rent out or sell up?

H

HollyHobby

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Hello! Total newbie to the site so please bear with me. Thanks. So a few questions really. Here is my situation & I would be grateful for advice.

Partner & I living in a little house with our 2 boys. It's so small so we are looking to upsize. However on a tracker - we pay 900€ pm. Houses of same around us are getting €1500 in rent.

My Q is if we could save €90,000 in 3 years (that's our goal) for a deposit on approx a €430,000 house in the same area, would we be better to rent out our current fishbowl & do it this way instead of selling to move?

Also, if we do it this way & try and hang onto our first house to rent it, what is the story with tax on the rental income? Would we be at a loss with those figures above do you think? (Where do I find out about how much tax one pays on rental income please)

Half of family say sell up & use the savings (currently have saved 30,000 this year - yr1 of 3 yr plan) and the chunk of equity on next house.. the other half say no way, hang onto 1st house & rent it out, that can be a pension for us essentially - as we only have 15 yrs left on it before it is paid off.

Any advice would be great for myself and the partner as we are very new to this property/tax/rent or not to rent lark!

Thanks
Holly
 
Welcome to Askaboutmoney.

How old are you, how much equity is in the house, and what's your income?
 
Thanks Gordon, we are 40 & 42. There is approx €130,000 equity. Combined income is €80,000 gross + €50,000 gross = €130,000.

Thanks
 
You need to give much more information to get any meaningful suggestions

1) Which lender are you with?
2) How much is your current house worth?
3) How much is the mortgage outstanding?
4) What term remains on that mortgage?
5) While your house is small, how long more could you stay in it? One year, two years more?

Brendan
 
Oh I see, thanks.
Ok so -
a) TSB (tracker)
b) approx 300,000
c) 160,000
d) 15 years
e) could manage another year or two at a push!

Cheers Brendan
 
The way to look at this is how much extra interest would you have to pay by moving.
I am assuming that you sell your existing house and transfer the tracker to the new house. PTSB will allow you do this, but they will charge an additional 1% interest.
The cost of your accommodation is the interest you pay on your mortgage. The repayments will be higher again, but they are the cost of repaying the capital outstanding on the mortgage, so they are a form of saving.

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I have assumed that you will spend the €30k cash on the costs of buying, selling and moving.

It will cost you an additional €6,000 a year to trade up. As you are earning €130,000 a year and saving €30,000 a year, you can well afford the extra cost of €6,000 for a better house.

This is clearly better than keeping your home as an investment. If you do that, you will be over exposed to both property and to interest rates.

So apply to ptsb for a tracker mortgage mover product. Then put your house on the market and start looking for a new house. Use your savings over the coming years to get your non tracker mortgage balance down to a more comfortable level.

Should you wait a year or two before moving?

The benefit is that your housing costs are so low with a cheap tracker mortgage.

However, you get the benefit of a larger house.
You both have good jobs and it will be easy to get a mortgage from ptsb.
The tracker mortgage mover may not always be available.

If you wait, you will build up capital, but if one of you loses your job or ptsb pulls the tracker mover product, you may not be able to move.

Brendan
 
That's food for thought thanks Brendan. My question is though, would we be better off in the long run, keeping this house as a pension/college fund for the boys? It will be paid off in 15years. Then the rent minus tax & costs obviously, will be an extra income. What do you think? Worth a sacrifice of another few years in a fish bowl? I think I want to know really, more about tax etc as a landlord but I don't know where to start looking. Thanks a lot for your input. I'll show that to my partner.
 
Sarenco, thanks for the reply. Why do you agree with Brendan please? I'm genuinely trying to understand as many viewpoints as possible.

With many telling us - we would be mad not to keep it as a rental, I was leaning towards that. Now reading this info, I'm leaning the other way. It's all very hard to figure out, as in, what's the best long term financially.

Thanks very much
 
Maybe look at it this way:-

If you move without "cashing out" your €130k home equity you will have borrow an additional €130k @~3.5%. So your rental would have to return more than ~3.5%pa to justify retaining your current home as rental.

Is it possible that your rental would produce a return of more than 3.5% per annum, after all costs and taxes? Yes, but when you crunch the numbers I think you will find that it will be a pretty close call (ignoring any possible capital appreciation). Is that worth the risk of tenant default, interest rate increases etc, and all the hassle that comes with running a rental business?

Now add the fact that selling your current home will allow you to avail of a tracker mover product and it starts to look pretty clear cut that selling your current home is the better option.
 
So far it's unanimous that respondents think we should sell & move. Anyone out there think the opposite & can argue the best reasons why? Would love to hear the other side of the coin. Thanks!
 
You mention that the property could be like a pension; do you have pensions?

Also, how much did you pay for your home?

If you keep your current home, the 3.85 debt to income ratio would not be excessive.
 
My recommendation is as follows:

- Look to move home sooner than 3 years time and obtain an exemption from the LTV requirement.

- Keep your current home as an investment. You have strong incomes, and your overall "debt to income ratio" will be 3.85:1 which is fine (and which ignores the rental income).

I estimate that your €140k of equity in your current home will deliver an after tax return of almost 6% (i.e. €8k). And you should be able to borrow at 3.1%, not the 3.5% used in the examples above. You also have a form of CGT shelter in respect of the property given that it was your home. And unlike many current landlords, you will not be restricted from charging market rent if you change your home to an investment property.

In my view, you should retain the property but also look to build up your pension funds with your surplus income. You should also look to keep an emergency fund of around €30k accessible at all times.
 
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Partner has a pension. I don't. We paid €295,000

Sorry would you explain in layman's terms, your last point to me? I haven't a notion what that means! (The 3.8 debt to income bit) Sorry & thanks a lot!
 
HollyHobby said:
Partner has a pension. I don't. We paid €295,000

Sorry would you explain in layman's terms, your last point to me? I haven't a notion what that means! (The 3.8 debt to income bit) Sorry & thanks a lot!
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You seem to have the surplus cash to contribute to pensions; it's one of the best way to invest. You should both do as much as is affordable.

Regarding your query, it's quite simple: You guys earn €130k a year and if you kept the property you'd owe €500k in total. That's about 3.85 times your income, which is fine by most measures.
 
Gordon, thanks a million for that. I didn't see your second message before I sent that last question. I need to read your second message as there are a lot of terms in that, that I don't understand at all. Like I said originally - newbie here! Thanks v much
 
Gordon Gekko said:
And you should be able to borrow at 3.1%, not the 3.5% used in the examples above.
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The best variable rate for LTVs over 80% that I'm aware of is 3.5%.

Your estimated after-tax return of 6% looks optimistic to me but, in any event, that's a leveraged return - it's not really comparing apples-to-apples.

Personally, I think a DTI ratio of 3.85 is actually pretty high for a couple is their 40s. Not excessive, perhaps, but higher than I would be comfortable with.

I would suggest that the relative CGT "shelter" is a pretty minor consideration on these facts and will obviously fade over time.

You are absolutely right that HobbyHolly would fall on the right side of Minister Coveney's rent control lottery (assuming the property is in a RPZ), which is certainly a real advantage, but that highlights another material risk of property investing - possible future government interference.

I personally think that maintaining a material cash reserve is critical to running a successful long-term rental business. HollyHobby's family would exhaust all their cash reserves if they buy a new PPR without cashing out their home equity. That seems excessively risky to me.

Strongly agree with your advice re maximising pension contributions which raises another issue - cash-flow. The rental will almost certainly be cash flow negative on an after-tax basis - will that inhibit HollyHobby's ability to make maximum use of tax-deferred pension vehicles?

Just my 2 cent - I'm not suggesting that there's a "right" answer here.
 
Thanks Sarenco & Gordon. My biggest problem now is to decipher what all your secret codes mean in your messages. I actually haven't a bogs notion what half of them mean! I suppose I should know though as we embark on these changes either way lol!

Ps - I have projected a 3 year plan but I should say we are at the end of yr 1 of our savings plan. So we are actually hoping to move in 2 yrs. Not sure if we can save another 30 next year and the yr after but if we can, then we will have 90,000 which is a 20% deposit on a lot of the kinds of houses we are looking at. But that all depends on prices in 2 yrs and if we have enough of a deposit.

Now off to google what on earth ye are talking about!!!
 
Sarenco said:
The best variable rate for LTVs over 80% that I'm aware of is 3.5%.

Your estimated after-tax return of 6% looks optimistic to me but, in any event, that's a leveraged return - it's not really comparing apples-to-apples.

Personally, I think a DTI ratio of 3.85 is actually pretty high for a couple is their 40s. Not excessive, perhaps, but higher than I would be comfortable with.

I would suggest that the relative CGT "shelter" is a pretty minor consideration on these facts and will obviously fade over time.

You are absolutely right that HobbyHolly would fall on the right side of Minister Coveney's rent control lottery (assuming the property is in a RPZ), which is certainly a real advantage, but that highlights another material risk of property investing - possible future government interference.

I personally think that maintaining a material cash reserve is critical to running a successful long-term rental business. HollyHobby's family would exhaust all their cash reserves if they buy a new PPR without cashing out their home equity. That seems excessively risky to me.

Strongly agree with your advice re maximising pension contributions which raises another issue - cash-flow. The rental will almost certainly be cash flow negative on an after-tax basis - will that inhibit HollyHobby's ability to make maximum use of tax-deferred pension vehicles?

Just my 2 cent - I'm not suggesting that there's a "right" answer here.
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Hi Sarenco,

- 3.1% is available from Ulster Bank. With €90k saved, the OP's LTV will qualify for that rate.

- It is comparing apples with apples on the basis that the choice is between a leveraged investment and an unleveraged one. I estimated 6%, but even if it's 5%, it's still attractive.

- Regarding the debt to income multiple, the Central Bank macroprudential rules look for a multiple of 3.5 times which irks many people due to its conservatism; this couple (who are barely in their 40s and who have relatively strong incomes) will have a multiple of 3.18 in three years time. By no stretch of the imagination is that strained.

- In relation to the effect of PPR relief, I wouldn't be so quick to dismiss it. Many investors would give their right arm to have 50% of their gains tax free, which would be the case for someone who (say) lived in a property for 10 years but then rented it out for 11 years.

- I don't agree with exiting stage left simply because of potential government interference; I've heard that argument from people in relation to pensions due to the pension levy and I don't accept it. And in any event, if we really want to crystal-ball-gaze, the favourite for the Fine Gael leadership and Taoiseach's office favours making things easier for landlords!

- Regarding the cash reserve, this is a couple with €2,500 of spare cash every month. Yes, that will change if they move home and increase pension contributions. But it also highlights a major issue for AAM; the right advice for successful prudent people is not the same as the right advice for those who are struggling.

- In relation to the pensions, we're in agreement; this couple need to do more. However, I believe that they've sufficient free cashflow to "do it all" so to speak.

A very interesting case, and a very interesting discussion.

Gordon
 
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