Finance new BTL property using equity on existing?

[Pauley]

Hello! (sorry, this got longer than I expected..)

I’m trying to find out if it’s possible to finance the purchase of a (rental) property by leveraging the equity in existing (rental) properties - basically I’m looking for an “equity release” loan.

However, from what I’ve found out so far this seems to be impossible - at least in my situation! I’m hoping someone here might have a better answer than what I’ve been able to find...

I’m non-resident Irish citizen but own 2 fully paid for properties which are rented to reliable tenants - the same ones have been in situ for over 5 years now...

This property that I’m interested in would cost about half the total worth of the existing two. If that 3rd property were to be let, the rent from all three would easily (even after tax) exceed any loan payment due - even at more expensive BTL mortgage rates.

I had assumed that getting such a loan by using the 2 existing properties as collateral and paying it back with the expected rental income from all 3 would be possible but it seems not..

(I’ve already tried banks and mortgage brokers. The bank where I just last year finished paying a 15 year mortgage won’t touch me, despite an excellent payment record, because of new policies etc. re earning in Euros. I’m early 50’s, self employed too which doesn’t help, but, as the rental income should be paying any loan payments, I don’t see why this should even come into the equation..)

This seems like a pretty low risk scenario for a lender. I live in the U.S. where such loans (“HELOCS” - Home Equity Line Of Credit) against property equity are readily available and for up to 90% of the property value, yet I cannot find anything like it in Ireland that doesn’t require you to be resident or to have a non-rental income in Euros...

Even if I could find someone to loan me even 1/3 the value of my equity I’d be “happy”...

Am I missing something/looking in the wrong places?

I’m trying to find a solution quickly, so any ideas or pointers much appreciated!

 

[NoRegretsCoyote]

I think banks/regulators in Ireland are very reluctant to allow this as the default rates on BTLs are so much higher than on PPRs.

To my eye a portfolio of BTLs with 33% debt is in theory extremely safe.

1. The customer is getting some tax benefit of the interest rate deduction
2. Risk of non-payment of rental income is mitigated as you have three properties
3. The bank has a huge cushion of equity if the loan stops performing and/or house prices fall

The problem in Ireland is that taking possession of collateral underlying delinquent lending is extremely difficult. A lot of borrowers don't even show up to court, and they probably assess your US residence as an additional risk factor in that regard.

What is needed is a wholesale reform of law and practice underlying collateralised lending. The political system has no interest in delivering this from what I can tell: google 'Strokestown' if you are curious.

 

[Brendan Burgess]

Hi Pauley

I don't think you will get a mortgage from an Irish bank. But make sure to try Pepper. Not sure if they are still doing loans but whoever took them over might do something like this.

But the bigger question is whether you should be doing this?
You are borrowing 100% of the value of the property.
The interest rate will be high.
I know that rents are strong in Ireland and the deal should be profitable.
But this may not always be the case.
Rents may fall and interest rates will rise.

While this should not worry the lender, it should worry you.

If rental turns out to be a good investment, you already have good exposure to the rental market.
If it turns bad, then you could see a big fall in your net wealth magnified by leverage.

Brendan

 

[Gerard123]

Agree completely with Brendan. In essence you’re looking to borrow 100% to purchase a BTL in Ireland. I would advise against. With costs of running, taxes, presumably needing to employ someone to look after, and pay mortgage this couldn’t make financial sense. Far from low risk I would see this as medium to high risk unless you can afford to take a punt.

 

[galway_blow_in]

I've 90 k in cash available to me and I wouldn't feel comfortable borrowing another 100k and I've two debt free properties currently producing 1850 per month.

A mortgage of 100 k would eat up all the rent and if the tenant went rogue, my other properties would come under pressure

 

[Gordon Gekko]

I’m strongly considering buying a 3 bed house as a long-term investment. Pepper were doing 3.5% recently which, with full deductibility, is effectively 1.68%.

If people were falling over themselves to buy places, I’d be worried, but all we hear is doom and gloom.

With no supply, tight credit, strong demand, and strong population dynamics generally, I’d be happy enough to be a buyer rather than a seller.

 

[moneymakeover]

OP, From tax point of view I imagine it makes sense to have at least some debt which allows offset of the interest

Otherwise I think you must have rather large tax bill every year.

 

[galway_blow_in]

I’m strongly considering buying a 3 bed house as a long-term investment. Pepper were doing 3.5% recently which, with full deductibility, is effectively 1.68%.

If people were falling over themselves to buy places, I’d be worried, but all we hear is doom and gloom.

With no supply, tight credit, strong demand, and strong population dynamics generally, I’d be happy enough to be a buyer rather than a seller.

The figures add up but if you do encounter a rogue tenant you are effectively powerless and becoming more powerless by the year.

 

[Gordon Gekko]

The figures add up but if you do encounter a rogue tenant you are effectively powerless and becoming more powerless by the year.

Which is why you do significant due diligence. Last time I had a vacancy, there were 30-40 potential tenants. Relatively easy to profile them and derisk the whole thing. Not 100% but very little in life is totally watertight. And that’s why one earns a return, the risk premium.

 

[cremeegg]

OP, From tax point of view I imagine it makes sense to have at least some debt which allows offset of the interest

Otherwise I think you must have rather large tax bill every year.

This is not true. Taking on an expense just to avail of the tax relief on the expense makes no sense.

 

[galway_blow_in]

Which is why you do significant due diligence. Last time I had a vacancy, there were 30-40 potential tenants. Relatively easy to profile them and derisk the whole thing. Not 100% but very little in life is totally watertight. And that’s why one earns a return, the risk premium.

Due dilligance isn't enough as it's out of your control if a tenant decides to go rogue, system is your enemy and will obstruct your attempts to resolve the issue.

No one knows for sure if a tenant is going to stay straight, doesn't matter what they do for a living either.

 

[RedOnion]

@Pauley
Pepper or Dilosk (ICS) are your best bet to get finance. But it can be a slow process even if they do approve it.

 

[NoRegretsCoyote]

Taking on an expense just to avail of the tax relief on the expense makes no sense.

It can in his case if you look at the level of the portfolio.

Hypothetical scenario. OP goes from 2x200k properties with no debt to 3x200k properties with 200k debt on the third. Assume interest at 4% so annual interest payments of 8k.

Gross rental income goes from 2x12k=24k to 3x12k=36k. Interest is is deductible at 75%. 8k*.75=6k.

So taxable income on the whole portfolio is 36k-6k=30k

You have added 50% to your gross income but your income liable to tax has only gone up by 25%.

 

[Gordon Gekko]

Due dilligance isn't enough as it's out of your control if a tenant decides to go rogue, system is your enemy and will obstruct your attempts to resolve the issue.

No one knows for sure if a tenant is going to stay straight, doesn't matter what they do for a living either.

I respectfully disagree...that’s why it’s called due diligence.

You can reduce your risk considerably by doing your research and imposing strict criteria.

 

[NoRegretsCoyote]

The figures add up but if you do encounter a rogue tenant you are effectively powerless and becoming more powerless by the year.

Yes but in the OP's case the risk is more evenly spread.

A non-paying tenant is bad if you only have one other property with a paying tenant.

In this case he is proposing to buy an extra property. So if you have one non-paying tenant you at least have another paying.

You really have to look at his business plan at the level of the portfolio, not the transaction. The risk if lower if you have more properties.

 

[galway_blow_in]

I respectfully disagree...that’s why it’s called due diligence.

You can reduce your risk considerably by doing your research and imposing strict criteria.

No way of categorically knowing that the tenant you choose will stay straight forever, such is the level of powerlessness you then have that it renders the endeavour very risky if taking on debt, I could probably buy a btl again now for 190 k by borrowing 100k but instead I'm going to spend the 90k on an energy stock paying 6.5% of a dividend, yield is as good as the two bed apartments available and I can cash out if I want to buy something or just need the money, I've two properties already so probably have enough bricks and mortar anyway and perhaps important, one of my properties is a commercial so if the tenant left, I'd have more difficulty replacing the tenant or selling.

 

[Daisy duke]

The Mortgage Credit Directive introduced in March 2016 makes it virtually impossible for you to gain a mortgage in Euros where your main income is paid in a foreign currency. I currently have a Euro Mortgage with KBC but my salary is paid in Sterling. I am pretty much stuck with the property as very few banks will entertain lending based on the foreign income.

 

[cremeegg]

It can in his case if you look at the level of the portfolio.

Hypothetical scenario. OP goes from 2x200k properties with no debt to 3x200k properties with 200k debt on the third. Assume interest at 4% so annual interest payments of 8k.

Gross rental income goes from 2x12k=24k to 3x12k=36k. Interest is is deductible at 75%. 8k*.75=6k.

So taxable income on the whole portfolio is 36k-6k=30k

You have added 50% to your gross income but your income liable to tax has only gone up by 25%.

In your example the borrowing is driven by the opportunity to invest, not to get tax relief. That is an entirely different matter. If you can gain a return higher than the cost of borrowing then borrowing to invest can be great, in fact it is the major reason to invest in property.

Anyone who thinks that borrowing to avail of tax relief is a good idea, just doesn't understand what they are talking about.

 

[galway_blow_in]

In your example the borrowing is driven by the opportunity to invest, not to get tax relief. That is an entirely different matter. If you can gain a return higher than the cost of borrowing then borrowing to invest can be great, in fact it is the major reason to invest in property.

Anyone who thinks that borrowing to avail of tax relief is a good idea, just doesn't understand what they are talking about.

Right now unless you are buying in d4 or one of the few uber exclusive adresses in the country, you will see a yield much higher than the cost of borrowing, that's the easy part, entire pickle is the risk of a bad tenant and how little you can do about it if you find yourself with one

 

[Pauley]

Thanks all for these well considered and highly informative responses.

"Pepper" (I see they're now "Finance Ireland") and "Dilosk (ICS)" - I had never heard of those but will definitely investigate..

Some points came up in all these responses. I'll give more background:

Re financing to 100%. That would be my preference and I'd do that if possible, else I'd be "happy" with even 50% as I could somehow cobble together the rest from various sources, but that would trigger a lot of overhead that I'd rather avoid.

It's amazing to me that I can have all that equity sitting there yet seem not be able to do anything with it. I agree that some reform of law is needed. Far too often IMO politicians (everywhere) come up with overly far reaching regulations in order to make a short term gain for themselves while causing negative effects in the long term.

As to whether or not I should even be contemplating this, the answer is that on a pure profiteering basis, I shouldn't/wouldn't.. However this particular property is the rare one that fits my particular needs in an area that I could see myself using 3 to 5 years down the road..

Re tax. Being non resident has advantages insofar as most rental income is taxed at only 20% (as there's no other Irish income to take me into the higher marginal rate), plus no PRSI. So as long as I'm "away" it's less of a consideration...

As a current landlord I fully see all the issues with doing so in Ireland - unending rules, regulations etc. From a pure investing point of view, like someone else said here I'd sooner put my money into a high dividend paying stock and not have to deal with all the overhead, PRTB, RPZ, deposit retention and probably "inspections" on the horizon while all the time being exposed to the whims of an errant tenant should they choose to make my life difficult...

The funny thing is, had I done that in the first place (i.e. put the money in high dividend paying stock), I'd now be able to borrow what I needed against the equity in it (through margin) or just sell it within seconds if need be..

"Live and Learn"!

Thanks all again, and if anything materialises I'll update here...