mortgage free investment property and deferred rental income

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SuperTina

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This is something I am contemplating and a lot of the questions I have would fall into different forums, so please move it there is a better forum than this one.

I currently own a house with my partner that is in negative equity - I'd say by about 200K. We have a tracker mortgage and a good 28 years left on it

House prices have come down massively in the area I live and i could buy the same type of house I own for about 100K - this would be a house that would require some work.

I have a little bit saved and my Dad, who lives in another EU country would be willing to lend me the rest (around 80K).

So in theory I would hope to buy a house for around 100K and then let my brother live there for free for a certain period of time against helping to do up the house.

The whole rationale behind all of this is that I am hoping that eventually house prices might come up again (in the long term) and that I might make a gain on the second house that would even out against the negative equity on the house I currently own.

So, coming to my questions.

Are there any implications in receiving an interest-free parental loan from another EU country - I assume I would have to tell revenue how I got the money and that it is indeed a loan and not a gift.

The property would be an investment property, but I would not receive any rental income for the first year (haven't thought the exact timeframe through yet) albeit having someone living in there. Would I still have to register this as tennancy and file a tax return and all the rest of it, or does this only really kick in the minute I receive money for letting the property.

And just in case someone wonders why on earth I don't put the money towards my current mortgage - well my relationship with my partner is a bit difficult and I think it would not be a bad idea at all to have a place to go to if it all fell apart.
 
Hi Tina

Let's assume you do as planned and you later split up with your partner and it's acrimonious. You will be in a terrible position.

Just read some of the case studies in the "Joint mortgages" forum.

You will be jointly and severally liable for the full mortgage. If he just abandons the house and repayments the bank will come after you. And the good news for them is that you own a house. You will be in a very weak negotiating position.

Now let's assume your dad keeps his money and you split up. You will owe the bank €200k in negative equity. It will be very messy. But there is a good chance that you will be able to come to some arrangement with the bank that they will accept a cash payment from you in return for not pursuing you for the balance.

You may even be able to do a deal with your partner and the bank as follows. Assume a mortgage of €350k on a house worth €150k. Partner contributes €50k. You contribute €100k. Bank lets your partner off the mortgage. You would end up with a house worth €150k and a €200k tracker mortgage and €80 owing to your dad. Not ideal, but a lot better than being stuck with a mortgage of €350k on a house worth €150k and your partner refusing to engage.

You could mess around by giving your father a mortgage on your new house so that the bank would only have a second charge. But why bother with all that hassle?

You could lend your father €20k to buy a house and then you would have a home available to you if you split up. But again, if you are not paying rent, you will have more to pay off your negative equity or mortgage shortfall.


In uncertain cases like this, the best strategy is to stay as flexible as possible.

Brendan
 
Thanks for your "food for thought" Brendan! I never thought about potential deals with the bank....

Unfortunately I have been very unlucky with this house purchase alltogether, and my motives are twofold... your estimates are fairly spot on, and the potential problems with my long-term partner are also not so far off, in being that he developed an alcohol problem in the last few years. So whilst things are ok at the moment, this situation might change in the future. If he gets a grip and we work it out then happy days, we'll have this second house with good prospects. Worst case scenario, he loses his job, fully falls victim to his addiction and refuses to leave the house, in which case having a fully paid house I could move to, would be very handy, since I have no family in Ireland and wouldn't have to go and rent anywhere. In that particular case I would probably end up with full liability for the mortgage for a house I don't live in, but I'd have peace and quiet! Now I would not expect that he would do any of this, but I can't afford not to consider all the possible outcomes.
 
Further to your thoughts Brendan -

I'm thinking would it be a good idea if my Dad bought the house, as first of all he'd become a foreign landloard and that comes with all the tax return and what not else if I got a tennant for the house, and this might be a bit difficult? And if I understood this correctly as foreign landloard (he is retired) he'd have to pay 20% tax in the rental income?

Secondly, the house would be in his name and if anything happened (god forbid!!!) then the house would be part of his estate and I'd be liable to inheritance tax (having paid for most of the house by "lending" my Dad most of the money to buy the house). Plus I have two siblings, so there'd have to be special conditions in his will regarding this house. All doable, but sounds like a lot of action.

If I buy the house in my name borrowing money from my Dad and I get stuck with the current house in NE, at least I would be able to make some additional income from letting the "new" house and make up for the shortfall on the second house, assuming that I stay in old house and don't want to sell it. If I was the landloard, I'd have to pay 40% tax though, which would be more than my retired father would have to pay...

I don't know, I'm just thinking I am in a position where with the help of my Dad I could get an investment property which eventually might help even out the NE we have on the current house. Assuming of course that house prices will come up a bit some way down the road.

Would appreciate other people's insights!
 

That's a very interesting thought, something I'll have to think about.

I don't think you should purchase property 2 as outlined. You need to sort out your relationship and see how this ends for good or bad. Your dad's 80K will presumably wait for you meantime. He's trying to help you but it will probably only make matters worse and as outlined by BB financial with the mess you're already in the 80K will also get lost.

You seem to be focusing on this 'dream' house as it's cheap and will have no mortgage and gives you an alternative place to live. You seem to be doing this instead of focussing on the problems you have.

Have you discussed with your partner him seeking help?
 
Many thanks for your input Bronte. I don’t think I’m focussing too much on this dream of a house, I’m just thinking how am I going to get rid of this negative equity that chains me to this house – and bar winning the lottery there is little else I can think of.

If I were to split from my partner, I would probably stay living in the house and I would pay what we would get from a tenant if we were to rent out the house and then split the difference towards the mortgage. I would probably manage this financially, although it might become a bit tight here and there.
If we both moved out and let the house, we’d be subject to income tax from rental profits, we’d possibly lose the tracker mortgage and the TRS which is still available till 2017. So renting out the house is not an option, plus then I’d have to pay rent someplace else, he would probably move back and live with his parents for a while. Selling the house and splitting the negative equity in my opinion would be madness – firstly I don’t expect the bank would let us and secondly even if they did, we’d both have to get personal loans of up to 100K and that does not sound like a good option.

With regard to my partner getting help… well easier said than done, there aren’t many places available in Ireland where one can go and seek help and receive proper treatment without having to fork out an absolute fortune. Thankfully his VHI waiting period will be finished this year in August, which will open a few options that so far have been out of reach. So it’s not like all hope is lost, but I am trying to prepare for the worst case scenario, which would be that I end up with full liability for the mortgage on the house. On my current salary this would be very hard to to, but if I had to I probably could, at least as long as the interest rates are the way they are now. But this might change. So I still keep thinking by having a second house, which would effectively bring me some income if I let it out, I could support the mortgage on house one and as said eventually hopefully house prices will rise again and then the profit on house 2 would even out the NE on house 1.

I could not forsee this situation with my partner, it is something that slowly developed and something I have no influence over. So if he does not go to get help or accept the help available to him, living together will eventually become impossible, and whilst this is all very unfair and unlucky, it does not change the fact that I might end up with the whole mortgage burden.

I could of course try and get him off the mortgage and put the 100K into the current house, but that seems a less profitable exercise than getting another house instead. I think I would just like to avoid putting all my eggs into the one basket. I am also worried if I sit and wait to see what happens – how long will I wait? And will I miss the chance of picking up a house at a price I can afford?
 
You are not chained to the NE when you can afford the mortgage.

My previous advice still stands unless you can prove with figures that what you propose makes sense. In addition if you put the 80K plus your savings into your current home you'd do a lot of damage to the NE.
 
I am with Bronte all the way on this.

You just can't foretell the future - your partner's outcome, house prices, your father etc.

Stay as flexible as possible. You do not need another house at this stage. Having access to money if you need to do a deal will be very valuable.

Brendan
 
Stress test

Note: I have tried to format the tables as best as possible, but it won't stay in place, sorry! I have all of this in excel - I've divided columns with a "/" here...

Thank you both so much for your helpful comments, and you may well be correct. In any case it has made me sit down and do a few calculations, and here is what I have come up with, but am no expert, so would greatly appreciate your thoughts.

I know the future is unpredictable, but I want to protect myself from the worst case scenario, which is that I end up with full liability for the mortgage on my PPR, which is in NE by about at least 200K.

I am looking at this from the worst case scenario point of view, i.e. I am the only one paying the mortgage on the principal private residence (PPR) and I’ve attempted to do a bit of a stress test.

STRESS TEST


I have sat down and worked out how much mortgage I can realistically afford on my own. This is net income after all outgoings, such as gas, electricity, refuse collection, UPC, TV licence, life insurance, house insurance, property tax – I have determined this by looking over the last 3 years. This works out at 1,350 Euro a month affordable repayment.

I have then looked at my outstanding mortgage on my PPR, currently at ~347K. I have then tried to come up with two different scenarios in terms of affordability. I have a tracker mortgage with PTSB.

Scenario 1: the loan amount does not change, but interest rates might change and repayments would be as follows (taking TRS into account in column 2, valid till 2017):

Scenario 2: I would inject my savings plus loan from father into mortgage of PPR (~100K)

Interest / Scenario 1 (status quo) / Scenario 2 (pay 100K into mortgage)
/ repayment / - TRS / repayment / - TRS
1.85% / €1,344.07 / €1,194.07 / €930.56 / €780.56
2.10% / €1,386.74 / €1,236.74 / €958.93 / €808.93
2.35% / €1,430.08 / €1,280.08 / €987.73 / €837.73
2.60% / €1,474.08 / €1,324.08 / €1,016.94 / €866.94
2.85% / €1,518.74 / €1,368.74 / €1,046.57 / €896.57
3.10% / €1,564.05 / €1,414.05 / €1,076.61 / €926.61
3.35% / €1,609.98 / €1,459.98 / €1,107.05 / €957.05
3.60% / €1,656.53 / €1,506.53 / €1,137.88 / €987.88
3.85% / €1,703.69 / €1,553.69 / €1,169.09 / €1,019.09
4.10% / €1,751.44 / €1,601.44 / €1,200.68 / €1,050.68
4.35% / €1,799.78 / €1,649.78 / €1,232.63 / €1,082.63
4.60% / €1,848.67 / €1,698.67 / €1,264.95 / €1,114.95
4.85% / €1,898.13 / €1,748.13 / €1,297.62 / €1,147.62
5.10% / €1,948.12 / €1,798.12 / €1,330.63 / €1,180.63
5.35% / €1,998.65 / €1,848.65 / €1,363.98 / €1,213.98
5.60% / €2,049.69 / €1,899.69 / €1,397.65 / €1,247.65
5.85% / €2,101.23 / €1,951.23 / €1,431.65 / €1,281.65
6.10% / €2,153.26 / €2,003.26 / €1,465.96 / €1,315.96
6.35% / €2,205.77 / €2,055.77 / €1,500.57 / €1,350.57
6.60% / €2,258.74 / €2,108.74 / €1,535.48 / €1,385.48
6.85% / €2,312.16 / €2,162.16 / €1,570.68 / €1,420.68


Scenario1: until 2017 I’d be ok up to 2.85% interest rise. Which isn’t great really. After 2017 I could only afford up to 2.1-2.35% interest.

Scenario 2: I could afford up to 6.35% until 2017 and 5.35% thereafter. This obviously looks a lot better. I would definitely have to try and get my partner off the deeds/mortgage though, again assuming the worst.


If I injected this 100K for example in Jan 2014 (at which stage I estimated the outstanding mortgage to be 337660) and would keep the loan at the same length I would make the following savings in interest (assuming the interest rate stays the same over the duration of the loan, which is of course unrealistic, but this is just to give me some idea):

Interest Rate / Total interest (337660)/ Total interest (237660) / Difference
1.85 / 89,397 /62,922 / 26,476
3.85 /200,677 / 141,245 / 59,432
5.85/ 326,009/ 229,459 / 96,549

So this would save me a good bit of money – assuming the mortgage runs over its entire life span, which is not likely as I will have an inheritance at some stage.

I have then looked at what yield I would get from buying an investment property (IP) costing 100K

BUYING AN INVESTMENT PROPERTY

/ Once-Off / Yearly Outgoings / Yearly income / Deductibles / Tax deductable
House Purchase Price / 100,000 / / / / No
Solicitor / 1,500 / / / / No
Stamp Duty (2%) / 2,000 / / / / No
PRTB / 90 / / / / No
NPPR registration (ends 2014) / 200 / / / / No
Property Tax / / 200 / / / Maybe?
Refuse Collection / / 200 / / 200 / Yes
Insurance / / 300 / / 300 / Yes
BER Survey (?) / 300 / / / / No
Building Survey / 500 / / / / No
Property Maintainance/Repair / / 500 / / 500 / Yes
Furnishings Wear/Tear / 10,000 / / / 1,250 / Yes 12.5% for 8 years
Gross Rental Income (2 bed) / / / 10,800 / /
Gross Rental Income (3 bed) / / / 14,400 / /
/ / / / /
Total / 114,590 / 1,200 / 10,800-14,400 / 2,250 /





Tax due and net yield


(Gross Income - Refuse ,Insurance, Repair and Wear/Tear) * 52% (41% tax plus 4% PRSI and 7% USC)

/Tax Due/ Net income from IP/ monthly/ Time in years to offset purchase price

2 Bed/ 4,446*/ 5,154**/ 430/ 22
3 Bed/ 6,318/ 6,882/ 574/ 17

*[(10,800-2,250)x0.52] ** [(10,800-1,200-4,446)]

(Gross Income - Refuse and Insurance only deductibles 500, total outgoings 700) * 52% (41% tax plus 4% PRSI and 7% USC)


/Tax Due/ Net income/ monthly/ Time in years to offset purchase price
2 Bed/ 5,356/ 4,744/ 395/ 24
3 Bed/ 7,228/ 6,472/ 539/ 18



Having done this, obviously it would be better to try and get a 3 bed, but depending on location and rentability this might not be possible. I have looked at current rentals of houses in the area I’m looking at, so the rental income is based on this.

I have researched the revenue webpage and askaboutmoney to figure out all the costs and tax etc, so I hope I have worked this out the correct way.

In any case, if I did calculate correctly I could expect a rental yield of somewhere between 400-570 Euro per month.


So now back to my scenario 1, if I had an extra let’s say 450 Euro per month to add to my max mortgage repayment of 1,350, this would bring me up to 1,800 Euro a month, which means I could afford an interest rate of 5.1 and 4.35% on the PPR before and after 2017 respectively. Which is not quite as good as scenario 2.


So to compare these options now:

I stick with scenario 1 and buy a, IP (house to let), I will be able to afford the PPR up to an interest rate of 5.1%/4.35%(post 2017). Assuming I have constant tenancy (I know this is not realistic either) the cost of this would be the 115K. Possibly another 20K depending on how much repair the house needs (I have this extra as savings, so no loan required). For this I’d need 80K from my dad.

Advantages: House prices are such that I can afford to buy a house without needing a mortgage. I have two houses, rental house helps paying for PPR. Value of both houses might increase. I could sell IP if necessary.

Disadvantages: All the hassles that come with being a landlord, house might not rent out, value of houses might decrease. House might not sell. Potentially 50-100K more interest than option 2 if kept over entire lifetime. Bank has to agree to take partner off mortgage and deeds.

Scenario 2: I put the 100K into PPR mortgage, which makes repayments affordable up to up to 6.35% until 2017 and 5.35% thereafter. For this I’d use 20K of my savings and 80K from my dad.

Advantages: I have one PPR, cost of mortgage less, no extra burden/stress with rental property, value of house might increase. Potential savings in interest would cancel out some/all of financial injection if mortgage kept over lifetime

Disadvantage: Bank has to agree to take partner off mortgage and deeds. House value might decrease. House prices might go up and I would not be able to afford a second house.


Conclusion

Scenario 1 would cost me about 120K to buy the house and potentially an extra 100 K in interest (compared to scenario 2), but I’d end up with two houses. It is likely that the mortgage on PPR will be paid off before its agreed lifetime though. Houseprices might go up again and I’d make up for the NE on PPR with increased value of Investment property.

Scenario 2 would cost me 100K but that would even itself out through savings in interest payments. I have one house. House prices might increase and I would not be able to afford an investment property.

So in the end it’s a bit of a gamble...

I could of course add a 3rd scenario, in which my Dad buys the IP, which would considerably decrease the tax due, but I need to look into the whole side of things with doing that, and he’d need to check tax laws to see how that would affect him (he is retired).

Sorry for this extremely long post, but Bronte challenged me to prove whether there is an advantage to doing this, which prompted me to go through this whole calculation!
 
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Well I haven't read that Supertina, yet, but I'm well impressed. When I can contentrate I'll have a good look. My own words coming back to haunt me LOL.
 
LOL! Yes apologies, it is a rather lenghty deliberation. If you have an email address I'd be happy to send a word version, which makes reading the figures a lot easier!
 
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