Investment apartment, not sure what to do..

[knock095]

I bought a section 23 apartment 3 years ago off the plans and have had it rented out, this is the middle of the 3rd year. I got royally screwed over by a "friend" of the family who talked me into buying this place and gave me all sorts of promises. I was so naive and really thought I could trust him. I look back now and realise it was my fault for relying on his opinion and not doing my homework but thats neither here nor there now!

I paid 265k for a one bed section 23 apt ( I can hear the groans already!) in Clondalkin. I have had it rented out for €900 pm for the first two years and rented it 2 months ago, new 12 month contract for €950 pm. I owe roughly €225k on it and would get in the region of €250k - €260k if I sell, according to local EA. A 2 bed in the same place was sold recently for €270 and the EA told me that a 1 bed would go faster becuse they're easier to rent and less hassle. The repayments on the apt is €1100 a month so I'm covering the shortfall. I would love to keep it for a while to see if the prices come back up a little and might consider buying another buy to let in a few years so the section 23 might come in handy. I have thought seriously about selling it and using whatever eqity I get back to buy a place in the city centre. Might be a better move long term and easier to rent.

Any ideas? I'm not sure what I'm asking but just wondering if the general concensus would be to keep it or shift it!
Thanks.

 

[rustbucket]

If you can afford to continue to make the sortfall keep it. At least until the remainder of the letting contract is up

 

[LouisCribben]

Your situation isn't too bad.

If you sell, you'll lose 10 or 15 K, which is not nice, but you are getting a gross return of around 4.3% a year, which isn't too bad.

The family friend who did a hard sell on the flat to you, his intentions were probably good, he saw that the market had been rising continuously for 10 years, and assumed (like many others, including the Irish government) that the rises would continue. It didn' happen.

I wouldn't rush out and sell.

You could put it up for sale at a price you are willing to accept (costs you nothing to put it up for sale). If nobody comes in with a good offer, then hold on to it

Because inflation is relatively high at the moment, you could benefit in the long term from the falling value of money.
Inflation helps people who owe money to banks like you. If we get high inflation for a few years, the amount you owe to the bank will appear much smaller than it is now.

It's like people in the 1970's who borrowed massively to buy a house in Blackrock for £7'000. A few years later, £7'000 was a years salary because of inflation.

Inflation is a debtors best friend.

 

[CGorman]

I think you would get a much better response if you posted this in the correct forum - the investment property one. Here's a summary of the figures and my two cents (for what its worth, im no expert)

Purchase Price: €265,000
Current Value: €250,000
Mortgage Amt: €225,000
Implied Equity: €25,000
LTV: 90%

100% Occupancy Rental Yield: €950pm
92% Rental Yield: €871pm (avg. if one month idle per annum)
Rental Yield: 3.94% - 4.3% (min - max on purchase price)
Rental Yield: 4.18% - 4.56% (min - max on current value)

Interest Only Repayment: €1,106pm
25Yr Capital + Interest Repayment: €1,453pm (approx.)
Implied Interest Rate: 5.9% (approx.)

1) You have invested in a section 23, yet indicate that you obtain relatively little tax benefit from the property as it is your only buy-to-let. A S23 property typically sells for a small premium over comparable properties because of the tax advantages it confers on certain purchasers. Without doing the figures I can see that much of this relief is 'wasted' in your case as you have insufficent rental income to justify it. I am open to correction on this.

2) The value of the property has fallen, however, thankfully you are not in negative equity, so you are in a position to sell if you like without having to dip into your pockets for more cash.

3) Excluding capital appreciation potential; you are and will continue to loss some money on the rent/mortgage side of the investment. The rent is currently 150e per month less than the interest repayments. This is not that bad and if you are able to increase rent by another 50e for the next 3yrs, then you'd be at a breakeven point with regard to the rent/mortgage. It remains open to speculation whether you can actually manage to raise rent that much in the next few years. It also depends on 100% occupancy.

4) On the capital appreciation side, you've seen just a 6% fall in the properties value in the 3yrs. This compares to much higher falls accross the property market. Perhaps the S23 has helped maintain the value, or perhaps you bought at an already reduced rate. Without making a specific prediction, it is likely that the property will continue to fall in value in the short/medium term. The long term growth is anyones guess.

If you sell now for 250k you will have lost 15k on capital and 18k on funding mortgage (less rent). Upon selling you will have about 25k cash less fees.

If you hang in there you will continue to loss about 1800e per annum funding the mortgage repayments until rent rises. On the capital side; well thats the great unknown... most likely you'd continue to see a loss in the short/medium term and eventually turn a profit... but how long before this happens?!

As much as it was a poor investment, in my opinion you should hang in there if you believe the price is likely to recover accross your investment timeframe. Also you are fortunate to be nearly breakeven on the rent/mortgage. This is the key difference compared to many who have posted similar queries because when the rent exceeds interest then you will start making a profit (which you can keep, or use to pay down the mortgage) - this is assuming you are not concerned with capital fluctuations in the short/medium term.

These are just my beermat opinions.

 

[CGorman]

You are sitting on Negative equity of 10 or 15 K, which is not nice, but you are getting a gross return of around 4.3% a year, which isn't too bad.

He has no negative equity as the asset value, even now, exceeds the outstanding loan balance by about 25k. As for the yield, you are spot on (see my last post)... however it's worth pointing out 4.3% is good in an Irish context in recent years, but still historically quite poor. Also this yield assumes 100% occupancy.

You could put it up for sale at a price you are willing to accept (costs you nothing to put it up for sale). If nobody comes in with a good offer, then hold on to it

Excellent advice.

Because inflation is relatively high at the moment, you could benefit in the long term from the falling value of money.
Inflation helps people who owe money to banks like you. If we get high inflation for a few years, the amount you owe to the bank will appear much smaller than it is now.

However current strong CPI inflation coupled with rental/asset deflation would be a disaster for the OP as his loan would be the same in money terms, yet the asset would be less and rent would be less. Yes his salary might be much bigger and the loan seem smaller... but thats irrelevent if the investment has'nt stood on it's own two feet! It all depends on his personal predictions for asset and rental growth.

 

[knock095]

Hi,

Thanks for your replies. There are a few things I should add to my earlier post.


The family "friend" who talked me into the apartment was heavily involved in the development and didn't tell me that the price of €265k was including a 10k " buy into the development" charge. He knew exactly what he was doing. He has since passed away so I can't get any answers. I was extremely upset about the whole thing but have to just let it go.
I am paying the capital as well as the interest on the apartment. Decided at the time that I might as well seeing as it was not a huge jump in the repayments and I figured it was a way of buying the place one brick at a time.
I don't have a specific timeframe for the investment to come good. I'm ok to keep subsidising the mortgage as long as its a relatively small payment and I see it as a form of saving. It may be naive but I know that in 27 years, if I hold onto the property or sell and buy an equivalent in city centre for a slightly higher price, I'll have a nice little earner bringing me in a tidy sum every month. The alternative is to sell the place if and when the market bucks up a little over the next few years.
I have not used any of the section 23 relief and my plan was to sell the apt with full use of the relief. There is 217k in total. I imagine that will become slightly more valuable to over stretched investors over the next 12-18 months.

Thanks

Thanks.