rent out or sell up?

I really think that keeping the house and buying a new one is bad idea.


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If you were to do it today, you would be borrowing the entire €430k.
Your total borrowings would be €590k or 4.5 times your income.

This might work out ok for you, but you are exposing yourself to a lot of things which might go wrong.

One of you might lose your job, or one of you might like to quit your job.
Interest rates will rise at some stage in the medium term
You could get a bad tenant who decides not to pay any rent
House prices might fall over the longer term

The problem is that these bad outcomes have a nasty habit of coming together.

If you sell your current house and move the tracker
  • You will have comfortable borrowings
  • You can move to a bigger house now
  • You will have surplus savings
HollyHobby said:
My question is though, would we be better off in the long run, keeping this house as a pension/college fund for the boys?
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You should never look at a property as a pension. There are very favourable tax rules for pensions. So take out a proper pension and get all those advantages.

The best way to look after your children is to avoid unnecessary risks. Assuming that they are quite young, pay down your mortgage so that when they get to college age, you will have your mortgage down to very low level or even paid off.

Check out the mortgage arrears forum to see the havoc caused to ordinary families who borrowed too much to buy an investment property or to keep their former home as an investment. It's just not worth it.

Brendan
 

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I should point out that if you decide to keep your current home and buy a new one, it's not a decision made in stone for all time.

If you find the financial pressure a bit much after a year or two, you can sell the former home and put the proceeds against your home loan. The downsides of taking this approach are
  • You will have to wait until you save a further €80k or €90k to buy the house
  • If you do it this way, when you sell the property you will lose your tracker completely.
Brendan
 
Sorry Brendan, but I can't agree.

This is a classic case of something we're all guilty of from time to time...transposing what's good advice for people who are in trouble over to a case where the poster in question is in fine fettle.

My sense is that this investment is yielding around 6% after tax; in the current low return environment, selling it just doesn't make sense to me. And even if they purchase the new property today, their debt to income ratio would be 3.8:1.0 which is a long way from reckless or excessive (€560k/€148k).

And we haven't even gone into factors like the lack of supply of rental properties (with no sign of material improvement) versus the unprecedented level of demand.

I'd be very wary of selling an asset that's leveraged at an interest rate that'll probably never be seen again in a market with a chronic undersupply of that asset and unprecedented demand. If yields were low, I'd be banging the table for exiting the market, but my honest view is that the patient unflappable property investor will be rewarded spectacularly for his/her conviction.
 
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Thanks very much lads for the responses. I think I can see all sides as you are pointing your arguments out very clearly. I'm going to sit down with partner in a while and relay your wisdom (when the 2 wee fellas are in their bunk beds!) Thanks very much again
 
Fundamentally, I think this debate comes down to a judgment call as to whether the risks of keeping the house as a rental justify the potential rewards.

Brendan and I take the view that the projected rewards are too slim to justify taking on the risks associated with keeping the house as a rental, having regard for your family's particular circumstances, whereas Gordon takes the opposite view.

Like any investment decision, it's really about balancing your need, ability and willingness to take the risk for the projected reward. I personally don't see the need for your family to take the risk and I would really question your ability to do so. Again, Gordon takes the opposite view.

Hopefully that gives you a "big picture" rubric for weighing up the pros and cons of the choice before you.
 
I think that the key thing here is that there is a potential for a life changing catastrophic risk. Everything is going well at the moment. You are both working with good incomes. Interest rates are low. House prices are rising.

If a few of these factors come together against you, you could be in deep trouble. It is just not worth that risk.

On a separate thread I have argued that it's worth investing in shares because the potential gain outweighs the risk involved. But the investor can easily handle a huge drop in the value of shares.

Hobby is facing a catastrophic risk. Although the chances of it happening may be small, it would be life changing.

Brendan
 
Brendan Burgess said:
You should never look at a property as a pension. There are very favourable tax rules for pensions. So take out a proper pension and get all those advantages.
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I wouldn't agree with the statement that one should never look at a property as a pension. That's precisely what I look at this type of investment as.

The first house has so much equity and such a low mortgage, such high rent, that even with catestropic events like house prices dropping, interest rates trebling or a really bad tenant still wouldn't affect the OP much.

Her second property she intends to purchase with around 25% equity. That's a good start and two good jobs to pay the mortgage plus some money from the rental.

I agree with the suggestion that she look into a pension for herself.
 
Hi Bronte

Just to clarify...

It's ok to look at property for long term saving, but you should not never look at it as a substitute for a pension.

A pension has great tax reliefs which everyone should avail of. If one has fully contributed to a pension fund, then one can put additional savings into property.

Borrowing to invest in property is risky. The effects can be catastrophic. Look at the Mortgage Arrears forum.

The OP has €30k cash and wants to buy a house which would cost €430k. 25% equity would be €110k + the costs of buying.

If they had €140k cash now, I would be less concerned. But I would still recommend that porting the tracker is the better idea.

Brendan
 
Never say never !!!
My pension is maxed out so I have looked at property to supplement my pension.
 
Ok, I get the difference about being a substitute. Always good not to have all your eggs in one basket.

About the morgage arrears forum: We only ever see the problem cases on here. By it's very nature this site is going to be dominated by the hard cases. But it is not balanced in the sense that you don't see the property investments that don't have issues. Or to take my own case I've one property still in NE (might actually be out of it actually with the property they way it is currenty) but it doesn't matter to me as the rents I'm getting cover the mortgage so I don't really care.

For each hard luck story how many are investments that made sense. And how many of the mortgage arrears cases were those that bought at the height of the madness where it never made any sense from the beginning.
 
To be fair that's an excellent point Bronte!

Brendan I really see your points and we cannot make the same mistakes so many made in the boom. I haven't yet and I don't plan to start. I am not the risky type but I do have good instincts that have served me well thus far. For example I wouldn't do this until I have 90-100 saved in the first place & I won't be taking any shortcuts on that! I wouldn't for example, take a loan for some of it (as I know people are still doing - unbeknownst to banks) etc - that's madness!

If we do it, it will be done with any eventuality we can invisage, having a solution .....

I am very grateful for all of your replies - such an amount of knowledge on this site!
 
Given your relatively favourable circumstances (salary etc) and taking into a/c the risks, it seems to me that it would be a good medium/long term investment strategy to hold onto the property.

It all depends on your outlook in terms of property prices, interest rates, gove interference, ability to pick decent tenants etc but even taking the worst case scenarios materialising you seem to be relatively comfortable financially and so there simply would not be a catastrophic affect on your circumstances.

Its arguably likely that house prices will increase, the gove will loosen rules, you will pick decent tenants etc and so it would remain a solid investment for you - either to sell off in the future or for your sons to live in at some stage.
 
Bronte said:
For each hard luck story how many are investments that made sense.
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I would say that the ratio of success stories to disasters is around 20:1. But the 1s are usually life changing. I really do not think that they are worth the risk involved.

If Hobby waits 4 years, that will reduce the risk considerably.

Brendan
 
But doesnt a lot of it depend on ones outlook ie wait 4 yrs for things to get better or less risky or wait 4 yrs for things to get worse. If finances are healthy then strike while the irons hot.
 
Brendan Burgess said:
I would say that the ratio of success stories to disasters is around 20:1. But the 1s are usually life changing. I really do not think that they are worth the risk involved.

If Hobby waits 4 years, that will reduce the risk considerably.

Brendan
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Why do you say 4 years Brendan please? Could you elaborate on that point? Why 4 exactly? Thanks
 
You want to buy a house for €430k

You will need a 20% deposit or €90k on top of the costs of buying and moving.

You are saving €30k a year so that would be 3 years.

So it's whenever you have got 20% of the deposit together.

Brendan
 
As said above a very interesting case and some great contributions above. No simple answer and can justify either in my mind.

Here's another way to look at it. Let's say you had your house at 460, with a mortgage of 330k, i.e. less the 130 equity in your existing house.

Would you in that situation then go out and buy a rental property costing 300k borrowing at std variable? Very simplified I know but another way to look at your situation.

Could possibly justify it on the numbers at a stretch I suspect but when you put everything together, being landlord, taxes, uncertainty, etc. Compared to maxing out pension contributions and the tax benefit of that? Seems to me the latter is a better option and also has much lower risk attached.

But I can easily understand someone having an alternative view given the facts here, high income couple, ages, well set up, etc.
 
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