50 income poor asset ok. Expenses Looming

C

cremeegg

Registered User
Messages
4,154
Age: 48
Spouse’s/Partner's age: 51

Annual gross income from employment or profession: €45,000
Annual gross income of spouse:None

Monthly take-home pay €3,750

Type of employment: Self-employed

In general are you:
(a) spending more than you earn, or
(b) saving?

Spending a little more than we earn.

Rough estimate of value of home €260,000
Amount outstanding on your mortgage: €170,000
What interest rate are you paying?
ECB plus 1.15% (€10,344 pa)

Other borrowings – car loans/personal loans etc.
€9,000 UB unsecured 3.5%

Do you pay off your full credit card balance each month? Yes
If not, what is the balance on your credit card?

Savings and investments:
Deposit ac €190,000
Short term deposit €20,000

Do you have a pension scheme?
PRSA €114,000 no contributions currently

Do you own any investment or other property?

BLT 1
Value €125,000
Mortgage None
Rent €9,000 pa

BLT 2
Value €160,000
Mortgage €200k ECB + 0.75% IO for 18 more years (€2,000 pa)
Rent €8,400

BLT 3
Value €95,000
Mortgage €208k ECB + 0.75% IO for 18 more years (€2,079 pa)
Rent €8,400

BLT 4
Value €170,000
Mortgage €175,000 ECB + 1.15% Cap & Int (€13,944 pa)
Rent €15,000 pa

Ages of children: 16,14,12,9

Life insurance:Sufficient to clear mortgages


What specific question do you have or what issues are of concern to you?

Mostly I am looking for perspective on my situation, I worry that as I am getting older my earning power is not going to improve. My kids are coming to the going to college stage. At present we are spending above our earnings, including BLT profits.

Specifically advice about how I should use the cash savings. As you will see from other threads I don't believe that investing in more property is the way to go, but I am not familiar with anything else.

Any suggestions welcome.
 
Since you're asking for perspective: I went to look at your recent posts to see what other threads you were talking about and I saw this post from a couple of weeks back -

cremeegg said:
I claim the full civil service rate for lunch every day. It may not be in accordance with the letter of the law but I defy any civil servant to point this out.
Click to expand...

So you probably have an as yet unquantified tax bill building up for yourself as well if you're playing fast and loose with your self-employed expenses... :(
 
You have a sizeable amount of savings despite several property investments so clearly you have been doing something right. I think what you need to do is really planning. As you say you are at a point where you are looking at your children possibly starting third level education so you would probably not want to tie up all your cash in illiquid assets or potentially volatile short term equities but at the same time you are probably not making much in cash savings and they attract DIRT and PRSI. I think you need to start thinking in in terms of what your short, medium and long-term goals are. Set them all down on paper and attempt a costing on them, you might have a clearer idea of what you need.
Also if you are currently spending more than you are earning you will bleed yourself dry so perhaps you need to look at why. Is it a short term bump or a long term trend? Is there any way to rebalance your expenditure and income?
 
mandelbrot said:
Since you're asking for perspective: I went to look at your recent posts to see what other threads you were talking about and I saw this post from a couple of weeks back -



So you probably have an as yet unquantified tax bill building up for yourself as well if you're playing fast and loose with your self-employed expenses... :(
Click to expand...

As a self employed person you are supposed to have receipts for all expenditure.

In practice this can be difficult or impractical for small one off items, like lunch. I often don't even get a receipt unless I specifically ask, and when I do I have to keep this in my pocket, until I can file it.

I have taken the view that this is impractical and charged reasonable amounts based on the civil service rate.

A Revenue audit 2 years ago raised no objection.

Conversely for diesel expenses, which I get a monthly account in the post the Revenue inspector disallowed 20%, despite my having full documentation.

In my experience Revenue are happy to accept expenses which are reasonable in their view.
 
Thanks Socrates for the comments

so-crates said:
You have a sizeable amount of savings despite several property investments so clearly you have been doing something right. I think what you need to do is really planning. As you say you are at a point where you are looking at your children possibly starting third level education so you would probably not want to tie up all your cash in illiquid assets or potentially volatile short term equities but at the same time you are probably not making much in cash savings and they attract DIRT and PRSI. I think you need to start thinking in in terms of what your short, medium and long-term goals are. Set them all down on paper and attempt a costing on them, you might have a clearer idea of what you need.
Click to expand...

This is probably the main issue for me, should I sell the mortgage free BLT and how should I invest the proceeds.

so-crates said:
Also if you are currently spending more than you are earning you will bleed yourself dry so perhaps you need to look at why. Is it a short term bump or a long term trend? Is there any way to rebalance your expenditure and income?
Click to expand...

Unfortunately it seems to be a long term trend. In the past we had a higher income and got used to a certain standard of living. While we certainly have cut back and looked for better value we have not cut to the bone. It is hard to say no holiday this year when you have the cash to pay for it.
 
> Any suggestions welcome.

you are borrowing 9,000 at 3.5% while you have large sums on deposit which are likely to be earning much less than 3.5% (and you must pay DIRT). So, I'd consider repaying that loan, using money from your deposit account, if there are no early repayment penalties.

The college expenses are likely to be major. I agree with So-crates that you should try to cost these and estimate your expenses for each year starting in about 2 years (when the eldest is 18) and continuing until the youngest is about 22.

Your 210,000 on deposit is likely to be at a low interest rate and after DIRT and inflation, you're probably not really earning anything.
I guess that you'll want to keep some of this on deposit though as an emergency fund.

Would you consider using some of that cash to repay some of the BLT4 mortgage (which is at the most expensive rate of all your mortgages)?
If you repaid half the mortgage, you would save approx 7,000 in repayments per annum. This assumes that there is no penalty for early repayment.

Would it make sense to make some contributions to the PRSA (again using the cash which is now on deposit)? You'd get the tax relief and even say 5,000 per annum would add up over the next 15-20 years.

You ask whether you should sell BLT1. If you sold it and put the proceeds towards BLT4, you would save about 10,000 per annum in repayments on the BLT mortgage. But BLT1 has a yield of 7%, so maybe using some of the deposit cash would be a better option.
 
cremeegg said:
As a self employed person you are supposed to have receipts for all expenditure.

In practice this can be difficult or impractical for small one off items, like lunch. I often don't even get a receipt unless I specifically ask, and when I do I have to keep this in my pocket, until I can file it.

I have taken the view that this is impractical and charged reasonable amounts based on the civil service rate.

A Revenue audit 2 years ago raised no objection.

Conversely for diesel expenses, which I get a monthly account in the post the Revenue inspector disallowed 20%, despite my having full documentation.

In my experience Revenue are happy to accept expenses which are reasonable in their view.
Click to expand...

Based on your current thread about your car / travel, I'd say you encountered an inexperienced or just plain not very good auditor who didnt know what they were at - [broken link removed].

(Sorry if I'm dragging your thread off topic!)
 
Very interesting thread Cremeeg.

Totally get your dreams on Croatia. You were just mulling over ideas and options.

Really lucky to have been audited, to me that means you've now got confirmation from revenue that you are running a tight ship, so if you continue you should never have a problem. How did the revenue guy come to the 20% decision on diesel?

College

How much is this going to cost you? Any chance one of those properties are in a location where the kids will go to college?

Rentals

BLT 1
Value €125,000
Mortgage None
Rent €9,000 pa

BLT 2
Value €160,000
Mortgage €200k ECB + 0.75% IO for 18 more years (€2,000 pa)
Rent €8,400

BLT 3
Value €95,000
Mortgage €208k ECB + 0.75% IO for 18 more years (€2,079 pa)
Rent €8,400

BLT 4
Value €170,000
Mortgage €175,000 ECB + 1.15% Cap & Int (€13,944 pa)
Rent €15,000 pa

Income 9000 + 8400 + 8400 + 15000 = 40 800
Interest 2000 + 2079 + 3500 (guess) = 7579 X 75% = 5684
Repairs?
Property tax? - debatable whether tax deductable or not

Let's say 6K interest, 4 K repairs, 2 K other, and there must be some voids and other costs. So a rental income of 40K less expenses, profits of maybe 25K/20K? But you'll only get 50% of that after tax and prsi. So you're maybe clearing 10K as extra income.

What's the term on the BTL 4?

What is the game plan in relation to the 2 interest only properties. Not a fan personally of IO. Don't see the logic. In 18 years, you have to pay them back. Would it be better to use the rental income profits to pay down capital now. You will be 66 and 69 when these mortgages have to be paid down. At that stage you will be presumable 'retired.'

Values of BTL's

Currently 550K

Mortgages 583

NE of 33

But this NE doesn't apply to BTL 1, nor really to BTL 4, but BTL 4 doesn't matter as there are capital repayments.

Problem is the two BTL's with no capital payments.

What happens if we are in a Japan scenario, I'm not discussing house prices, but one has to consider all options, what if in year 18 property prices mean you don't even have enough to repay those loans from selling at that time. Would like to be in a scenario where the bank comes looking at your assets and you lose an income producing stream.

Retirement

What are you going to live on in retirement.

Are you entitled to state pension, is your partner? How much will your pension pot pay out?

Home

Don't see any problem with this, payments are low, very low for a decent house for 6 people. Eventually you will own it.
 
Bronte said:
Really lucky to have been audited, to me that means you've now got confirmation from revenue that you are running a tight ship, so if you continue you should never have a problem. How did the revenue guy come to the 20% decision on diesel?
Click to expand...

It's in no way confirmation that everything is ok - it may well mean the period already audited isn't revisited, but it gives no assurance on a particular issue in the event of a future audit.
 
|Total|Home|BTL1|BTL2|BTL3|BTL4
Value|€810k|€260k|€125k|€160k|€95k|€170k
Mortgage|€753k|170k|0|€200k|€208k|€175k
Interest||1.15%||1%|1%|1.4%
Annual interest||€2k||€2k|€2k|€2k
Rent|||€9k|€8k|€8k|€15k
Savings: €210k

These are very profitable investments due to the low cost trackers

Total Rent: €40k
Total interest: €6k
Profit before costs and tax: €34k

Paying off the car loan seems clear
It doesn't make any sense to be paying 3.5% while you have money on deposit. Assuming that there are no early repayment penalties, pay this off.

Your three mortgaged buy to let properties
These are extremely profitable due to the low cost trackers and should not be sold.

Buy to let 4 is very profitable. I presume you understand this? Paying this off is terrible advice. Cash flow is not a relevant consideration for you. It has been suggested to pay this off to improve you cash flow! Why pay it up front, when you can pay it over 20 years?

Your mortgage free buy to let is earning a good yield
You are getting a pre cost yield of 7% on this. That is pretty good and, in isolation, seems worth holding onto. But I will come back to this later when looking at your overall portfolio.

You should be maxing your pension contributions
With around €70k of taxable income, you should be making the maximimum pension contributions to the point where you are no longer paying 41% tax. You should not be paying pension contributions at the rate where you get only 20% tax relief on them.

After maxing your pension, you should keep your assets available to take advantage of any deals on tracker mortgages
You should make sure that your deposits are easily accessible. If a lender offers a good deal to pay off the trackers early, you want to be able to avail of it.

I assume BTL2 and BTL3 are BoSI mortgages. There is a fair chance that you will get a deal on these at some stage in the future.

What risks do you need to guard against?
Interest rate rises. With net borrowings of €550k a 2% rise would cost you around €10k a year. You can handle this. If it happens, you might need to reassess your strategy.

Rents falling and or a sustained fall in property prices. With €810k in property, you are probably overexposed to it. By selling the BTL1, you will reduce this risk somewhat. Even if you think that property prices and rents are going to rise, you should still sell BTL 1, as you will still have almost €700k invested in property after the sale and so will benefit strongly from any increase in property prices

Bank or state default. I continue to think that it's too risky to have substantial sums on deposits in banks and the state. The risk of anything happening might be small, but the impact would be big. You should not have money on deposit.

What is the CGT position if you sell BTL 1?
If you have a CGT liability, it might be worth holding onto it, as you presumably have unrealised CGT losses on some of the other properties.



So what should you do with your savings?
You should buy around 5 blue chip shares directly with your cash. This way it's accessible if you need it to make a pension contribution or to avail of a deal on the tracker mortgages.

By owing them directly, you will be able to engage in a bit of CGT planning i.e. setting losses in the shares against profits in the property or vice-versa. If you buy an ETF, you may not be able to set losses in one against gains on the other.
 
Overall perspective

You are in a very good position and should not be unduly worried about your reduced earning power.
You have a gross income of €75k a year.

You may well find that you will be running down your assets over the next few years due to the costs of education. You have €200k cash and €175k of a mortgage free investment property available to fund that. So you do not need to worry.

When you hit 65, your employed income will probably drop away, but your kids will probably be no longer dependent on you at that stage. You will have assets a good income and a pension pot.

In the past we had a higher income and got used to a certain standard of living. While we certainly have cut back and looked for better value we have not cut to the bone. It is hard to say no holiday this year when you have the cash to pay for it.
Click to expand...

You can't afford to buy a property for cash in Croatia, but you can comfortably afford to go on holidays. You do not need to go mad but you do not need to cut to the bone either.
 
What is the game plan in relation to the 2 interest only properties. Not a fan personally of IO. Don't see the logic. In 18 years, you have to pay them back. Would it be better to use the rental income profits to pay down capital now. You will be 66 and 69 when these mortgages have to be paid down. At that stage you will be presumable 'retired.'
Click to expand...
On investment properties, Interest only is fine, generally.

It's particularly fine, if the interest rates are 1%.

If I can borrow at 4% to get a return on 8%, that is good investment.

There is a risk of a long-term sustained fall in property prices. But the solution to that is not to pay off your cheap loans, it's to reduce your exposure to property. You can do this by selling of BTL 1.

Don't forget, that you are contractually committed to monthly capital repayments on your home and BTL 4 anyway, so in 15 years, you will have paid down these mortgages to close to zero.

There would have to be a massive triple whammy to justify selling off your other BTLs and repaying the trackers

  • A sustained fall in property prices over the next 15 years from the current level
  • A significant fall in rental income
  • A significant rise in interest rates
This could happen, but the probability of a profitable outcome is far higher and easily justifies the risks


  • A volatile property market with prices higher in 15 years time than they are now
  • A rise in rental income
  • Interest rates will rise by around 2% or 3%
 
Would he not be better repaying the capital in order to have the properties guaranteed to be paid down so that on retirement he has an income stream or the option to sell?

Agree that the triple whammy is unlikely, but we do live in a strange financial crisis at the moment. Political problems like Ukraine too.

Brendan Burgess said:
If I can borrow at 4% to get a return on 8%, that is good investment.
Click to expand...


What do you mean by this bit?

Cremeeg it will be very interesting to see what you think?
 
Bronte said:
Would he not be better repaying the capital in order to have the properties guaranteed to be paid down so that on retirement he has an income stream or the option to sell?
Click to expand...

No.

If you can borrow money for less than you can earn on interest, then you should not repay those loans.

The Mr Egg is repaying his overall borrowings anyway, so on retirement, he will owe a lot less than his assets.

Where does he get the money to repay the capital? If he takes it from his deposit accounts , he is not changing his overall net borrowing. Should he cut down his expenditure furhter? I don't think so. He is well off and should enjoy his wealth and income.
 
Excellent response BB! Good advice to Cremeegg. Given the low rate and good return on the BTL's, it would be a foolish decision to part with them, unless given a very attractive deal from the lender or if cash-flow (not earnings) was an issue. Too many responses focussed on earnings rather than cash-flow.
 
Thanks Bronte for the comments.

Bronte said:
College

How much is this going to cost you?
Click to expand...

€10,000 per child per year. Thats 4 years 4 children €160,000. Thats just my best guess. Might not be enough if they ended up in Dublin. Does anyone know if this is realistic?



Bronte said:
Any chance one of those properties are in a location where the kids will go to college?
Click to expand...

BTL 1 or 3 might be suitable


Bronte said:
So you're maybe clearing 10K as extra income.
Click to expand...

Yes that is about right

Bronte said:
What's the term on the BTL 4?
Click to expand...

14 years remaining

Bronte said:
What is the game plan in relation to the 2 interest only properties.

What happens if we are in a Japan scenario, I'm not discussing house prices, but one has to consider all options, what if in year 18 property prices mean you don't even have enough to repay those loans from selling at that time. Would like to be in a scenario where the bank comes looking at your assets and you lose an income producing stream.
Click to expand...

This is one of my main issues. I suppose at present there is no plan except wait 18 years and see. On balance I think that is better than selling them now, also taking on Brendan's points below.


Bronte said:
Retirement

What are you going to live on in retirement.

Are you entitled to state pension, is your partner? How much will your pension pot pay out?
Click to expand...

This is the single biggest issue. As a self employed person I pay PRSI Class S and my wife pays the same on the rental income. I believe that this entitles us both to a contributory pension.

I know you raised this issue before on this thread

http://www.askaboutmoney.com/showthread.php?t=156335&highlight=prsi&page=2

I don't know how to get certainty. I asked a professional pensions advisor and the said they didn't know but would get back to me. 2 days later they produced a printout from Citizens Information. It is hardly conclusive.

Thanks Brendan and Brendan for your comments I will read them fully later.
 
Thanks Brendan for a very comprehensive reply

Brendan Burgess said:
Paying off the car loan seems clear
Click to expand...


Yes I should do that.

Brendan Burgess said:
Your three mortgaged buy to let properties
These are extremely profitable due to the low cost trackers and should not be sold. Buy to let 4 is very profitable.
Click to expand...

Agreed. I am concerned that I will have to pay €408K when I am nearly 70 but on the whole I agree it is best to keep these.


Brendan Burgess said:
You should be maxing your pension contributions
Click to expand...


Do you recommend this even though I will effectively using savings to make the pension contributions?


Brendan Burgess said:
I assume BTL2 and BTL3 are BoSI mortgages. There is a fair chance that you will get a deal on these at some stage in the future.
Click to expand...

Yes BSOI. I will basically forget about these unless or until they make some such offer and I can consider that then.

Brendan Burgess said:
What risks do you need to guard against?
Interest rate rises. With net borrowings of €550k a 2% rise would cost you around €10k a year. You can handle this. If it happens, you might need to reassess your strategy.

Rents falling and or a sustained fall in property prices. With €810k in property, you are probably overexposed to it. By selling the BTL1, you will reduce this risk somewhat. Even if you think that property prices and rents are going to rise, you should still sell BTL 1, as you will still have almost €700k invested in property after the sale and so will benefit strongly from any increase in property prices
Click to expand...

Rising interest rates are most likely in the context of rising inflation, which would benefit me so I am somewhat relaxed about that. I don't see my home as a simple property investment. It provides me with accommodation that would cost about €10k to rent with the added intangible benefit of being home. That is important to me

Brendan Burgess said:
Bank or state default.
Click to expand...

This is a good point. I have some of the money on deposit outside the country ever since this thread

http://www.askaboutmoney.com/showthread.php?t=144245

Brendan Burgess said:
What is the CGT position if you sell BTL 1?
Click to expand...


Any gain or loss would be very small. It would sell today for almost exactly the purchase price.


Brendan Burgess said:
So what should you do with your savings?
You should buy around 5 blue chip shares directly with your cash.
Click to expand...

I think that I am going to do this, although there will be many more posts looking for advice in the investment thread first.


BLT 1

I am not convinced that I should sell this

Part of my reluctance is that I don't know what would I do with the money, buy more shares? I am not comfortable with that yet.

In Summary

Pay off €9k loan
Keep mortgaged BLTs
Consider contributing to pension
Investigate state pension
Consider selling BLT 1
Develop the idea of buying 5 blue chip shares
 
Originally Posted by Brendan Burgess http://www.askaboutmoney.com/showthread.php?p=1380897#post1380897
You should be maxing your pension contributions
Do you recommend this even though I will effectively using savings to make the pension contributions?
Click to expand...


Money is money. You get tax relief on it up to a certain percentage of your salary.

You are just moving money from a Deposit Account into a pension fund and getting tax relief on the way in. It seems clear to me.
 
You must log in or register to reply here.
Back
Top