Should I sell - Badly need advice!!

Marshian2015

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Hello all

am new to this forum and really hope I have come to the right place.

So, I bought my one bed Dublin apartment in 2007 for Eur 320k.
Currently Owe - Eur 260k
Can sell for - Eur 205k approx.

So you can see I made a huge loss and the negatvie equity gap is currently Eur 55k. I am moving to another county where my fiance already has a house so my options are to rent or to sell my dub apartment. a relative has very generously offered to give me an interest free loan to bridge the gap of negative equity which I can pay off over 10 years and he is really urging me to sell.

between tax on rental income, hassle with being a landlord and other costs he thinks I will never ever be in a winning position with my apartment. Rent per month would be Eur 1200 if I decided to rent out. I am on a variable rate mortgage of 4.25%. My interest payments are still quite high at the moment.. approx Eur 900 per month out of total repayments of Eur 1375 per month. My estimated tax bill would be Eur 2-eur 3k per year.

So my question is, does it make sense to sell and take the Eur 50k loan over 10 years interest free or should I hold on to my apartment and rent it out in the hope that some day it will come good again? really cannot see the wood from the trees at the moment yet I know he is probably giving me very sound advice. Further, myself and my fiance would like to sell his house in about 5 years time and move to a better house. he is not in negative equity.

Please help!!

Many thanks
 
I would sell up, take the 55k loan and don't look back and start your new life without all the hassle that being a landlord can be.
The 55,000 int free loan will not cause a problem gift tax wise from the zero interest as you can get 3k pa gift from an individual each year so
just go do it
Good luck.
 
I think your relative is offering you very sound advice and I would accept his very generous offer if I was in your position.

Here's the way I would look at the numbers:-

A monthly rent of €1,200 on a property with a fair market value of €205k equates to a gross yield of 7% and a net yield of around 5% (allowing for voids, expenses, etc). However, you are currently financing the purchase of that property at an effective rate in excess of 5% (4.25% x 127% (your LTV)). And that's before you consider the fact that 25% of interest payments and LPT are not deductible for income tax purposes...
 
Let's look at the actual numbers

upload_2015-8-28_8-8-13.png


I assume that as a non-resident, you will be taxed the same as in Ireland. I don't know.

The second column is where your relative gives you the money and you pay it off the expensive mortgage. This is a better measure of the profitability of the investment.

The only reason this is loss making is because you are paying a scandalously high interest rate of 4.25%. It should really be no more than 3%. But given that you are in negative equity, you probably don't have much option to switch if a new lender enters the market with fair rates.

So you need to make a few predictions to get the decision right.
Will the value of the apartment rise or fall?
Will the level of rent rise or fall?
What will be the level of hassle with tenants? For example, if you get a bad tenant, you may not get any rent at all and have to pay to get them out.
Will the interest rate rise or fall?

My gut feeling is that you are making a lot of changes to your life. You are moving to another country. You will presumably be changing job. You are moving into a new stage in your relationship. Things do go wrong. My gut feel is that these are more important considerations than the purely financial. So I think you should retain your apartment for a couple of years and see how you get on. Then sell it if everything works out o.k.

Against that, the apartment is probably looking its best now after owner occupation. It may not be in such good condition after tenants have rented it for two years.

Brendan
 

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Thanks all for your advice and Brendan thank you for the workings! you are right when you say things can go wrong and not even with the relationship but more to do with potentially not being able to settle outside of Dublin and wanting to move back here. My relative is saying that even if this did Happen we would be better off renting as the apartment will. Only ever be a losing battle.

Brendan I'm not sure I Understand your second calculation where you have included the value of property at 4.25%. Is the rate not irrelevant if that's the value I am selling at?

P.sI am an Irish resident
 
Let's look at the actual numbers

View attachment 813

I assume that as a non-resident, you will be taxed the same as in Ireland. I don't know.

The second column is where your relative gives you the money and you pay it off the expensive mortgage. This is a better measure of the profitability of the investment.

The only reason this is loss making is because you are paying a scandalously high interest rate of 4.25%. It should really be no more than 3%. But given that you are in negative equity, you probably don't have much option to switch if a new lender enters the market with fair rates.

So you need to make a few predictions to get the decision right.
Will the value of the apartment rise or fall?
Will the level of rent rise or fall?
What will be the level of hassle with tenants? For example, if you get a bad tenant, you may not get any rent at all and have to pay to get them out.
Will the interest rate rise or fall?

My gut feeling is that you are making a lot of changes to your life. You are moving to another country. You will presumably be changing job. You are moving into a new stage in your relationship. Things do go wrong. My gut feel is that these are more important considerations than the purely financial. So I think you should retain your apartment for a couple of years and see how you get on. Then sell it if everything works out o.k.

Against that, the apartment is probably looking its best now after owner occupation. It may not be in such good condition after tenants have rented it for two years.

Brendan
Is he not moving to another 'county' not another 'country'?
 
SHE is moving to another county.

*Updated* I'm also assuming the offer of the loan from your relative is in the event that you decide to sell and hence this will enable you to clear your mortgage? Does the offer apply if you decide not to sell?
 
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Yes I am a she and I am moving to another CounTY! :) And yes the loan only applies in the event that I sell! Ok so its not a relative yet.. its my fiances father.. so it is a Very generous offer indeed. I guess essentially he is offering both of us the loan as once we are married the apartment will also become my hubbies issue.. in theory!

The property agent called last night and is pushing me to at least "test the market" to see what reaction it gets.

I guess my concerns are, I will be paying off a Eur 50k loan with nothing behind it. if I keep the apartment and let it out, even though I will be paying tax on rental income etc, am I not at least "investing" my money in an asset that could potentially come good? My "father in law" says that to ever make money on this property it will have to at least sell for the capital value I paid for it (Eur 320k) Plus interest paid?

Never considered tax on a gift... looked this up online last night and see that I have to pay 33%!!!! ARGH!
 
My "father in law" says that to ever make money on this property it will have to at least sell for the capital value I paid for it (Eur 320k) Plus interest paid?

That's just nonsense. The price you paid for it is simply not relevant to today's decision.

You have to decide whether you want to sell it at today's price or not. The factors I have outlined all apply, other than the fact that you are not moving to another country.

You should suggest to him reducing the loan, which would have the same benefit for you. If the loan is conditional on selling, then you should sell it, as that swings the deal. Make absolutely sure to do an agreement in writing on the loan. People often forget the terms of the loan, if they fall out after a few years.

Brendan
 
Brendan I think he was just counter arguing what I said about thinking my negative equity apartment may some day be a good investment. also the price I paid is relevant as if I paid less than the current value I would definitely hold on to it !

Yes the loan is conditional on selling !! just so hard to know what to do even though I am aware I have a great "get out clause" being offered.
 
It all comes down to two factors which you have to decide for yourself:

1. Gambling: you are hedging your bets that property prices will/won't increase in whatever space of time is reasonable to you. Therefore I would recommend you take the risk and decide what your gamble is - increase or decrease over 10 years or whatever time frame. Remember to factor other future desired property purchases into this time frame and play out either side of the coin if you keep the property. For example, if prices start falling over the next 10 years what position will I be in to buy another property.

and 2. Being happy with the financial outcome: most people won't sell a property because they are afraid of crystallizing a loss. This can be detrimental for a number of reasons but primarily - if you are exposed to a loss-making asset class and have no end determinate time when you KNOW that asset will regain value, it limits further investment risk you will be able to take. In other words, sometimes it's better to sell at a small loss than hold on to something where you never know when/if it will recover the initial amount you paid for it. Much of this is psychological.

Good Luck! If it were me, I would sell and take the int. free loan.
 
Property is about location location.So if you are in a secondary location sell and move on with your life.
 
but more to do with potentially not being able to settle outside of Dublin and wanting to move back here
How real an option for you would this be? Would you, with your then husband in tow, be happy to move back into your 1 bed apartment in Dublin should you find it difficult to settle outside of Dublin? Would it fit with both your working situations at that time? Would it still be suitable for your requirements at that time, i.e. starting a family, etc.?

On the flip-side, if you did get rid of it and down the line you wished to return, would you and your then husband be happy to rent in Dublin at whatever cost that may be?

I think you need to remove some of the variables and focus on the key factors in this decision. Seem's like there are too many "if's/but's/when's" in your head at the minute for you to get clarity of thought?! :confused: Maybe you could rule out the above scenario from the decision as it stands today for starters. Who knows what your requirements may be down the line, deal with them then!

If the loan is conditional on selling, then you should sell it, as that swings the deal.
I'd agree with Brendan here and would regard this as a key factor. Holding on is a gamble, nobody can say what your apartment will be worth in 12/24/36 months time. You could potentially sell at some point in the future without requiring any loan from anybody, but again it's a gamble, pure and simple.
 
Hi Marshian

The workings in the first column of Brendan's post illustrate the point that I was making above that the anticipated rent, net of anticipated costs, is actually less than the interest that you are paying on the mortgage and you will still have a tax liability on the rental "profit" (because certain costs are non-deductible). So, by retaining the apartment you would indeed be investing your money (by paying down the principal on the loan) but you would be investing in an asset with a negative rate of return (ignoring any possible capital appreciation).

By way of an imperfect analogy, would you deposit money with a bank if the interest rate on the deposit was negative?

Yes, the apartment could rise in value in the coming years but it could just as easily fall in value in that time frame. The long term (20 years +) anticipated appreciation in the capital value of real estate is actually zero, when you strip out inflation and maintenance costs.

As irchoa points out above the interest free loan should not cause any gift tax problem because of the annual small gift allowance.

I would agree with your future FIL that if you did want to return to Dublin in the future you would be better off renting another property than retaining the apartment. If I was in your position, I would grab your future FIL's offer with both hands - it really is a very generous offer and will significantly simplify your finances.
 
With apologiess in advance for getting into the numbers, hope you can follow the logic................

When looking at these situations I always find it useful to get good clarity on the numbers as Brendan has done. Its not about numbers only, but need to have clarity on numbers as this helps. I take a simplistic approach at the start and build from there. I estimate the following based on facts provided:

1 Assume status quo, no change in house prices, no change in interest rates, no change in current tax regime, no change in rents (very simplistic I know and I am not saying these are reasonable, however I always want to know facts based on the current situation and keeping thing very simple to start with). Also ignoring time value of money. Agree with the 25% costs (I use 9 months rents but its the same thing. I take 2 of the other 3 months as representing costs and 1 month void. Over long period of renting I find these numbers are about right.

Also, is it a 35 year mortgage that you took out - if paying 1,375 per month incl full interest at 4.25% and full capital, that's the only way I can calculate the mortgage being paid off (i.e. if it was a 35 year mortgage stating 2007, about 26/27 years left, approx.).

After 10 years (that's the life of the relatives loan)

Assuming keep the apt. Continue to repay the mortgage at 1,375 per month.
Estimated mortgage balance in 10 years is about €192,000 (if it was a 35 year mortgage). Assuming current rent, same tax regime and interest rates, I estimate that you will need to fund the apartment to the tune of €75-80,000 in pure cash terms over the next 10 years. About €15-20,000 of this is tax payments you will have to make, the balance is in effect capital repayments that you are making yourself. The rent approximately covers the interest expense, costs of running the place and tax over the 10 year period.

Assume sell the apartment. Over 10 years a need to repay the 55,000 to your relative, ie 5,500 per year.

CONCLUSION

Easy to get overwhelmed with the numbers so let me take a stand back/high level view. What's the above saying?

1 In pure pure cash terms cheaper to sell now. Brendan's numbers point to the same conclusion.
2 If keep, you need to fund it 80k over next 10 years. That's 25k more than repaying your relative.
3 It would need house prices to rise marginally over the 10 years to get to breakeven, ie a situation where your continued funding of the apt would be offset by the extra payments (over and above repaying the 55k loan).

Then take all the non number/financial factors into consideration, hassle, uncertainty, risk of changes in interest rates, tax regime, house prices, leaving Dublin, lifestyle, you guys have a house to live in, etc - I find these also pointing in the sell direction. And when combined with the numbers I think the case is getting much stronger to sell. What makes this an easier decision is the interest free loan.

As I look at it you would need substantial house/apt price increases in the next 10 years to make it worthwhile keeping. Chances of that?? Your call.
 
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The rent covers the interest expense, costs of running the place and tax.

I actually don't think the anticipated rent would in fact cover interest payments, holding costs and income tax.

However, I agree with your conclusion that the only logical reason for retaining a rental property with a modest (or in this case negative) rate of return, after financing costs and tax are taken into account, is where you anticipate that capital appreciation will be significantly above the long term trend over the chosen holding period. That's a gamble that a lot of people took in the years leading up to our recent crash and are bitterly regretting it now...
 
Thanks. Splitting hairs. For decision making and simplicity, its there or there about if you take the ten years together (I've run detailed calculations through the end of the mortgage and for the 10 years). Not in earlier years but in later years the interest component decreases as capital is paid down.

If only people had run detailed numbers and paid attention to what they were telling them ...........................
 
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Fair enough. IMO there are too many assumptions involved with projecting forward beyond a year for that level of analysis to be particularly useful.

However, I strongly agree with you that running the numbers is critical and whether you project forward for 1 year or some other period is really just a detail.
 
IMO there are too many assumptions involved with projecting forward beyond a year for that level of analysis to be particularly useful.

I have to say I found that analysis particularly useful.

With respect, far more useful that your analyses involving yields, which as we have discussed elsewhere, really add very little to the discussion.

Brendan
 
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