Rental property - keep or sell to pay residential mortgage?

[brianxc]

Hi all,

Looking for some impartial advice here with a rental property I own. It belongs to my spouse and was originally her ppr until we bought another house together and have rented out her property for a number of years. I am now concerned that given the erosion of income from various tax measures in the last few years (esp with prsi due on rental income in 2014), it is no longer worth keeping and should be sold, given its poor rental yield versus the risk/Hassle of being a landlord. Specifics as follows:

Rental property -
Bought for 115k euro circa 1999
Current value approximately 270k euro
Mortgage approx 7 years left to run -repayments of approx 580 euro pm, interest portion of this approx 260 euro pm
Rent earned of 1100 euro pm
Due to new charges /taxes, and my lack of mortgage interest to write off, i calculate that I could end up paying more in taxes and charges than I receive in income from this.

I have a substantial mortgage on our currently family home, with interest payments over the life of the mortgage in the 200k region.

Would I be better off to sell off my rental property to pay down my mortgage on my home, rough calculations indicate I could halve my mortgage ( and my interest bill)by doing this.

Am I gaining currently by renting out our rental property, or is the net gain negligible, or I would be better off disposing of it? Both my wife and I work full time and it definitely feels that the rental property is a lot of stress and risk with little return for this.

Would love to hear impartial thoughts from posters on this one!

 

[cremeegg]

With this level of rental income, you should be making about €3,000 per annum after tax profit.

The sell or hold decision does not come down to the fine details of the arithmetic.

It depends where you are in your life.

In my case I hope to have 4 children in college in 7 years time. I would hold the property with a view to selling in 7 years when the property will be mortgage free.

If I sold now and repaid my home mortgage, I would not have that option. All my equity would be tied up in my home and not really available to fund college.

Of course your life situation will be different, but that should be the basis of your decision, not detailed yield and tax considerations

 

[brianxc]

Hey,

Thanks for the reply, I guess it really does depend on your personal circumstances. My main concern was that say over the next 25 years of the mortgage on my own home, I could expect to pay 150k+ in interest over the life of the mortgage.

If i was to add up the profit from the rental income over the course of the same timeframe, and allow say 2% inflation per year on this, then perhaps I am not really making any real profit on this.
If I could pay off my residential mortgage, I could take the funds that would have been devoted to paying the principal/interest on my private residence and invest them elsewhere (say fixed term deposit accounts ) for no risk?

I am just turning the numbers over in my head, and it doesn't look like the yield from the rental property is worth it, especially given the following factors :
- In the event of a family emergency, I could not access the equity I have in the rental house for a long period of time (it could take 6 months at least to dispose of it...)
- the risk of tenant non-payment of rent
- the high likelihood that the govt is going to continue to squeeze landlords and make it unprofitable to continue with a rental property (reduction in ability to write of mortgage interest, prsi to be paid on rental income, increase in property tax etc)

As stated above, if the equity from the sale of the rental property is used to reduce my residential mortgage substantially, then it could save me a substantial amount that would otherwise be handed over in interest to the banks. And then of course, I could take the balance left from my reduced mortgage payments and invest this in other less risky investments and end up actually better off overall, if my sums are correct.

I would definitely be keeping it I had less commitments wrt my residential property, but that is not the case, unfortunately.....

If anyone can pokes holes in the above hypothesis, that would be great!

BR,

Brian

 

[Hugh]

Tax -- Capital GAins TAx

Hi,

Bought property for 115k
Sell for 270k
Profit 155k

Less CGT @33% =103.85

You have to pay Revenue 51.15k approx
and you have a very short period to pay Revenue depending on what time of year the sale is completed.
Good Luck.

 

[Brendan Burgess]

Hi Brian

These sorts of calculations are pretty meaningless:

i calculate that I could end up paying more in taxes and charges than I receive in income from this.

...

If i was to add up the profit from the rental income over the course of the same timeframe, and allow say 2% inflation per year on this, then perhaps I am not really making any real profit on this.

I set out a methodology for analysing an investment property in this Key Post

Should I sell or keep this investment property in negative equity?

Although you have positive equity, the principles are the same.

I suggest that you use this methodology and post the results, and we can review them.

When you get an accurate assessment of the financial implications, you can consider whether it's worth the hassle of retaining it.

 

[Cantalia]

You haven't said if you have children? If you have sufficient pension? The question is in fact broader than just sums, it might need a little helping along for the time being, but bit by bit things will eventually be on the up. It could be hard to acquire again. Be careful to get rid of it just to be hassle free. It is an asset that can provide you with a huge cushion in the future. As they say work hard while you are young so you don't have to when you are old. It might be alot easier to struggle with this now rather than have to struggle without it later. Seven years left on the loan is very short.

 

[Bronte]

I suggest that you use this methodology and post the results, and we can review them.

That's a good idea. Also maybe he should do the money makeover to see if there is something that can be done about the fact that his current income doesn't seem to be enough to manage on without it being a stretch.

Brian, in addition to calculating the rental return, you need to think about whether you will get an additional capital gain in a few years time, and both combined might make a lot more that the derisory returns you'll get on deposit interest.

 

[brianxc]

more detailed profit and loss...

Hi guys,

thanks for the replies, here's the deal with a profit and loss assessment of the property:
Rental Income (1100pm) 13200

Interest 3300
Property Tax 250
Prtb 90
Other 500
Income tax + usc 5450
Costs - 9590

Balance (gross profit) 3610 per year

Capital balance owed on the property - 43000...

As the house was purchased in the 1990s, thankfully, it's still worth more than we paid for it. However, I am conscious that it will need substantial investment in the near future (not much done with it in the last decade).

A flip side to this is the large mortgage left on my primary res. Rough calculations suggest a saving in interest payments on the capital of approx 132K. or 6600 per year, were I to sell and take the balance and pay off the mortgage on my ppr.

So there it is. As a family man with the normal outgoings (childcare, car, groceries), currently I would be unable to cover an extended period where the house would not generate rental income, or if either property required extensive investment\repair. While mortgage rates are currently low (my ppr is on a tracker at approx 2%) It has gone up to 4.5% in the past (2008/2009) and will again within a few years when the ECB push rate up (not if but when IMHO)This would increase monthly mortgage payments up to over 2k pm!

Hopefully this makes things a bit clearer, thoughts much appreciated. WRT the stamp duty comment, this doesn't matter hugely, as stamp is due on the house whenever I sell, be it now, or in twenty years, so doesn't affect the main decision...

Cheers,

B.