rent out or sell up?

Most of my ideas on property letting are being well expressed by others so I will not address those points.

However there is one point that I think is being mishandled.

I suggest that using the marginal rate of tax is not appropriate. The tax rate should be the landlords effective rate, or in many cases including my own, it is appropriate to apply the various reliefs and standard rate first to the rental income.

As a self employed person with rental income, I look at my rental income as my base income. I have a contract for a set rent for a year ahead, almost everything I need to do is already done. Having provided and furnished the property I just have to collect the rent.

For my day job, I have to find work, I have to do the work, I have to get paid. Thats marginal income. If I take on a new contract for €10k I will pay €5.2k tax
 
Hi Brendan,

Is that not double-counting?

The options are:

- Use the €140k equity to have a lower home mortgage at 3.1%.

- Keep the €140k chugging away at 5/6% net of tax.

My sense is that focussing on that 1.9%/2.9% differential is the right thing to do and doesn't miss the point or constitute a fundamental error.

But maybe I didn't sleep as well as I should and I'm a bit slow this morning!
 
I suggest that using the marginal rate of tax is not appropriate. The tax rate should be the landlords effective rate, or in many cases including my own, it is appropriate to apply the various reliefs and standard rate first to the rental income.
Click to expand...

No, it might be the right way for you, but it's not for Holly.

HollyHobby is earning €130k a year.

His decision is whether to keep the family home as an investment or not. Therefore he must look at the effects of that decision alone. If he keeps it, he will receive rent, pay expenses and pay a lot more interest and a lot more tax.


Your case is different. You already have a rental income.

You can decide whether to work or not. If I offer you a contract at €10k, then you must assess it as being worth €5k after your marginal rate of tax.

Brendan
 
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Gordon Gekko said:
Is that not double-counting?
Click to expand...

I am open to correction, but I don't think so.

The easiest thing to do is to look at the table to see if I have made an error in it. I have checked it again, and I don't see it.

When you discuss % yields, it's much easier to make mistakes in reasoning.

Brendan
 
upload_2017-5-31_10-28-15.png


This is the key point. If he retains the investment after buying a new home, his interest bill will be:

€160k@ 1% : €1,600
€430k @3.5%: €15,000
Total: €16,600

Brendan
 

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cremeegg said:
I suggest that using the marginal rate of tax is not appropriate. The tax rate should be the landlords effective rate, or in many cases including my own, it is appropriate to apply the various reliefs and standard rate first to the rental income.
Click to expand...

Hi Cremeegg

I understand where you are coming from but I found this analysis that Sophrosyne forwarded me very helpful –
https://www.kitces.com/blog/underst...e-vs-effective-tax-rate-and-when-to-use-each/

The correct rate to apply is indeed the marginal rate, which is calculated by dividing the amount of additional taxes that will be due as a result of some decision by the amount of income involved. Depending on a taxpayer's individual circumstances, this rate could be anywhere between 0% and 55% as things stand.
 
Sarenco said:
I understand where you are coming from but I found this analysis that Sophrosyne forwarded me very helpful –
https://www.kitces.com/blog/underst...e-vs-effective-tax-rate-and-when-to-use-each/
Click to expand...

An excellent article.

The key is that in the end, marginal tax rates should be used to compare strategies, and effective tax rates should be used to compare people.

Accordingly, if you want to know who commits a larger portion of their total income to their tax obligations, use an effective tax rate. But if you want to know whether to do that Roth conversion/IRA withdrawal/annuity investment/sale for a capital gain or loss/etc., the marginal tax rate is what should be used. In point of fact, this actually means that the marginal tax rate is really the only rate that should be used for financial planning scenarios!
 
Brendan,

The additional interest is 3.1% on €140k (i.e. €4,340);

How can that turn the €8k of after-tax rental income negative?

Gordon

Edit: Straightaway I can see that you're treating the whole €430k as mortgage; the borrowings will be €340k.
 
Gordon

I think Brendan is calculating the figures on the basis of the facts as they exist today (rather than projecting forward).

So the "saved" interest is €7,300 (€[email protected]% and €160k @1.5%).

Versus your projected, after-tax, profit of €7,000 (ignoring capital allowances, which seems reasonable in this context).

The calculation is obviously very sensitive to the assumptions/inputs used.

In my opinion, the bigger issue is the impact of retaining the property as a rental on cash-flow and risk profile.
 
With the interest rate inflated from 3.1% to 3.5%, no mention of what happens to the "ported" tracker in a few years, and an assumption that the tracker rate is 1% when it may be lower.
 
Sarenco said:
Gordon

I think Brendan is calculating the figures on the basis of the facts as they exist today (rather than projecting forward).

So the "saved" interest is €7,300 (€[email protected]% and €160k @1.5%).

Versus your projected, after-tax, profit of €7,000 (ignoring capital allowances, which seems reasonable in this context).

The calculation is obviously very sensitive to the assumptions/inputs used.

In my opinion, the bigger issue is the impact of retaining the property as a rental on cash-flow and risk profile.
Click to expand...

And Sarenco, you're also double-counting! The after-tax return is already net of the rental property's interest cost, so including it again in the €7,300 figure (which is wrong in any event) is erroneous.
 
Gordon Gekko said:
And Sarenco, you're also double-counting!
Click to expand...

I don't know about Sarenco, but you have not pointed out any double counting or other error in my example, yet.

Based on the current figures, he will be borrowing the full amount, so the decision to buy another house today would result in an interest rate of at least 3.5%.

The figures will be completely different in 3 or 4 years. I suspect that the conclusion will be the same - he will be paying a lot more in interest to keep the property. It may well be worse as he will have paid capital off the tracker so it will be less valuable.

Sarenco said:
In my opinion, the bigger issue is the impact of retaining the property as a rental on cash-flow and risk profile.
Click to expand...

Agreed. My figures show that, from the start, this would result in a negative yield. So it's just not worth the risk. I haven't looked at the cash-flow as any repayments which are not interest are a form of saving. But it would be a useful exercise to do as it would show if the OP would be under pressure.

Brendan
 
Gordon Gekko said:
And Sarenco, you're also double-counting! The after-tax return is already net of the rental property's interest cost, so including it again in the €7,300 figure (which is wrong in any event) is erroneous.
Click to expand...

I haven't included the rental property's interest cost in the €7,300 figure. €160 @1.5% reflects the value of the tracker mover product (the difference between 3.5% and 2%).

If you want to project forward to a time when Holly has a 20% deposit saved, you will have to project forward all the other figures in the calculation to reflect principal repayments in the interim, future property values, rent, interest rates, etc.
 
That is the situation today, is it not?

As Sarenco has pointed out, you will need to project all the variables forward if you want to arrive at the right decision after three years.

I would be fairly sure that in three years, porting the tracker will still be the right idea.

Therefore, as their family is growing, as the tracker mover product is available now, and as they meet the criteria for a trade-up mortgage, they should do so now.

Brendan
 
There are too many unknowns at this stage.

- A tracker rate of 1% was assumed by someone but never confirmed

- A rate of 3.5% is being used when 3.1% should be available (in a retention scenario) from UB and KBC

- It's being assumed that the ported tracker rate will remain in situ ad infinitum; I'd be surprised if this is the case.
 
Well, how can you be so sure that this will be "an extraordinarily good investment" if there are too many unknowns?;)

- 1% is the average tracker rate - is that not the rate you used in your projections?

- The best variable rate for LTVs over 80% that I'm aware of is 3.5%. Again, Holly doesn't have a 20% deposit saved as things stand today. If you want to project forward to some future factual scenario, then you make have to make certain assumptions on all variables.

- We have been told that the current mortgage is with PTSB. The terms of their current tracker mover product allow for the tracker rate, plus 1%, to be retained for the remaining life of the loan.

As things stand today, it looks pretty clear cut to me that cashing out the home equity and porting the tracker is the better option.

Will this still be the right option in three years time? You would have to run the figures again at that time but I strongly suspect it would still be the right decision.
 
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Sarenco,

You're now veering into the realm of the ridiculous;

- The query relates to saving a 20% deposit and borrowing 80%. Speculation around a 100% mortgage (which no institution would offer) is a complete red herring and adds nothing to the discussion.

- I didn't introduce a 1% rate to the discussion.

- A 3.1% rate should be available if the property is retained. Your constant referral to a 3.5% rate is misleading.

This discussion has well and truly run its course.

I won't be contributing further.

Gordon
 
Gordon Gekko said:
You're now veering into the realm of the ridiculous;
Click to expand...

I really how his argument can be called ridiculous - and not just because I agree with him.

The OP does not currently qualify for a 3.1% rate. They won't qualify for that for at least three years, by which time all sorts of things may have changed.

I used the 1% rate, but if you use at 0.6% rate, it would be the same. By porting the tracker , they will pay an additional 1%.

I don't agree with your calculations because you are assessing the investment on its own merits alone. You are not looking at his total finances.

If he takes this approach, my concern would be that he would wait three years.

His choice today is to trade up now or wait three years so that he would be in a position where he could buy the new house and keep the investment. The worst outcome for him would be to wait for three years and then find that he no longer qualifies for enough of a mortgage to trade up or that the best option is to trade up, but the tracker transfer package is no longer available.

Brendan
 
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