

Things are not black and white. As the future is unpredictable, the correct decision will only be known in retrospect.

If the OP is planning on buying a family home, they will have a big enough exposure to property, so they should probably sell. And I think that they should sell now. It's not easy to simply sell and buy again in the same market. The sale might not go through. I appreciate that the OP says that they do not need to sell in order to buy. They might not need to, but it's a good idea. If they will need a mortgage, they may get a lower rate if they have €30k extra to reduce the LTV. If they already have a mortgage, lenders will be less enthusiastic about lending to them.

If I had a house in Galway and were posted abroad for two years and probably expected to come back to a job in Dublin, I think I would keep the house in Galway as a hedge against property prices escalating suddenly. I wouldn't like the idea of a property investment, but I think it would be a good idea. If I were wealthy enough, the property hedge would not be needed.The OP seems wealthy enough, so they don't really need the property hedge.

Gerard123 said:
Personally I would find it tough stomaching a 120k cash loss by selling now
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Let me put it like this to you. If you had a family home worth €200k today and you were considering selling it, would it matter much to you if you had paid €100k for it or €300k for it? It really should not matter at all. The value today is the main factor.

Here is where it might make a small long-term difference. If they keep it as an investment, any increase in value back to the purchase price will be free of Capital Gains Tax. If the OP has a diversified portfolio of investments outside the family home, then maybe it would be worth keeping to avail of this CGT kicker.
 
Mouse7 said:
2. I don't need to sell the house to help me purchase another house for deposit or additional morgage reasons.
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thedaddyman said:
I don't think you should look at this purely as a "what to do with the rented house" question. You should be looking at what you plan on doing for the next few years and where does the rented house fit into that
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Hi Mouse,

as daddy says, you should not look at any investment decision in isolation. Could you give us some more details here.

Do you own another house in which you can live mortgage free?
Do you intend to buy a family home? Why are you renting and not buying?
If you do buy, how much will it cost and how much of the purchase price do you have?

You can only get fully informed answers to your questions, if you give the full information.

Brendan
 
Hi Brendan

Agree with the broad thrust. Really a matter of timing of the sale, my point was if there is no immediate pressure then they need to consider what they want to do. They say they are 'stuck as to what to do next'. In that scenario my point is hold fire until you figure out your plans, don't rush a sale. When they have sorted out what they want then by all means start the process.

Re cash out the 120k loss, absolutely no right and wrong answer. My point is that there is a need to consider a range of issues, current overall financial position, incomes and outlays, stage of life, planning, pensions, investments, all that goodstuff. Using pure pure investment analysis say 3 years ago, if people had sold then the cash losses then would be much greater than today. House price rises in the interim have helped to reduce the losses.

Also, like many people they are accidental landlords, so unlike pure investors where it really is about investment principles and yields, etc, there is a little more to it here with their personal case.
 
Hi Sarenco

Thanks for comments. Let me explain a bit further.

1 Agree with your additional comments pretty much. However, they do not take away from the need to run the numbers. At the moment the OP is most probably not losing money despite the list you provide. While I think the 25% is a bit high from my personal experience of letting, I will use it to illustrate. Rent pm 1,300 less 25% = 975 per month available to pay mortgage (remember the 25% covers the costs, etc). Mortgage 200k times variable rate say 4.5% = 750 per month. So the 975 comfortable covers the mortgage interest element and may allow a small contribution to the capital piece. This is a small saving and if the OP has to add to it then its really deferred savings.

Neither of us have any idea about the OPs income tax position, however it seems to me that they are still within the period on which capital allowances are claimed and together with other costs (25% of the rent), and 75% deduction for mortgage interest, any income tax bill on the rental income is likely to be low (though OP can correct on this).

2 See my comments above to Brendan re the OPs own situation. While not directly relevant they need to get their own house in order (excuse the pun) to allow a fully informed decision, ie figure out what they want to do. They are accidental landlords not traditional investors. A money decision has two feature, a qualitative consideration and a quantitative one. Both are important to consider.

3 I don't think I said they should hold long term. To quote, I stated "Needs to consider whether he really want to cash out that loss or if preferable to hold longer term as part of overall investment and pension planning". Nothing there about speculation. Rather a need to make an informed decision talking account of many factors.

4 Again I don't disagree, however for this couple yield is not the only consideration. For traditional investors, yes a lot more relevant. However, as accidental landlords with several options and decision points, there are other matters relevant. (As an aside, now that they own the property, its renting out and under financial control, I would not overstate the risk. Any investment has risk, look at the stock market activity in the past few days to see pretty massive swings, that sure is risky. Well controlled and managed property, as part of an overall investment strategy, helps to mitigate and diversify risk).
5 LPT and the interest deduction restriction (while unwelcome) are additional costs to be factored into the numbers. Taking in isolation one cannot simply say that it is tax inefficient. Far too simplistic.

Taxes are another expense, however without knowledge of the OPs situation, tax affairs, whether self employed and potential to put into a pension and have tax free returns (as an example), it is incomplete to say its tax inefficient. It may well become tax disadvantageous though my sense is it is not there yet.

I think Brendan has somewhat clarified his comment on the 'hit' comment, and I agree with his later comments. While not a persuasive factor, it is incorrect to say it is completely irrelevant come what may.

Finally, your last comment that the numbers clearly don't make sense - I think from my comments in 1 above it shows that the numbers most certainly do make some sense.

I reiterate that it is not as simplistic or black and white as you are suggesting, with respect.
 
Thank you all so much for your comments. Greatly appreciated!

So here's a few meters to clarify:

1. My husband and I are in full time pensionable government jobs and are in our mid 30s.

2. While renting at the minute, we intend to buy or build a house when the right thing comes to the market ideally for no more than €300,000.

3. We have savings of €65000.

4. You are all right now that I understand what you meant by 'hit', yes it bloody hurt but it could be a lot worse, we are over it and just want to make to best decision now going on the current scenario.

Thank you all once again :)
 
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