Rental property - Keep or not?

Discussion in 'Money makeover' started by wab0607, Oct 12, 2017.

  1. wab0607

    wab0607 Frequent Poster

    Last edited: Oct 12, 2017
    Age: 43

    Spouse’s/Partner's age: 40

    Annual gross income from employment or profession: €28K for the next 15 months, €44K from Jan 2019

    Annual gross income of spouse:€44K

    Monthly take-home pay €5500 (incl Child Benefit and other specific allowances. Tax credits are higher than standard PAYE employees)

    Type of employment: e.g. Civil Servant, self-employed

    Me: Public sector (post 1995, pre 2010), Spouse: Private sector

    In general are you:Covering all outgoings, bills, utilities, insurances, therapies for special needs child, mortgages and tax bill on rental property, not saving or reducing credit card bill which is a concern.

    Rough estimate of value of home: €400K

    Amount outstanding on your mortgage: €310K

    What interest rate are you paying? 3.62% SVR - while disposable income is higher than in previous years banks will not consider switching to avail of lower rate as on paper income is reduced. Reason: My income is currently reduced as I chose to reduce hours for 2017 and 2018. Currently earning approx €18k from employment and €10k from Carers Benefit. Carers Benefit will cease in Jan 2019. Ideally would like to continue on reduced hours for another few years after that but will not qualify for any SW payment.

    Other borrowings – car loans/personal loans etc:

    Me: €300 per month, will finish in 12 months. Spouse: €200 per month, will finish in 7 months.

    Savings and investments: None

    Do you have a pension scheme? Me: Public Sector Superann Scheme, Spouse: Private Pension

    Do you own any investment or other property? Rental Property, former PPR. Approx value: €250K. Outstanding mortgage: €82K. Interest rate: 3.7% SVR. 10 years left on mortgage.
    Mortgage: approx €900 per month (incl insurance), rental income: €1350 per month. Property in good location and in good condition.

    Ages of children: 7 & 8

    Life insurance: Just mortgage cover on both properties

    What specific question do you have or what issues are of concern to you?

    Number of concerns:

    1. The second property has been rented out for the last 7 years. The first 5 years were a struggle as rents achieved were significantly lower than now but sale prices had dropped so much in those years and with very few viewings we chose to hold out and hope for a better selling environment. If we sell now we could have a potential gain of approx €140K taking taxes, remaining mortgage and fees into account. This could reduce the PPR mortgage and allow us to switch to a more favourable rate on PPR as our incomes and the LTV would meet criteria for the banks. However we would still be looking at a 20 yr mortgage. We would also remove the stress of being an accidental landlord and all that goes with that. On the other side the rent on the second property is now more favourable and helps with the reduced income that we now earn. It will be clear of all mortgage debt in 10 years and could potentially clear almost all of the outstanding mortgage debt on PPR at that point which would mean we would be close to mortgage free in 10 years. It feels a little like we managed through the difficult time financially of rents being lower than now and maybe we should see it out now that it is proving more beneficial. We are of course aware that rents and property prices could drop again and the situation may not be as good as it is now. It is, however, appealing to be mortgage free in our early 50's and this is also the time that our children could be looking at third level so we need to consider that expense too.

    3. Just to put a spanner in the works spouse employment is looking a little shaky and we could see potential redundancy in the next 12 months or at a minimum significant changes in income and/or T&C's. That said, we always have the option of me going back to work full time and spouse taking over my role as the reduced income earner. It would mean a change in the improved work/life balance that we have achieved this year but needs must.

    Just finding it hard to weigh up everything and see a clear picture.
    Last edited: Oct 12, 2017
  2. cremeegg

    cremeegg Frequent Poster

    I like that idea.

    There is no clearcut answer, your situation is finely balanced, no one can tell the future.

    At the moment you have choices, if you sell the rental then you have closed them off.

    I suggest that you wait 18 months, then you are back to work and your husbands employment situation may have stabilised.

    Maybe make a plan now what you will do in 18 months if a) value of rental has increased 10%, b) not moved, c) decreased 10%
  3. kaiser1

    kaiser1 Registered User

    Agree, you are moving in the right direction and that your position is finely balenced on wether to hold or sell now. With time you will clear your loans with either option.
    Once spouse has his €200pm loan paid off it might be a good idea to have some emergency funds just in case, but in general try to tackle the credit card as much as possible (maybe even suspend pension payments for the moment) and review your current spending on groceries etc to see if you can save anything there.
  4. Brendan Burgess

    Brendan Burgess Founder

    Let's look at the rental property in its own right first of all

    Rental income: €11,000
    Costs: €2,000
    Interest cost: €3,000 ( €82k @3.7%)
    Interest cost: €1,000(€8,000 credit card @16%)
    Interest cost €6,000 : (160k home loan @3.6%)
    Tax : €3,000 (€11,000 - €3k interest - €2,000 costs @50%)
    Loss after tax: €4,000

    If you sell the house you can use the proceeds to repay the credit card and the loan on your family home. I am ignoring the personal loans, but the same principle applies.
    So by not selling your home, you are paying this interest to fund your investment property. )

    It's fairly clear to me: Sell the investment property and you will be a lot better off.

    You will have a home worth €400k
    You will have a mortgage of €150k (LTV :38%)

    So you could switch to AIB at 2.75% which would save you a further €1,500 or so a year.

    You won't need the mortgage protection policy on the investment property after you sell it, but you may choose to keep it anyway.

    But what if house prices go up?

    If you sell the property and house prices continue rising, you will still see an increase in the value of your home, so you will benefit from that.

    The worst outcome for you is that the financial pressure, a delay in tenant paying the rent or your spouse's loss of their job tilts you into arrears, and your credit record is damaged which would prevent you from switching lender.

    Holding onto the property is costing you in terms of profits and cash-flow. Get rid of it.

    RedOnion likes this.
  5. Brendan Burgess

    Brendan Burgess Founder

    Leaving the finances aside, this decision is absolutely clear for other reasons.

    You will have a much smaller mortgage and much lower outgoings.

    You will have reduced the risks you face.

    You will be able to decide what is best for your family in terms of whether your work full-time, part-time or at all.

    RedOnion likes this.
  6. RedOnion

    RedOnion Frequent Poster

    Big +1 to everything Brendan said above.

    You've a gross yield if just over 6% on the rental property, with very little tax shelter. You're borrowing the full value at over 3.6% in one form or another. You're basically giving away money to have a gamble on the property market.

    Sell the house, pay down your debt, and have less stress in your life!
  7. Sarenco

    Sarenco Frequent Poster

    That's an excellent way of putting it.

    It's absolutely clearcut to me that the right decision here is to cash out the equity in the rental property and use it to pay down debt.
    Gordon Gekko and RedOnion like this.
  8. wab0607

    wab0607 Frequent Poster

    Thanks for all the replies an usual spot on advice of AAM. Having discussed it we are going to look at selling the rental property in the early Spring.