At a crossroads.. Sell rental property and trade up or extend

[djdarraghj]

Age: 40
Spouse’s/Partner's age: 42

Annual gross income from employment or profession: 150,000 (IT Contractor and Wedding DJ)
Annual gross income of spouse: 0

Monthly take-home pay after tax: 8000

In general are you:
Saving approx 4000 per month

Home:
Rough estimate of value of home: 370K
Amount outstanding on your mortgage: 286K, 23 years remaining
What interest rate are you paying? Tracker No .75 percent

Other borrowings – none

Do you pay off your full credit card balance each month? Yes

Savings and investments: around euro 30k cash on deposit in bank, 18k in Saving Scheme at Post office

Do you have a pension scheme? Yes but not paying into one currently. 30k PRSA and some small pension pots from previous employment


Do you own any investment or other property? Yes, 3 bed End Terrace on Tracker rate also .075 percent. Purchase price €320,000 Rent €1400PM,, Mortgage €950PM (19 years left). House worth about 230K today and remaining mortgage is 186K

Ages of children: 9, 7 and 5 Month old

Life insurance: yes

Question:

I am debating whether to sell the investment property and try and trade up on my main residence. Part of me does not want to get into more debt in my early 40s. To trade up and stay in the area I am currently living in it would cost €550k + to get a 5 bed property. My main issue is the size of our 4 bed house for 5 people in years to come. The house is 1250 sq feet but the bedroom are very small and I would prefer larger rooms to give everyone some space. I could sell the rental property however it would take 4 -6 months to sell based on recent transactions and it would only yield €45k equity max. The alternative is to extend our current property into our very small back garden to give us extra space albeit eat into the garden space that we do have. I am holding off on upgrading or doing anything with my main residence at the moment which is making me a little miserable as there are a number of areas that need to be upgraded like new kitchen units etc. Would love if some of you could look at the numbers and see what you think would make most sense for me to do.

 

[Brendan Burgess]

Let’s first look at the investment property in isolation

You are getting a pre-tax return of €13k - say €7k after tax - on an equity investment of €40k

Look at it another way, if you sell the investment so that if you trade up now, you will borrow €40k less, you will save interest of about €1,400 a year. €[email protected]%

You do not give up €7k net after tax to save €1,400 a year.

So keep the investment property.

You do need to review this every couple of years. At the moment, most of your repayments are capital, so after a few years, these numbers will be different, but the above table is the way to assess it.



The Trade up decision

Ages of children: 9, 7 and 5 Month old

My main issue is the size of our 4 bed house for 5 people in years to come.

You might well have a "problem" in years to come. But you have no problem now. I doubt very much that you will have a problem for at least 5 years. Even then, you will be able to live with it comfortably.

Over the next 5 years, you will be saving huge amounts of money. You will be paying chunks of capital off both your home and your investment property. You will have saved a further €250k. You will probably be able to trade up without further borrowing.

The key thing is the cheap tracker mortgage on your home. Your accommodation costs at the moment are €2k a year (€[email protected]%). The rest of your monthly mortgage payments are capital.

If you trade up now and borrow €420k, your accommodation costs will rise to about €12k a year.

Don't extend your house as you don't need to. I suspect kids of 9 and 7 need garden space more than bedroom space, but I am not a parent.

Do spend money on upgrading the kitchen. Bear in mind that you will probably move in 5 years' time, so don't go completely mad on it.
But €10k now on a kitchen is not material in the greater scheme of things.

Brendan

 

[michaelm]

If happy with the neighbours, location and area, and if there is a secondary school nearby then I wouldn't move. And I would delay any major refurb as long as possible. In a few years the older kids will have no interest in the back garden and will want to be out the front instead. Then you can bolt on the biggest planning exempt sun/playroom allowable. Unless you have more kids then a 4 bed is fine for a family of 5. You could always convert the attic down the line to a playroom/study if needed.

 

[llgon]

Agree with other posts that you should not rush into extension or move at present, maybe just some upgrades and new kitchen etc.

What strikes me is the level of savings/pension for your income and age. I would look to prioritise pension contributions over any major spending on your home in the immediate future. Bear in mind education costs for your older two in particular in the not too distant future.

 

[Brendan Burgess]

I would look to prioritise pension contributions over any major spending on your home in the immediate future.

No, no,no, no,no.

As darragh is planning to trade up in the near future, access to cash is the priority. So no pension contributions until you have bought the house and got the mortgage down to a comfortable level.

Brendan

 

[cremeegg]

If I had €150k pa and was living with 3 kids in 1250 sq ft and could trade up by taking on €420k debt I wouldn't hesitate.

You are saving €4k per month, you could even repay the mortgage over 10 years with a 10 year fix at 3.2% from KBC for €4,100.

Do it now: because you can afford it: because if you wait 5 years you will miss out on 5 years enjoying the new house, and your kids will miss out on that as well at this point in their lives: because in 5 years time you will be 47.

The only question I would have is about the security of your earnings, are you confident that you can continue to earn at this level or even 80% of this level into the future.

As to the question of selling the investment property, Brendans reply is all you need to know.

 

[Blackrock1]

I

Do it now: because you can afford it: because if you wait 5 years you will miss out on 5 years enjoying the new house, and your kids will miss out on that as well at this point in their lives: because in 5 years time you will be 47.

agree with this

 

[djdarraghj]

Age: 40
Spouse’s/Partner's age: 42

Annual gross income from employment or profession: 150,000 (IT Contractor and Wedding DJ)
Annual gross income of spouse: 0

Monthly take-home pay after tax: 8000

In general are you:
Saving approx 4000 per month

Home:
Rough estimate of value of home: 370K
Amount outstanding on your mortgage: 286K, 23 years remaining
What interest rate are you paying? Tracker No .75 percent

Other borrowings – none

Do you pay off your full credit card balance each month? Yes

Savings and investments: around euro 30k cash on deposit in bank, 18k in Saving Scheme at Post office

Do you have a pension scheme? Yes but not paying into one currently. 30k PRSA and some small pension pots from previous employment


Do you own any investment or other property? Yes, 3 bed End Terrace on Tracker rate also .075 percent. Purchase price €320,000 Rent €1400PM,, Mortgage €950PM (19 years left). House worth about 230K today and remaining mortgage is 186K

Ages of children: 9, 7 and 5 Month old

Life insurance: yes

Question:

I am debating whether to sell the investment property and try and trade up on my main residence. Part of me does not want to get into more debt in my early 40s. To trade up and stay in the area I am currently living in it would cost €550k + to get a 5 bed property. My main issue is the size of our 4 bed house for 5 people in years to come. The house is 1250 sq feet but the bedroom are very small and I would prefer larger rooms to give everyone some space. I could sell the rental property however it would take 4 -6 months to sell based on recent transactions and it would only yield €45k equity max. The alternative is to extend our current property into our very small back garden to give us extra space albeit eat into the garden space that we do have. I am holding off on upgrading or doing anything with my main residence at the moment which is making me a little miserable as there are a number of areas that need to be upgraded like new kitchen units etc. Would love if some of you could look at the numbers and see what you think would make most sense for me to do.

Let’s first look at the investment property in isolation

View attachment 3325

You are getting a pre-tax return of €13k - say €7k after tax - on an equity investment of €40k

Look at it another way, if you sell the investment so that if you trade up now, you will borrow €40k less, you will save interest of about €1,400 a year. €[email protected]%

You do not give up €7k net after tax to save €1,400 a year.

So keep the investment property.

You do need to review this every couple of years. At the moment, most of your repayments are capital, so after a few years, these numbers will be different, but the above table is the way to assess it.



The Trade up decision

View attachment 3326





You might well have a "problem" in years to come. But you have no problem now. I doubt very much that you will have a problem for at least 5 years. Even then, you will be able to live with it comfortably.

Over the next 5 years, you will be saving huge amounts of money. You will be paying chunks of capital off both your home and your investment property. You will have saved a further €250k. You will probably be able to trade up without further borrowing.

The key thing is the cheap tracker mortgage on your home. Your accommodation costs at the moment are €2k a year (€[email protected]%). The rest of your monthly mortgage payments are capital.

If you trade up now and borrow €420k, your accommodation costs will rise to about €12k a year.

Don't extend your house as you don't need to. I suspect kids of 9 and 7 need garden space more than bedroom space, but I am not a parent.

Do spend money on upgrading the kitchen. Bear in mind that you will probably move in 5 years' time, so don't go completely mad on it.
But €10k now on a kitchen is not material in the greater scheme of things.

Brendan

Fantastic response Brendan. Really appreciate the effort and detail you have gone to. It really opened my eyes to how I should be looking at this. The tracker is very important and we are benefiting hugely from having one for both properties. We will definitely upgrade the Kitchen and perhaps continue saving for the meantime. One thing i forgot to mention is that I have only started IT contracting 7 months ago and I believe I will have to wait at least another 12 - 18 months before a bank would look at me for approval anyway as they want to see a consistent flow of work.

 

[djdarraghj]

If I had €150k pa and was living with 3 kids in 1250 sq ft and could trade up by taking on €420k debt I wouldn't hesitate.

You are saving €4k per month, you could even repay the mortgage over 10 years with a 10 year fix at 3.2% from KBC for €4,100.

Do it now: because you can afford it: because if you wait 5 years you will miss out on 5 years enjoying the new house, and your kids will miss out on that as well at this point in their lives: because in 5 years time you will be 47.

The only question I would have is about the security of your earnings, are you confident that you can continue to earn at this level or even 80% of this level into the future.

As to the question of selling the investment property, Brendans reply is all you need to know.

Fair point! The only thing stopping me obtaining mortgage at the moment is the fact I am contracting just 7 months so would need another year minimum for the banks peace of mind before they would lend. I would imagine I would then have to sell one of the properties so how would that impact your assessment? I sell my currently rental and lose the tracker rate and rental income it brings to purchase a new property with the added mortgage expense it would bring. I'm not sure I would want 3 mortgages as I would be getting a little nervy albeit the rental income from renting out current residential property and the rental property would generate about 20k per annum before tax which would go a long way towards the mortgage on the new property!

 

[Mrs Vimes]

You haven't mentioned whether both mortgages are with the same bank.

I have no idea whether it would be possible to port both trackers to one new property if they were.

Does anyone know whether that could be an option?

If you wanted to keep the investment property in that scenario (if the numbers still made sense) you would need to remortgage but at least the higher interest you'd be paying would be allowable against the rental income for tax purposes.

I agree with the posters saying not to delay a move longer than you need to - no point in moving into the dream house to raise children when they're mostly raised!

 

[cremeegg]

OP if you want to be anonymous on AAM you might want to reconsider your username.