Buying a Second Home

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JayjayS

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I’ve searching the internet and various forums for answers on this topic but not sure what category this type of sale falls under. I currently own my own home outright without a mortgage. The house is worth approximately €160000. I’m looking at purchasing a home for approximately €300000 - €350000 to become my primary residence and rent out my second home. The current rental yield in that area for a three bed is €1000 per month. I’m currently working in the public sector on a salary of 50k per annum. I’m just wondering what my best options would be to achieve this?
- If I hold onto my first property will the current value of my house and rental yield enable me to increase the amount mortgage lenders would offer to me?
- Would a better option be to sell the house and put this money towards the new house and add it to whatever mortgage the lenders offer me at 3.5 times my gross salary?

Cheers in advance for any advice given.
 
I’m in the process of exiting a property I rented out in a similar situation to yours, I just don’t think the effort and risk for the few quid you make is worth it. So I may be a bit biased here.

€12k per annum on €160000 is 7.5% yield, maybe closer to 6% after you factor in some overheads like property tax, rental costs, months between tenants etc. You’ll pay basically 50% tax on that, so your return is somewhere around 3%.

Compare that 3% return to the 2.2-2.5% interest you’ll be paying to borrow money for your mortgage, that just doesn’t stack up for me at all. Your own time spent on the rental hasn’t been factored in, you could get a bad tenant who does damage or won’t pay, rental rates could drop, or there could be a movement in interest rates and suddenly you’re not even making your measly 0.5-0.8%.

My recommendation would be to sell and enjoy the comfort of a much smaller mortgage and not having to go fix a bathroom fan on a cold winters night.
 
JayjayS said:
- If I hold onto my first property will the current value of my house and rental yield enable me to increase the amount mortgage lenders would offer to me?
Click to expand...

Not really. Lenders will heavily discount the value of any rental income as it is pretty volatile. You could have a void or a dud tenant so no rent for 12 months.


JayjayS said:
- Would a better option be to sell the house and put this money towards the new house and add it to whatever mortgage the lenders offer me at 3.5 times my gross salary?
Click to expand...

Yes. 3.5 times your salary for 50k is €175k of a mortgage so you will need the €160k value of current house to get into your target range. Unless you have other savings you haven't told us about.
 
Hi JayJay

Sarenco has set out a systematic way of evaluating this decision here:

Key Post - Keep property as Rental or Sell?

Updated May 2020 The question regularly comes up on AAM whether somebody should keep an apartment that their family has outgrown as a rental or whether they should just sell up. Borrowers often run projections on the anticipated rental income from an apartment with a cheap tracker and conclude...
www.askaboutmoney.com

I did one a few years earlier here:

Should I keep my old home as an investment?

Sarenco also has a Key Post on this thread here: https://www.askaboutmoney.com/threads/keep-apartment-as-rental-or-sell.203907/ A typical question I have a house worth €300k on which I have an €80k mortgage. I have €100k on deposit and I am borrowing €500k to buy a house for...
www.askaboutmoney.com
 
Ye don't take account the appreciated asset. In 2021, house prices are forecasted to see 3%to 5% across the board. Some places even higher.

If his 160000 house rises three percent only it's worth 164800 next year. He needs to take this potential appreciation into consideration in his decision. Yes prices can go down, but that's not what's forecast.
 
PebbleBeach2020 said:
Ye don't take account the appreciated asset. In 2021, house prices are forecasted to see 3%to 5% across the board. Some places even higher.

If his 160000 house rises three percent only it's worth 164800 next year. He needs to take this potential appreciation into consideration in his decision. Yes prices can go down, but that's not what's forecast.
Click to expand...

While if you decide to keep the original property the capital appreciation or depreciation is likely to be the biggest element of the actual outcome in the years to come. Strangely that is mostly irrelevant to the decision

First of all if the rental return does not work then you should not have a rental property. In this case the rental return does work. I see Zenith63's view that there is a lot of work for little reward, but equally I could ask where else can you get 3% return on someone elses money.

Think about that for a moment, the return on the rental here is on the banks money, not on the OPs money. The OP does not have the alternative of investing €160k in shares because he does not have €160k to invest and the bank wouldn't loan it to him. But for this specific purpose he can borrow 160k and invest it to get a return after tax and after interest. Thats is an oportunity that he may never have again.

Back to the question of how to value the possibilities of the change in capital value. The upside/downside potential is not symmetric for the OP. No matter what happens to the capital value, the OP has to repay the bank €160k, he can cashflow that from the rental income over 20 years or whatever (if an investor cannot repay cap and int over a mortgage term, then its a bad investment) . When he sells the property he will have the price give or take CGT. If that is €150k he will probably feel he has lost out, but in reality his costs were just higher over the term, €500 pa in the case of 10k over 20 years.

The final sale price is irrelevant to the decision, (especially because you have no way to know what it will be) if property increases significantly great (well great for the OP whatever about society), but it would be foolish to count on that when deciding to invest.
 
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