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.
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.
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.
Taking on an expense just to avail of the tax relief on the expense makes no sense.
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.
Yes but in the OP's case the risk is more evenly spread.The figures add up but if you do encounter a rogue tenant you are effectively powerless and becoming more powerless by the year.
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.
(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 said: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.
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.
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