Rental Property-Keep or sell

superhooper

Registered User
Messages
39
Hi There,

Have a rental property with the following numbers.

Rent 7,800
Exps -954
Repayments -8832(incld int)
Tax -2,566.49
Total Net Outflow -4,553

This cash outflow though is killing us even though we are on a tracker which is great and we are paying off capital debt mainly. If we sold we would pay off mortgage thankfully.
My question is though if I had this €4.5k cash to spare and no rental property(which I don't), would I be better topping up my pension scheme and getting the tax shelter ie. pay €4.5k @ .44. net cost €2,520. Therefore sell the property and get out of the landlord game...
 
To give a meaningful answer, we would need a lot more detail, I'm afraid.

What would the rental property sell for today?
What is the tracker rate on the rental mortgage?
Is your PPR mortgaged and, if so, at what rate?
Do you have material retirement savings for your age?
Do you have material cash savings outside your pension?
Do you pay income tax at the higher rate?
Do you manage the rental yourself and, if so, do you enjoy it?
 
To give a meaningful answer, we would need a lot more detail, I'm afraid.

What would the rental property sell for today?
What is the tracker rate on the rental mortgage?
Is your PPR mortgaged and, if so, at what rate?
Do you have material retirement savings for your age?
Do you have material cash savings outside your pension?
Do you pay income tax at the higher rate?
Do you manage the rental yourself and, if so, do you enjoy it?
Thanks for reply Sarenco

What would the rental property sell for today? €150k

What is the tracker rate on the rental mortgage?1.1% 18 years left €146k left

Is your PPR mortgaged and, if so, at what rate? Yes 3.6

Do you have material retirement savings for your age? Nope- DC company scheme

Do you have material cash savings outside your pension?Nope

Do you pay income tax at the higher rate?Yes

Do you manage the rental yourself and, if so, do you enjoy it? Yeah, don’t mind it but….there will always be issues along the line and I live about 3 hrs away from it. Also have another property (apartment) which attracts a small tax liability but in a highly rentable area which is 20 mins away from where I live. Up to ears in negative equity though so can’t see it going anywhere and will have to sit on it.


The way I’m looking at this is that I am paying out €4.5k per year and getting €7.6k in return i.e(capital off mortgage) excluding capital appreciation(or depreciation!!) of property.

If I paid €4.5k into a pension I would get €4.5k+tax back =€6,525 less fees.
I am also then more flexible as we try to pay childcare costs etc in the next 3 years...

I probably should add another €500pa in outgoings to rental if I was to include a bit of a rainy day fund for renovations which will come yet.

That tracker rate is tasty though. If only I had better cashflow:rolleyes:
 
You need to bear in mind that the majority of your repayment is not an expense but a form of investment. I.e. you are paying 1.6k pa in interest and the balance of the repayment is reducing your mortgage and will in time increase your equity in the property. Any decision should also factor in the location of the property and it's potential to appreciate in value. If you sell the property now, you will still need to pay back the negative equity element. The pension comparative is not quite a like for like one.
 
You need to bear in mind that the majority of your repayment is not an expense but a form of investment. I.e. you are paying 1.6k pa in interest and the balance of the repayment is reducing your mortgage and will in time increase your equity in the property. Any decision should also factor in the location of the property and it's potential to appreciate in value. If you sell the property now, you will still need to pay back the negative equity element. The pension comparative is not quite a like for like one.
Thanks 44B . I mentioned the capital repayment above. Neg equity is hopefully gone. I feel I already have enough skin in the property game(and been skinned too). When you have very limited cash resources or sometimes none these comparatives are very relevant e.g I could for instance have to replace by 16 year old car at any stage. That 4.5k would see me get a nice upgrade with a small loan...The pension option also has risks too so I'm just trying to balance all the arguments out..
 
Thanks for the follow up.

If I was in your position, I would sell that rental property and apply whatever modest equity you might realise against the outstanding balance on your PPR.

Here's the way I would look at it:-

That rental property is producing a net yield of around 3.64% (€7,800/€150,000 x 70%) that you are financing at a rate of 1.1% (that's 2.54%, net of financing costs). Here's a link to another thread where I set out my rationale for deducting 30% from the gross yield figure to arrive at a long term net yield figure.

http://www.askaboutmoney.com/threads/buyers-remorse.196291/

Before you even start to allow for taxes on the rental income, it should be obvious that the capital tied up in that rental property would generate a better return by simply paying down a mortgage on your PPR that carries a rate of interest of 3.6%. In a nutshell, the net return is roughly 1% per annum higher before taxes.

On an after-tax basis the investment proposition for retaining the rental property really starts to fade.

As 44B correctly points out you also need to factor potential capital appreciation of the rental property into the decision. However, over the very long term the value of real estate really does nothing more than rise in line with the general rate of inflation and CGT is obviously applicable. As such, relying on potential capital appreciation alone to justify a property investment makes no sense - you might get lucky or you might not.

You will have plenty of exposure to real estate even if you sell this rental property so that shouldn't be a consideration. If anything, dialling down your property exposure should be seen as a positive.

Liquidating the rental property should also significantly improve your cash flow position. I would suggest that you need to be careful not to simply inflate your lifestyle to account for the additional cash flow - your long term financial goals are important. Replace the car by all means but don't forget to look out for your future self!

Whether you apply any additional cash flow against your PPR mortgage balance or make additional pension contributions is a matter of judgment. On the one hand, paying down your mortgage gives you a guaranteed, tax free return equivalent to 3.6% per annum with zero investment costs. Would your pension fund produce that sort of return, net of investment costs, over the term of your mortgage? Well it might, particularly when you factor in the 40% head start the tax relief gives your pension contributions, but it is obviously far from guaranteed.

If it was me, I would focus on building up a decent cash reserve in the first instance - I would shoot for around 6 months of your typical household expenses. You should also make sure you have adequate insurance in place (life, health, income and assets).

Once you are comfortable that you have adequate "downside" protection in place, I would personally concentrate on ramping up pension contributions rather than further accelerating your mortgage repayments.

Having said that, there is no "wrong" decision here - accelerating your mortgage repayments out of freed up cash flow may well turn out to be the better option and it does protect your position if and when interest rates start to rise again. This is really a question of balancing risk and (potential) reward.

Hope that helps.
 
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Thanks for the follow up.

If I was in your position, I would sell that rental property and apply whatever modest equity you might realise against the outstanding balance on your PPR.

Here's the way I would look at it:-

That rental property is producing a net yield of around 3.64% (€7,800/€150,000 x 70%) that you are financing at a rate of 1.1% (that's 2.54%, net of financing costs). Here's a link to another thread where I set out my rationale for deducting 30% from the gross yield figure to arrive at a long term net yield figure.

http://www.askaboutmoney.com/threads/buyers-remorse.196291/

Before you even start to allow for taxes on the rental income, it should be obvious that the capital tied up in that rental property would generate a better return by simply paying down a mortgage on your PPR that carries a rate of interest of 3.6%. In a nutshell, the net return is roughly 1% per annum higher before taxes.

On an after-tax basis the investment proposition for retaining the rental property really starts to fade.

As 44B correctly points out you also need to factor potential capital appreciation of the rental property into the decision. However, over the very long term the value of real estate really does nothing more than rise in line with the general rate of inflation and CGT is obviously applicable. As such, relying on potential capital appreciation alone to justify a property investment makes no sense - you might get lucky or you might not.

You will have plenty of exposure to real estate even if you sell this rental property so that shouldn't be a consideration. If anything, dialling down your property exposure should be seen as a positive.

Liquidating the rental property should also significantly improve your cash flow position. I would suggest that you need to be careful not to simply inflate your lifestyle to account for the additional cash flow - your long term financial goals are important. Replace the car by all means but don't forget to look out for your future self!

Whether you apply any additional cash flow against your PPR mortgage balance or make additional pension contributions is a matter of judgment. On the one hand, paying down your mortgage gives you a guaranteed, tax free return equivalent to 3.6% per annum with zero investment costs. Would your pension fund produce that sort of return, net of investment costs, over the term of your mortgage? Well it might, particularly when you factor in the 40% head start the tax relief gives your pension contributions, but it is obviously far from guaranteed.

If it was me, I would focus on building up a decent cash reserve in the first instance - I would shoot for around 6 months of your typical household expenses. You should also make sure you have adequate insurance in place (life, health, income and assets).

Once you are comfortable that you have adequate "downside" protection in place, I would personally concentrate on ramping up pension contributions rather than further accelerating your mortgage repayments.

Having said that, there is no "wrong" decision here - accelerating your mortgage repayments out of freed up cash flow may well turn out to be the better option and it does protect your position if and when interest rates start to rise again. This is really a question of balancing risk and (potential) reward.

Hope that helps.
Thanks Sarenco for the excellent and comprehensive analysis. Some sound advice here. I particularly agree with your analysis of possible interest rate hikes and potential to hit me on the PPR mortgage. I think my mind is fairly clear now on the way forward which is to shift the rental property. Thanks again.
 
And as usual I'm going to disagree with Sarenco.

Most of your rent and your cost is going on capital repayments, a form of saving. Eventually you will own all the equity. At that point in time you will have the possibility to sell the asset or to continue renting it and see it as a form of income. If you sell it you will find it extremely difficult to ever get back into property. And you most certainly will never get back in so cheap.

You have a pension, I don't see any benefit to adding to that when we've seen Noonan tinkering with them already and taking away the benefits after people paying in for decades and goodness knows what he might do again. It's also not good to have all your eggs in one basket. One pension only. Remember Waterford Wedgewood and the company in Cork etc.

Would you really use the 'extra' to pay off your PPR, would it go on a 9% car loan, and then on something else.

Any possibility of extending the PPR loan to make it more manageable?

As usual it's actually impossible to give proper advice unless a poster gives us all of the figures for everything. It is wrong to base a decision on just this one property without the bigger picture.
 
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Only sell if you know for sure you will invest the majority of that extra money in something sensible.
I can see that freeing up cash flow is important & a car purchase might be essential in the future, but it's easy to get used to that extra money & end up spending it.
DC pensions are a lottery & a second string to your retirement plans in property is no bad thing. But I think you are currently over exposed to property. Shame the apartment is in NE as the first property isn't doing that badly.
 
Making capital repayments on an amortising loan is certainly a form of saving - no argument there. But if that’s all there is to the analysis then logically an investor should simply maximise their leveraged property holdings, regardless of the underlying return on those properties. That makes no sense to me as a strategy.

I have no particular problem with anybody carrying a cash flow negative rental property provided: (a) they have no better use for the capital invested in that property (such as paying down a high interest loan); (b) they have a sufficient cash buffer available to address any financial shocks that might arise (e.g. a sharp increase in interest rates or an extended void or over holding period); and (c) this does not restrict their ability to maximise their pension contributions and thereby build wealth within a tax deferred space.

The OP’s rental property is producing a pretty lacklustre after-tax return that, in my opinion, does not come close to adequately compensating him for the considerable risks inherent in the investment. Leverage is always a double edged sword – it amplifies returns and losses.
 
And as usual I'm going to disagree with Sarenco.

Most of your rent and your cost is going on capital repayments, a form of saving. Eventually you will own all the equity. At that point in time you will have the possibility to sell the asset or to continue renting it and see it as a form of income. If you sell it you will find it extremely difficult to ever get back into property. And you most certainly will never get back in so cheap.

You have a pension, I don't see any benefit to adding to that when we've seen Noonan tinkering with them already and taking away the benefits after people paying in for decades and goodness knows what he might do again. It's also not good to have all your eggs in one basket. One pension only. Remember Waterford Wedgewood and the company in Cork etc.

Would you really use the 'extra' to pay off your PPR, would it go on a 9% car loan, and then on something else.

Any possibility of extending the PPR loan to make it more manageable?

As usual it's actually impossible to give proper advice unless a poster gives us all of the figures for everything. It is wrong to base a decision on just this one property without the bigger picture.

Thanks Bronte. The rental though isn't all gravy. I'm putting 5k into it every year. There is also a good deal of risk and I already have exposure with another property and my PPR. I agree there is risk with the pension and the money is also tied up. I would say though that the scheme puts the contributions directly into various well known funds which I can control.Extending the PPR will have me paying off mortgage at age 68!!! Whats important here for me is I am not really in a position to ride out any financial ups and downs. If I had more available cash yeah sure I'd probably keep it going for a while.
 
Only sell if you know for sure you will invest the majority of that extra money in something sensible.
I can see that freeing up cash flow is important & a car purchase might be essential in the future, but it's easy to get used to that extra money & end up spending it.
DC pensions are a lottery & a second string to your retirement plans in property is no bad thing. But I think you are currently over exposed to property. Shame the apartment is in NE as the first property isn't doing that badly.
Yes its a slippery slope. The car purchase is a matter of when rather than if though as I clock up the miles. Still I'd hope to borrow a small amount if possible. Hopefully get another year or two out of it. I agree I am overexposed to the property though I did buy the PPR at a good time and have a decent amount of equity in it.
 
If you sell it you will find it extremely difficult to ever get back into property. And you most certainly will never get back in so cheap.

Hi superhooper.

From your posts, you appear to have another property let:

Also have another property (apartment) which attracts a small tax liability but in a highly rentable area which is 20 mins away from where I live. Up to ears in negative equity though so can’t see it going anywhere and will have to sit on it.

Could you supply details regarding the apartment?
 
Hi superhooper.

From your posts, you appear to have another property let:

Could you supply details regarding the apartment?
No prob-details here:

Income € 10,800
Exps -€ 1,800
Repayments € 14,316
Tax € 841
Interest 3.95%
Mortgage bal € 200,000
Value € 130,000

Ouch!!
 
Thanks Bronte. The rental though isn't all gravy. I'm putting 5k into it every year. There is also a good deal of risk and I already have exposure with another property and my PPR.

Absolutely agree with you Superhooper that you have to make the decision that is best for you and that's why this website is great, you get different viewpoints and different experiences and from it you hopefully can come to your own decision.
 
No prob-details here:

Income € 10,800
Exps -€ 1,800
Repayments € 14,316
Tax € 841
Interest 3.95%
Mortgage bal € 200,000
Value € 130,000

Ouch!!

Rent: 900
Mortgage: 1200
Subsidising Mortgage: 300
Expenses:150
Tax: 70
Mortgage 200K @ 3.95 7900 Interest. 14316 - 7900 = 6416 capital. (534 in capital monthly)

Actual montly cost to you is 150 + 70 + 300 = 520.

I wonder if we had your income and expenditure figures would the whole scenario look a lot different.

What is the mortgage term. Is it possible to extend to make it more manageable.
 
Absolutely agree with you Superhooper that you have to make the decision that is best for you and that's why this website is great, you get different viewpoints and different experiences and from it you hopefully can come to your own decision.
Yes great website and really appreciate the different views being expressed.
 
Mortgage 200K @ 3.95 7900 Interest. 14316 - 7900 = 6416 capital. (534 in capital monthly)

Actual montly cost to you is 150 + 70 + 300 = 520.

So at the moment if you sell you're are down 70k. For every year hold on you will be down 6k less. So the three factors that matter
1) Interest rate
2) Dwelling cost currently at 130k
3) Rent

All being equal you are losing nothing by hanging on as for every year your -70k reduces by 6k. Given that 1 and 3 are currently in your favour I would be tempted to hang in there. It's certainly not as bleak a picture as you seem to think it is (assuming ouch above is exactly that)
 
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