Home in positive equity, but three investment properties in negative equity

[Nic]

Hi, hoping this forum can bring me a bit of sanity and direction. I have a family home and 3 investment properties. Details as follows:

Property 1 has been interest only for some time and I am making a profit which is helping with the shortfall of property 2 and 3. I expect the bank will force me off interest only soon and this will hurt alot. Will be a long time before this property is worth what I paid for it in 2007.

Property 2 I am subsidising €300 per month. In the long run, the value of this property will increase and I plan to sell within 10 years.

Property 3 is a section 23 apartment and is a complete disaster. I am not making enough rental profit to shelter any tax and the value of this property will never be worth more than €80K (even in 10/15 years time).

So, my problem is that soon I will be paying through the nose for 3 properties, 2 of which are viable long term investments and 1 is a lead balloon. Kids will be starting college soon, but the extra income we have will be going towards mortgages. Interest rates will start climbing which will become a very serious problem for us. Have spent many days and weeks mulling this over and cannot see a way of making this work. We have a modest family home and our absolute last resort (nightmare) is to sell our home.

Would appreciate a fair appraisal and guidance from this forum.

 

[Agent 47]

It seems you have made serious inroads into capital payments on property 1, 2 and 3. Rental property 2 is nearly finished but you need to restructure rental Property 3. As ever you need to engage with your lender ASAP and get a plan worked out before it and the problem mushrooms.

 

[respectableobserver]

OP, are tax etc and maintenance charges and management fees etc been taken in to account in your figures above?
Overall it appears top me as a neutral observer that the total value of your 4 properties, inc your home, is €55k less than your mortgages. It looks manageable, I guess it depends on your income / career, the property location, if your job is pensionable etc. Is property 3 really worth only a fifth of what you paid for it?

 

[Nic]

invest 1: rate = 0.85% / int = €162 / repay = €162 / Mgt Fee = €850
invest 2: rate = 0.95% / int = €107 / repay = €700
invest 3: rate = 0.80% / int = €100 / repay = €835 / Mgt Fee = €1,400

Looking for home rate but repayment is approx €300 per month on €70,000

 

[Brendan Burgess]

Hi Nic

You have three very profitable investments. The rental income, even on property 3, exceeds the interest you are paying.

So it's critical that you keep all these investments.

For example, Investment 2. Of the €700 you are paying every month, €600 is repaying the capital. So you you are reducing the mortgage by €7,000 a year. After three years, the negative equity will be gone.

The problem is that there is a significant risk that your lender will insist that you sell these properties. They may offer you an alternative of switching to SVR and interest only. However, you should not accept this alternative. If they force you to sell the properties, you will have €235,000 of a shortfall which you will not be able to make the repayments on. You will effectively be insolvent and at serious risk of losing your home.

The best and simplest solution for you is as follows:
1) Sell your home and rent something similar. Ideally could you find an investor who would buy your home and rent it back to you?
2) You will then have €180,000 capital with which to meet the repayments on your investment properties for many years to come.
3) Over time, you will reduce the mortgages so that Properties 1 and 2 are in positive equity.

In summary , you will go from a position where you are currently insolvent to the tune of - €55,000 to a situation where you are solvent and have profitable property investments.

Alternatively, you could try to get a re-mortgage on your home, but I think that will be difficult given the net negative equity you are in.

Another alternative worth considering is whether there is a family member who could lend you the money to meet the shortfalls on your monthly repayments. They would be lending you money to repay capital. Your total indebtedness would not be increasing. Even if they can do that only for a few years, it would give you longer in your current home which is presumably where you want to stay. At any stage, you can sell your home and repay them the loan.

I have assumed that none of the investment properties is suitable as a family home.

Brendan

 

[Nic]

Thanks for the comprehensive feedback Brendan. I should add that all mortgages are with separate lenders. I don't know if this is a good thing or a bad thing or is this changes the dynamics ???

 

[Brendan Burgess]

The only advantage is that if it were one lender, they might call on all loans at the same time.

As you have 4 lenders some of them must be with banks who are no longer operating in Ireland. There is a slim chance that one of them might be interested in a deal to sell the property and pay off the mortgage and give you some discount for doing so. But it's only a slim chance and not worth planning for.

 

[Sarenco]

Obviously not an ideal situation.

Some degree of (hopefully short-term) pain looks unavoidable but it should be possible to reverse your way out of what now look like some pretty poor financial decisions.

If it was me, I would sell the family home - I appreciate that will be very painful - and Property 3. Incidentally, I suspect you are significantly undervaluing Property 3 - a monthly rent of €440 on a property worth €35k equates to a gross yield of 15% - any sane investor would bite your hand off for that kind of return. Unfortunately, I don't see how you can afford to keep all your investments from a cash-flow perspective.

I would apply the balance of the freed up equity from your family home, having paid off the shortfall on Property 3, to the mortgage on Property 2 and that should see a dramatic improvement to your cash-flow position. You should actually be in a position to start saving and, with time, can look forward to buying a house to live in again.

You will obviously have to rent a property to house yourself (assuming none of the rental properties are suitable) in the interim period but that's hardly the end of the world.

I wouldn't hold cash back to drip feed into your investment properties as the after-tax return on the cash deposits will probably be no greater than the after-tax interest on the outstanding mortgages - just pay off as much debt as you can, as quickly as possible.

I personally wouldn't dream of asking a family member for a loan to continue funding an investment. I have seen families literally go to war over property related investments far too many times - life is too short in my opinion.

Finally, good luck with whatever you decide. Not sticking your head in the sand and actually dealing with your situation is an important first step. It will take some time but i would be confident that you can successfully come out the other side of this situation.

 

[Brendan Burgess]

I personally wouldn't dream of asking a family member for a loan to continue funding an investment. I have seen families literally go to war over property related investments far too many times - life is too short in my opinion.

I would have no problem asking a family member for a loan if it meant keeping my family home. And don't forget that this loan is being used to pay down debt. It is not a loan to fund lifestyle expenses. Nic can pay it off at any time by selling the family home.

There well may be a parent or an uncle or aunt who has cash on deposit getting a return of 0.5% on it. Wouldn't it be a much better use of the cash to help a son keep their family in their home?

I wouldn't hold cash back to drip feed into your investment properties as the after-tax return on the cash deposits will probably be no greater than the after-tax interest on the outstanding mortgages - just pay off as much debt as you can, as quickly as possible.

A very interesting point. My initial reasoning was:
You have a cheap tracker on an investment property.
This package as a whole is very profitable and therefore you must keep your cheap tracker
Keep the cash to help make your repayments as they fall due.

I had not considered paying down the mortgages. Let's look at that option now.
Net interest received on deposit: 0.9% (1.5% from KBC or Rabo less Dirt)
Net interest paid: 0.6% (0.95% less tax relief on 75% of it)

So it makes arithmetic sense to hold onto your cash on deposit.

It also makes a lot of other sense in that it gives you great flexibility.
If any of the lenders offers an incentive for paying off the mortgage early, you will be able to avail of it. You will have lost that incentive if you have paid off your mortgage with the lump sum.
You may choose at some later stage to sell one of the investment properties. If you have paid off the mortgage on the other one, then you will not be able to do so.
Your financial position may improve and you may be in a position to buy a family home again. If you have paid off all your mortgages, you won't have the deposit.

 

[Brendan Burgess]

I would sell ... Property 3. Incidentally, I suspect you are significantly undervaluing Property 3 - a monthly rent of €440 on a property worth €35k equates to a gross yield of 15% - any sane investor would bite your hand off for that kind of return. Unfortunately, I don't see how you can afford to keep all your investments from a cash-flow perspective.

Property 3 is a section 23 apartment and is a complete disaster. I am not making enough rental profit to shelter any tax and the value of this property will never be worth more than €80K (even in 10/15 years time).

This is the one property you should definitely not sell, assuming your figures are correct.

If you sell it, you will be left with a loan of €120,000 and the lender will probably insist on you paying it off immediately.
If you keep it, the rent is paying the interest in full and knocking €3,000 a year off the mortgage after the management charge.
Not sure how Section 23 works, but I presume that there is some tax advantage in the longer term in keeping it?

 

[Sarenco]

Hi Brendan

I thought it might be worth adding some colour on where I was coming from in my post:

There well may be a parent or an uncle or aunt who has cash on deposit getting a return of 0.5% on it. Wouldn't it be a much better use of the cash to help a son keep their family in their home?

I certainly agree that, on paper, a soft-loan from a family member can make good commercial sense for both parties. However, in my experience, these types of arrangements often give rise to suspicions among other family members that somebody is being unduly advantaged or pressurised and this can lead to rows. These types of loan arrangements can also give rise to significant tax and/or succession issues. Personally, I would steer clear, except, perhaps, as an absolute last resort.

A very interesting point. My initial reasoning was:
You have a cheap tracker on an investment property.
This package as a whole is very profitable and therefore you must keep your cheap tracker
Keep the cash to help make your repayments as they fall due.

I had not considered paying down the mortgages. Let's look at that option now.
Net interest received on deposit: 0.9% (1.5% from KBC or Rabo less Dirt)
Net interest paid: 0.6% (0.95% less tax relief on 75% of it)

So it makes arithmetic sense to hold onto your cash on deposit.

It also makes a lot of other sense in that it gives you great flexibility.
If any of the lenders offers an incentive for paying off the mortgage early, you will be able to avail of it. You will have lost that incentive if you have paid off your mortgage with the lump sum.
You may choose at some later stage to sell one of the investment properties. If you have paid off the mortgage on the other one, then you will not be able to do so.
Your financial position may improve and you may be in a position to buy a family home again. If you have paid off all your mortgages, you won't have the deposit.

Rabo only pay 1.5% interest on their instant access account on amounts up to €20k - their rate on amounts above €20k is only 0.75%. To be fair, KBC pay 1.5% interest on amounts up to €100k (or at least they will do from 5 May) but their accounts are loaded with fees. Also, the OP will have to pay PRSI on all deposit interest in addition to DIRT. As such, I would be surprised if the OP was able to earn more than around 0.75% interest, net of taxes and fees.

On the other side of the equation, I would look at things slightly differently. Unlike DIRT, which is levied at a flat rate, income tax is obviously levied on a tiered basis. As such - and I am conscious that a number of posters strongly disagree with me on this point - I think using the average rate of income tax that applies across an investor's total income is more appropriate than using the marginal rate when comparing investment income that is subject to income tax and investment income that is subject to a flat rate of tax (such as DIRT or the exit tax that applies to distributions from certain funds). If the OP pays income tax at an average rate of, say, 30% across his entire income, then by my calculations the net interest paid on the mortgage would actually be 0.77%.

More significantly, if the OP discharges the mortgage in full, he will no longer be required to maintain mortgage protection insurance. On an annual basis, the premium savings would be fairly significant.

I certainly take the point that the OP would forego a degree of flexibility by discharging the mortgage as opposed to retaining the liquid cash. However, I think it is highly unlikely that a lender would offer an incentive for paying off a mortgage early - what's their incentive for doing so?

 

[Sarenco]

Property 3 is a section 23 apartment and is a complete disaster. I am not making enough rental profit to shelter any tax and the value of this property will never be worth more than €80K (even in 10/15 years time).

This is the one property you should definitely not sell, assuming your figures are correct.

View attachment 436

If you sell it, you will be left with a loan of €120,000 and the lender will probably insist on you paying it off immediately.
If you keep it, the rent is paying the interest in full and knocking €3,000 a year off the mortgage after the management charge.
Not sure how Section 23 works, but I presume that there is some tax advantage in the longer term in keeping it?

Agreed, on the basis of the figures as presented but I think the OP must be understating the fair market value of Property 3 - a gross yield of 15% is unheard of in Ireland.

I wouldn't be particularly hung up on which properties the OP retains but I do think if he is moved off an interest-only arrangement on Property 1 (which I would agree is highly likely) that he will ultimately have to dispose of assets to pay down debt. He might be able to restructure his other mortgages - perhaps a term extension would help - but there are obviously limits here.

 

[Brendan Burgess]

Personally, I would steer clear, except, perhaps, as an absolute last resort.

If it's a choice between taking a loan from a parent and having to sell the family home, I know which one I would take. It's quite possible that at some time in the future, Nic will get an inheritance. Getting an advance now could be great. Getting it in 20 years might be too late.

If the OP pays income tax at an average rate of, say, 30% across his entire income, then by my calculations the net interest paid on the mortgage would actually be 0.77%.

This makes no sense at all.

In simple terms, if I am paying an effective tax rate of 30% on my income and a marginal rate of 51% and I have to decide whether or not to work overtime to earn €100. If I work overtime, I will earn €49 not €70. All these decisions should be made on the marginal rate.

Points taken on the deposit rates and prsi. But the overall point is that it's not costing him anything to keep the cash and he gains huge flexibility.

More significantly, if the OP discharges the mortgage in full, he will no longer be required to maintain mortgage protection insurance. On an annual basis, the premium savings would be fairly significant.

I think it would be unusual to have mortgage protection insurance on an investment property. If he does have it, he should cancel it whether or not he keeps the properties.

 

[Sarenco]

If it's a choice between taking a loan from a parent and having to sell the family home, I know which one I would take. It's quite possible that at some time in the future, Nic will get an inheritance. Getting an advance now could be great. Getting it in 20 years might be too late.

Getting an advance on a possible inheritance would certainly be great for the OP. However, it may not be so great for any other potential beneficiaries, such as the OP's more prudent siblings/cousins, etc.

At the end of the day, the OP's PPR is just bricks and mortar - if selling it puts the OP in a position to discharge liabilities relating to his rental property business that he could not otherwise discharge, then I don't really see the problem. It goes without saying that lots of people rent, rather than own, their family home.

This makes no sense at all.

In simple terms, if I am paying an effective tax rate of 30% on my income and a marginal rate of 51% and I have to decide whether or not to work overtime to earn €100. If I work overtime, I will earn €49 not €70. All these decisions should be made on the marginal rate.

It is obviously the case that every Euro of income above the relevant ceiling will attract income tax at the marginal rate (plus PRSI and USC at the applicable rates) and I certainly wasn't trying to suggest otherwise. My point is quite different.

75% of relevant mortgage interest payments are deductible for the purposes of calculating net rental profits. Rental profits are then aggregated with all other sources of taxable income (whether derived from a trade or profession, PAYE income, dividends, etc.) and the total amount is then taxed on a tiered or progressive basis. A tax payer is not taxed at one rate on net rental profits and a different rate on his salary - he is taxed on a blended basis on his composite income (i.e. the different sources of taxable income are entirely fungible). As such, it is more accurate to use the average (or effective) tax rate on all taxable income in determining the net (after tax) interest rate on a RIP.

In contrast, DIRT is levied at a flat rate on all deposit interest. DIRT is not levied on a progressive or tiered basis and therefore the effective tax rate on deposit interest (including PRSI) is simply 45%.

There is nothing at all novel about using effective tax rates to compare the tax treatment of different investments and I'm surprised that it is so controversial on this forum.

I agree that the OP would loose flexibility by discharging a loan rather than staying in cash but in my calculations the OP would be marginally better off by paying down the mortgage on Property 2 and I assumed a relatively high effective income tax rate in arriving at this conclusion.

In any event, if the OP comes into money and does not sell his PPR this whole discussion becomes totally academic!

I think it would be unusual to have mortgage protection insurance on an investment property. If he does have it, he should cancel it whether or not he keeps the properties.

While it is not obligatory under the Consumer Credit Act, I would have thought that it was more common than not to have mortgage protection insurance on a RIP. In any event, the OP's dependants may not thank him if he cancels any such insurance that he may have in place and then (God forbid) shuffles off this mortal coil in his current financial circumstances!

 

[Nic]

Thanks all for your feedback. There are no other funds whether it be from parent, uncle, aunty and there is no inheritance on the horizon. Based on your collective feedback it seems the investment properties have long term viability and my problem is having the cashflow to support the increasing repayments. Selling the family home will result in divorce and really is not an option for us. So, I need to sell one car, find another income stream (2nd job), win the lottery. This is what I get for trusting the old bricks and mortar !!!!!

 

[Brendan Burgess]

Selling the family home will result in divorce and really is not an option for us.

I have had these discussions with people before. Not selling the family home will result in continued stress for a long time to come.

Brendan

 

[Sarenco]

Thanks all for your feedback. There are no other funds whether it be from parent, uncle, aunty and there is no inheritance on the horizon. Based on your collective feedback it seems the investment properties have long term viability and my problem is having the cashflow to support the increasing repayments. Selling the family home will result in divorce and really is not an option for us. So, I need to sell one car, find another income stream (2nd job), win the lottery. This is what I get for trusting the old bricks and mortar !!!!!

Thanks for coming back to us Nic.

First off, my apologies for dragging the thread off in a somewhat academic discussion about effective tax rates - obviously not a significant consideration in your circumstances.

Don't get divorced whatever you do! You can't afford it.

Sorry, I've just been reminded (by way of an elbow to the ribs) that there are many other good reasons to stay married (tax credits?).

If selling your PPR is off the table, then increasing your income and/or reducing your expenses would appear to be your only remaining options if you have to start meeting principal payments on Property 1.

Remember that cutting back on your expenses will have a far greater impact (after tax) on your bottom line than increasing your income.

You obviously know your family better than anybody else but would it be worth sitting everybody down to explain your financial situation? Agreeing a realistic family budget would give you the confidence to make sound future decisions. You might be pleasantly surprised at your kids' reaction (and my apologies in advance if that sounds overly familiar or intrusive).

Best of luck with whatever you decide. Your situation looks challenging but manageable with a fair wind and, critically, if everybody pulls together.

 

[Bronte]

I would have no problem asking a family member for a loan if it meant keeping my family home. And don't forget that this loan is being used to pay down debt. It is not a loan to fund lifestyle expenses. Nic can pay it off at any time by selling the family home.

.

I think this is a crazy suggestion. Anything can happen in life. And it is not at all easy to just suddently liquidify a family home. Some ideas on what can go wrong:

6 months in family member who loaned money wants it back.
Another property crash and family home halved in value
Divorce of someone and fights over who owns what in family home
Separtation and one party will not sell family home
Minimum period to get someone out of family home is yonks
Lending family resentment
Lending family thinking why would they loan on a home where a person is in deep NE on not one but 3 'investments'
If parents loan the money siblings might be upset at unfair treatment, especially if loan gets 'forgotton' about

Life insurance on property

I also disagree with the advice to cancel this, particularly if the premiums are low and if you have no other life insurance. It gets increasingly difficult to get life insurance as we get older. At one time it would have been encouraged to get this insurance with investments but more recently not so.

In Nic's case if the worse were to happen, not only would the investments go, but the equity in his house and any other assets he has would have to be used up to pay the shortfall on the investment properties mortgages. There would also the loss of a main earner. These decisions have to be fully thought thru.

 

[Brendan Burgess]

I think this is a crazy suggestion. Anything can happen in life. And it is not at all easy to just suddently liquidify a family home. Some ideas on what can go wrong:

Yes, and you balance all those things which might go wrong against the definite loss of the family home now.

 

[Bronte]

It is obviously the case that every Euro of income above the relevant ceiling will attract income tax at the marginal rate (plus PRSI and USC at the applicable rates) and I certainly wasn't trying to suggest otherwise. My point is quite different.

75% of relevant mortgage interest payments are deductible for the purposes of calculating net rental profits.

As outlined on other threads I disagree with you in relation to tax, as far as I'm concered he's paying around 54% or thereabouts. He is in addition paying exceedingly low interest so these properties are quite a headache tax wise I would have thought.