Looked at from first principles.
It has been suggested that we start a new thread examining the issues involved in the property letting business in Ireland today. Here goes my contribution dealing with some of the issues.
YOU
In considering getting involved in this business, the first thing to examine is yourself.
What is your time frame for the letting business. You need to know how many years you expect to be happy to be involved in the letting business. What age are you, when do you expect to retire, what age are your kids. For me I hope to retire when my youngest child becomes financially independent, unless you are seriously wealthy, I think that is a limiting factor.
At a minimum you need to be able to say 15 years and 25 is better.
Do you expect to live in the same area for all that time. Living in one place and owning property in another is not ideal.
What is your present financial situation, do you have €20,000 for a deposit. Unless you do I suggest that you should try to save that first. Do you own your own home, do you have a pension, for most people you should have these in place first before you get involved in property letting. However everyones circumstances are different, and you may decide that the property letting business will be part of your pension. However I consider having the deposit essential, this is from your own point of view before considering practical issues and banks.
Do you have secure employment that gives you some money to spare each month, and do you reasonably expect this to continue into the future.
If this profile fits you, probably in your 30s, good income, secure employment, expect things to continue, then property letting may suit you. (There is also a profile for an older cash investor but I am going to park that for now.)
THE BUSINESS MODEL
“Turnover is vanity, profit is sanity, but CASH IS KING”
The idea of a business model is to explain the driver of the profit, to understand what causes the business to be profitable or not. The better you understand this the better chance you have of being successful.
The property letting business is not like other business, and you need to understand it on its own terms. Weekly profit is not a relevant concept.
The residential property letting business is unique in that it allows for significant leverage, you can borrow a large amount of money, this is not available to the ordinary person in any other business.
This makes the property letting business model all about cashflow.
The first thing to consider about cashflow is what are the monthly cash outflows.
In the worked example below, you borrow €120,000 at 5% this means monthly repayments, capital and interest over 25 years of €700.
If you get into the business you are taking on this commitment. If you have no rent coming in for a period you need to be able to meet this from your income.
In the worked example below the free cashflow before any repayments of interest or capital from the letting is €500 per month. Net cash requirement from your salary or other income is €200 per month.
This means that if you put €200 per month from your salary after tax in 25 years you will own the property free of any mortgage. This will then give you the rental income as a type of pension. (€800 per month in the worked example.)
According to the pensions board pension calculator you would need to put €360 (increasing at 3% per annum) after tax into a pension to get the same pension in 25 years time. This is taking an opening pension pot of €20,00 to correspond to the deposit.
The worked example below is supposed to deal with a typical investment opportunity that might be available in Ireland today. It is based on a 3 bed semi in a good town.
This post is intended to be as objective as possible setting out the position as I understand it. I would be glad to receive any comments or observations. Also if anyone can tell me how to keep the formatting from the spreadsheet I would be grateful.
I will come to other topics, borrowing and banks, the property, dealing with tenants, the macro economic climate, in later posts, where I intend to be more subjective.
Worked Example
Cost 140,000
Deposit 20,000
Borrowing 120,000
Annual Monthly
€ €
Interest at 5% 6,060
Rental 9,600 800
Ins 392
PRTB 90
NPPR 200
Advert 50
Maintenance 600
Contingency etc 800
Tax cost 1,462
Total cash outgoings 3,594 300
Free Cash before
Int and Cap repayments 6,006 500
Tax estimation at 50%
Income 9,600
Allowable Interest cost 4,545
Other Expenses 2,132
Taxable profit 2,923
Tax charge 1,462
It has been suggested that we start a new thread examining the issues involved in the property letting business in Ireland today. Here goes my contribution dealing with some of the issues.
YOU
In considering getting involved in this business, the first thing to examine is yourself.
What is your time frame for the letting business. You need to know how many years you expect to be happy to be involved in the letting business. What age are you, when do you expect to retire, what age are your kids. For me I hope to retire when my youngest child becomes financially independent, unless you are seriously wealthy, I think that is a limiting factor.
At a minimum you need to be able to say 15 years and 25 is better.
Do you expect to live in the same area for all that time. Living in one place and owning property in another is not ideal.
What is your present financial situation, do you have €20,000 for a deposit. Unless you do I suggest that you should try to save that first. Do you own your own home, do you have a pension, for most people you should have these in place first before you get involved in property letting. However everyones circumstances are different, and you may decide that the property letting business will be part of your pension. However I consider having the deposit essential, this is from your own point of view before considering practical issues and banks.
Do you have secure employment that gives you some money to spare each month, and do you reasonably expect this to continue into the future.
If this profile fits you, probably in your 30s, good income, secure employment, expect things to continue, then property letting may suit you. (There is also a profile for an older cash investor but I am going to park that for now.)
THE BUSINESS MODEL
“Turnover is vanity, profit is sanity, but CASH IS KING”
The idea of a business model is to explain the driver of the profit, to understand what causes the business to be profitable or not. The better you understand this the better chance you have of being successful.
The property letting business is not like other business, and you need to understand it on its own terms. Weekly profit is not a relevant concept.
The residential property letting business is unique in that it allows for significant leverage, you can borrow a large amount of money, this is not available to the ordinary person in any other business.
This makes the property letting business model all about cashflow.
The first thing to consider about cashflow is what are the monthly cash outflows.
In the worked example below, you borrow €120,000 at 5% this means monthly repayments, capital and interest over 25 years of €700.
If you get into the business you are taking on this commitment. If you have no rent coming in for a period you need to be able to meet this from your income.
In the worked example below the free cashflow before any repayments of interest or capital from the letting is €500 per month. Net cash requirement from your salary or other income is €200 per month.
This means that if you put €200 per month from your salary after tax in 25 years you will own the property free of any mortgage. This will then give you the rental income as a type of pension. (€800 per month in the worked example.)
According to the pensions board pension calculator you would need to put €360 (increasing at 3% per annum) after tax into a pension to get the same pension in 25 years time. This is taking an opening pension pot of €20,00 to correspond to the deposit.
The worked example below is supposed to deal with a typical investment opportunity that might be available in Ireland today. It is based on a 3 bed semi in a good town.
This post is intended to be as objective as possible setting out the position as I understand it. I would be glad to receive any comments or observations. Also if anyone can tell me how to keep the formatting from the spreadsheet I would be grateful.
I will come to other topics, borrowing and banks, the property, dealing with tenants, the macro economic climate, in later posts, where I intend to be more subjective.
Worked Example
Cost 140,000
Deposit 20,000
Borrowing 120,000
Annual Monthly
€ €
Interest at 5% 6,060
Rental 9,600 800
Ins 392
PRTB 90
NPPR 200
Advert 50
Maintenance 600
Contingency etc 800
Tax cost 1,462
Total cash outgoings 3,594 300
Free Cash before
Int and Cap repayments 6,006 500
Tax estimation at 50%
Income 9,600
Allowable Interest cost 4,545
Other Expenses 2,132
Taxable profit 2,923
Tax charge 1,462