Keep investment property with cheap tracker?

Discussion in 'Mortgages and buying and selling homes' started by Gordon Gekko, Oct 12, 2017.

  1. Gordon Gekko

    Gordon Gekko Frequent Poster

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    2,233
    Hi Sarenco,

    I met someone today (socially) with a lot of debt who's adamant about keeping his investment property.

    Home: €800k
    Mortgage: €600k
    Rate: 3.0%

    Home improvement loans: €100k
    Rate: 7.5%

    Investment property: €300k
    Mortgage: €200k
    Rate: 0.5%
    Rent: €19,500 pa

    I suggested selling the property, but he's not keen to, on the basis that:

    - He has funds coming through over the next two years which will clear the €100k
    - He's maxing out his AVCs

    Interesting to see how people approach these issues.
     
  2. Sarenco

    Sarenco Frequent Poster

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    4,172
    Hi Gordon

    The problem with projecting out into the future is you have to start making all sorts of assumptions around future interest rates, inflation, etc. I think it makes more sense to run the numbers based on what is actually known (or at least can be estimated with a reasonable degree of accuracy) today and to make decisions on that basis.

    I suppose you could get fancy and run the numbers with a projection of the weighted average interest cost - allowing for the expectation that the expensive home renovation loan will be paid down over a shorter period - and then run the numbers as above. In other words you could add, say, 1% to the PPR mortgage rate before running the numbers.

    Personally, I would just realise the €100k equity in the rental and pay off the 7.5% loan. If and when the €100k arrives, I would just pay down the 3% PPR mortgage.
     
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  3. Gordon Gekko

    Gordon Gekko Frequent Poster

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    I'm gonna take a look at the numbers today; rental income, AVCs, etc
     
  4. Brendan Burgess

    Brendan Burgess Founder

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    Let's look at the figures today

    Rental income: €19,500
    Interest cost: €1,000 ( €200k@0.5%)
    Interest cost: €7,500 (€100k @7.5%)
    Tax €9,000
    Profit before expenses: €2,000

    In other words, this is breaking even this year and next, even with a 7.5% loan.

    When the loan is paid off, the figures will be

    Rental income: €19,500
    Interest cost: €1,000 ( €200k@0.5%)
    Interest cost: €3,000 (€100k @3%)
    Tax €9,000
    Net profit before expenses: €6,500

    He is maxing out his AVCs which suggests that cash flow is not a problem for him. (If it becomes a problem he can stop maxing out his AVCs)

    So this is a clear case where he should hold onto the apartment.

    The only issue is whether he should be borrowing money at 7.5% to fund an AVC? I would think that this is not a good idea unless he is very close to retirement and has a very small pension fund.

    So, with that caveat, I would say that he should stop making AVCs and pay down the 7.5% loan aggressively.

    When he gets the total loans on his home down to €640k (80% of €800k) he should look at switching and trying to refinance the €40k at the mortgage rate.

    Brendan
     
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  5. RedOnion

    RedOnion Frequent Poster

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    I'm not even sure if this is possible, but if he sold the investment would he be able to transfer the 200k tracker to his PPR?
    I normally look at these before the PPR is purchased.
     
  6. Gordon Gekko

    Gordon Gekko Frequent Poster

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    No, it's with a bank who've exited the market.

    My suggestion around selling the investment property was made before I got greater colour around the individual's circumstances.

    The second property is quite a profitable investment and it has other attractive characteristics (it still lies below its base cost for CGT purposes for example).
     
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  7. Brendan Burgess

    Brendan Burgess Founder

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    Absolutely clear that he should keep it.

    It sounds like a BoSI interest only tracker? He should keep it anyway, but if it's interest only, it's even clearer again.

    There is also the possibility that the lender might give him a discount for early settlement.

    All of these decisions should be reviewed every couple of years. When the tracker loan is small in relation to the value of the property, then the decision can easily switch to sell.

    Brendan
     
  8. Sarenco

    Sarenco Frequent Poster

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    You good certainly make a good case for retaining the rental but I wouldn't describe it as absolutely clear.

    The accounts for the rental might look something like this:-

    Gross rental income................................................................................19,500

    Expenses:
    Allowable Interest (80% of €200k @ 0.5%)....................................................800
    Mortgage Protection Premiums..................................................................... 300
    Annual Service Charge (OMC)....................................................................1,700
    Estate Agent Letting/Management Fee............................................................ -
    Repairs/Replacements & Maintenance............................................................500
    Advertising Costs..........................................................................................45
    RTB Registration Fee.....................................................................................90
    Cleaning....................................................................................................... -
    Legal............................................................................................................ -
    Landlord Insurance Premiums.......................................................................200
    House Insurance Premiums............................................................................. -
    Refuse Charges/Local Authority....................................................................... -
    Gardening..................................................................................................... -
    Sundry (phone, postage, key cutting) .............................................................. -
    Accounting.................................................................................................... -

    Total Allowable Expenses..........................................................................3,635

    Taxable Rental Income.............................................................................15,865

    Tax (Income Tax, USC & PRSI) @ 50%....................................................... 7,933
    LPT........................................................................................................... 267
    Non-deductible Interest.............................................................................. 200

    Net Rental Income After Tax................................................................. 7,465


    So, it's pretty clear that there is no net benefit to retaining the rental while the home renovation loan (€100k@7.5%) is outstanding.

    If you ignore principal repayments, and assume that everything else remains constant, once the home renovation loan is discharged you could project a net benefit of €4,500 pa in retaining the rental over paying down the PPR mortgage (€100k@3%).

    Over, say, a five year period (assuming the home renovation loan is paid off at the end of year 2), that averages out at €2,700pa. Is that a sufficient reward for bearing the risks and hassle associated with retaining the rent? Maybe.

    Obviously the above ignores any possible capital appreciation/depreciation.
     
  9. Brendan Burgess

    Brendan Burgess Founder

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    Agreed but only if he had no means of repaying the loan. He can reduce it by stopping the AVCs. And he will have some other source to clear it completely within two years.

    So I still think it's "absolutely clear" based on what he has told us.

    Brendan