Keep current home as an investment when trading up?

Discussion in 'Property investment and tenants' rights' started by mojoask, Jan 8, 2017.

  1. mojoask

    mojoask Registered User

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    Last edited: Jan 8, 2017
    Here's our situation, married couple both 34, one baby. Have a house which we like, but which is ultimately too small for our needs. Net income of €7,600 p/m (excl. annual bonus), mortgage of €1,250 p/m (155k equity / €275k remaining @ 3.1% over 28 yrs), no other borrowings, only other major expense is childcare @ €1,000 p/m. 90k in savings & liquid investments. We're considering moving to another house close by.

    Want to explore some options, one of which is to keep and let our current house. A neighbour did similarly and achieves a rent of €2,300 p/m on their identical house. Would require a second mortgage of 500k for the new house, with payments of €2,300 p/m.

    There's a lot of hassle with being a landlord, which is well documented on this forum, so I'd to focus on the financial side of this.

    Over 10 years, my calculations show a potential return of €150k, based on the following assumptions:
    1. Income tax @52%
    2. Interest relief @80%
    3. CGT @33%
    4. No other changes to reliefs available (eg: allowance of property tax)
    5. Average rental increases of 2% p/a
    6. Average expense increases of 2% p/a
    7. Average property appreciation of 2% p/a
    8. 90% occupancy rate
    The downside is that all capital is tied up and of course the risk that my assumptions turn out to be incorrect.

    The alternatives would return the following:
    1. Sell current house, use capital towards new house and over-pay the mortgage to a similar level as the second mortgage above = €100k in interest savings / additional capital, with no risk but illiquid capital
    2. Sell current house, invest equivalent amount annually in a liquid investment portfolio with 4% ROI after taxes, charges & dividends = €100k with some stock market risk but liquid capital
     
    Last edited: Jan 8, 2017
  2. Brendan Burgess

    Brendan Burgess Founder

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    Hi moj

    You are completely underestimating the risk of everything you do. For example. "a liquid investment portfolio with 4% ROI after taxes, charges & dividends = €100k with some stock market risk but liquid capital" You would need about 10% return before taxes and charges. To get this you would have to take a punt on an individual share so you are more likely to lose all your money.

    Pay down your mortgage immediately. The sooner you start getting a tax free risk free return of 3.1% per annum, the better.

    Then sell your house and trade up with a smaller mortgage and a lower mortgage rate.

    The only variation on this would be to use your €90k as the deposit on a new house. Then when you have moved into the new house, sell your own and pay down your mortgage.

    Brendan
     
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  3. DCD

    DCD Frequent Poster

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    Tax free risk free return of 3.1%. In 2017 and the current climate. As Brendan thats the way I would play.
     
  4. mojoask

    mojoask Registered User

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    Were I to do this, would I be liable for CGT on the gain made since I bought the old house, as it is no longer my primary residence at that point?
     
  5. Gordon Gekko

    Gordon Gekko Frequent Poster

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    No, PPR relief is time apportioned with an extra 12 months' grace on top.
     
  6. Gordon Gekko

    Gordon Gekko Frequent Poster

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    Sorry Brendan, but I disagree;

    Hi mojoask,

    - You can gross €27,600 per annum by renting out your house.
    - Interest is €8,525 per annum.

    By selling, you'll save €155,000 x 3.1% (assumed new mortgage rate) which is €4,805 per annum.

    So what's the tax position on the proposed rental?
    €27,600 less (€8,525 x 80%) less (say) €1,000 for capital allowances less (say) €1,000 for repairs.
    That's €18,780. Total tax rate of 52% means tax of €9,766.

    So cashflow-wise, €27,600 less interest less estimated repairs less property tax (say €500) less tax. You're left with €7,809.

    €7,809 after-tax return from renting out your property vs €4,805 after-tax return from not borrowing €155,000 at 3.1%.

    You should keep the property but review the position annually as you pay down the mortgage on the investment property.
     
  7. Andarma

    Andarma Frequent Poster

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    Gordon, are you assuming that the investment mortgage would be interest only? If it's not then the OP has to factor in the cost of full mortgage repayments, ie 12 X €1250.
     
  8. mojoask

    mojoask Registered User

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    Last edited: Jan 8, 2017
    Nice to see some difference in opinion :) We haven't made any decision, I just want to tease this out and see where it goes.

    Isn't the capital payment academic Andarma?
    Were I to liquidate the investment after 12 months, what would the return be?
    • Any surplus (or deficit) after all costs and the mortgage had been paid (let's assume in this instance it's neutral, break-even)
    • The capital repayment which the mortgage covered (€6.3k)
    • The difference in the value of the house between selling it in 2017 vs selling it in 2018 (let's assume 2% gain = €8.6k less CGT @33% + €1.27k exemption giving approx €7k)
     
    Last edited: Jan 8, 2017
  9. Gordon Gekko

    Gordon Gekko Frequent Poster

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    No they don't. That's just deferred savings. When comparing the various options, one ignores the capital element. It's only an issue from a cashflow perspective.
     
  10. Gordon Gekko

    Gordon Gekko Frequent Poster

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    What did the house cost you and when did you buy it?
     
  11. mojoask

    mojoask Registered User

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    €365k, mid '14. I perhaps see where you're going with this. From when would the gain on CGT apply?
     
  12. Andarma

    Andarma Frequent Poster

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    I agree that it's a cash flow issue, but it's a pretty significant expense!
     
  13. Gordon Gekko

    Gordon Gekko Frequent Poster

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    Okay, it's worth €430k and it cost you €365k. You probably have total costs of around €12k in total for buying and selling. So a tax-free gain of (say) €53k if you sell today. That gain will be tax-free for 12 months after you move out. Thereafter, its tax-free nature starts to dilute. If you move out in mid-2017, by mid-2019 4/5ths of any gain will be tax-free. In mid-2020, it's 4/6ths, and so on.
     
  14. mojoask

    mojoask Registered User

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    Thanks, that's clear.
     
  15. PGF2016

    PGF2016 Frequent Poster

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    You've 275k of mortgage debt and you're looking to to add 500k? Too much debt in my opinion.
     
  16. Brendan Burgess

    Brendan Burgess Founder

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    Hi Gordon

    Absolutely no need to apologize for disagreeing with me.

    Here are your figures in tabular form:
    upload_2017-1-8_22-20-40.png
    Let's assume for the moment that they are correct.

    So that compares with saving €4,800 by selling and borrowing less.

    Is it really worth all the hassle and risk for €3,000 net a year? I doubt it. Mojask has a net income at present of €7,600 so my guess is that they have a fairly busy job. Do they have time to run a business of letting a house?

    In any event, I would challenge your figures. There will be empty periods between lettings. The costs of maintenance and repairs will be much higher than €1,000. He will have to furnish the house. If he gives it to a letting agent, they will charge around €3,000 a year.

    On the positive side, property prices may rise over his period of ownership, so he will get capital gains.

    On the negative side, property prices may fall. Even if they do, he could end up with a CGT bill.

    But look at the posts in this thread:
    Who wants to be a landlord?

    And since then, the whole attitude and treatment of landlords have changed for the worse.

    I think that the guaranteed, tax-free and risk-free and hassle-free return of 3.1% trumps the potential taxable gains of investing in property.

    Brendan
     
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  17. Gordon Gekko

    Gordon Gekko Frequent Poster

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    Last edited: Jan 8, 2017
    We shall have to agree to disagree. I would hang on to the property.

    Prices could fall and rents could fall, but they could also increase. Supply is so short, I would be wary of dumping such a profitable investment.

    Which I'm surprised to be saying in respect of a non-tracker mortgage.

    I do accept the point regarding hassle though.

    I just couldn't bring myself to give up a 5.1% yield (after tax) in the current low interest rate low return environment.
     
    Last edited: Jan 8, 2017
  18. Sarenco

    Sarenco Frequent Poster

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    I couldn't either but I don't think your numbers are realistic.

    In my experience, the expenses associated with managing and maintaining a rental property, on average, account for around 20% of the gross rental income.

    Typical costs include mortgage protection premiums; house insurance premiums; landlord insurance premiums; annual management fee (OMC); estate agent letting and/or management fee; repairs & maintenance; advertising costs; RTB registration fee; replacing white goods, furniture, etc.; cleaning; legal; refuse charges; travel; accounting. Obviously you could self-manage the rental but you should still account for your time when assessing the viability of the property as an investment.

    It is also prudent to allow at least an additional 10% for the inevitable voids and over holding periods.
     
  19. Brendan Burgess

    Brendan Burgess Founder

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    Here are the revised figures using Sarenco's estimates.

    upload_2017-1-9_14-25-45.png
    It means you are taking all the risk and all the hassle for no current financial benefit. Although this might be compensated for by an increase in property prices over the holding period.

    Brendan
     
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  20. Gordon Gekko

    Gordon Gekko Frequent Poster

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    Last edited: Jan 9, 2017
    Gents, I think the 30% is overly conservative. I have one rental property and my parents have two. In the last four years, we have had seven tenants in total, and literally no void periods. Also, repairs have been minimal. For example, I've spent circa €500 in four years; that's negligible...circa €60 a year after tax.
     
    Last edited: Jan 9, 2017