A few points
1) Your home is an excellent investment because you have a cheap tracker. You should keep it unless BoI tries to take the tracker rate from you when you rent it, but I don't think that they will.
2) You should sell Investment 1 immediately. It is loss making and a hassle. You will have a shortfall of €5k but you have the cash to pay this. It makes no sense to wait until it's out of negative equity.
You already have a big exposure to property and to interest rates and will have a bigger exposure after building your home.
3) Investment 2 is very profitable and you should keep it.
"property 2 we need to start paying down the capital."
This makes no sense at all. Why would you pay down the capital on such a good investment?
The interest rate is about 1.5% after tax.
When you take out a new mortgage for your home, you will be paying about 3%. So you should pay down this mortgage before paying off capital on your cheap and profitable Investment 2.
You should review this decision every couple of years. If interest rates rise and rents fall, you might want to get rid of it.
Can you transfer your tracker to your new property?
Does Bank of Ireland allow people to transfer their trackers to self-builds?
If they do, you will pay 2.2% on the €160k for 5 years and then the normal mortgage rate after that.
Let's say you get your self-build from AIB, you will be borrowing €180k/€230k or 78%. So you will pay 3.3%.
Here is the situation for the first 5 years:
So it looks pretty clear, that you will be better off keeping your home as an investment rather than transferring the tracker to your new self-build.
I would expect that keeping your home as an investment will continue to be the right idea while it is in negative equity. But after you have built up some equity, it may make sense to sell it and pay down your home mortgage with the equity. But that is some time away.
Brendan