Section 23 Vs Non for apartment investment

D

DeBarr

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Hi

We're thinking of investing in a 2 bed apartment in New Ross in Co. Wexford. This would be our only investment property. We currently live in Dublin (mortgage of €120K, house valued at €500K approx). My wife is from New Ross - we hope to sell in Dublin in the next year or two and move down and build on a site we already have. The sale of the house in Dublin would fund the build and we would clear the mortgage in Dublin as well as having some funds left over.
The apartment we are looking at costs €155K and with an interest only mortgage the repayments at current rates would be in the region of €500 pm for the first 5 years (interest only payments). Rental income from the apartment in the current market would yield €650 pm and demand is strong. This apartment does not have section 23 status. The apartment is on first floor in a two-story block of 10 - there are two such blocks in a private estate of about 90 units (3 bed semis, 4 bed semis and 4 bed dormer detached). Each apartment has it's own entrance (not just one door to the block) and has great views across the river estuary. Waterford is a 15 minute drive, Wexford town is about 25 mins. New Ross and Wexford are also on the de-centralisation list (if that ever happens).

Other apartments in the town which are located in much larger blocks (30 - 40 units) are selling for approx €225K but have Section 23 status. I realise there is tax relief to be had with section 23 but am wondering if it is worth it given this is the only investment property we will have.

I guess the questions I have are:
1) Does the non-section 23 apartment make more sense given the price and the fact the rent will cover the mortgage (initially at any rate).
2) What do people think that once section 23 status is gone or if there was a "correction" in the market would the value of section 23 and non section 23 properties harmonise.

In the event of the rental market softening we are comfortable with repayments if the apartment is vacant for a while. We currently divert all childrens allowance to CU accounts for the kids (we're about to have our third) and could use this savings stream to help fund it in the event of a bubble bursting. We also have 2 maxed SSIAs.

We are looking at the apartment as a long-term investment either as a contributor to our kids education in the future or as an investment vehicle to partially fund our pensions.

Any thoughts on the questions above and the investment in general?

Thanks
 
Hi

If you are going to have only one investment property, then there is little point buying a section 23 property. As you can see from the price difference, the builder has already made them more expensive due to them being section 23.(all other things being equal)

I dont know about New Ross , but most section 23 properties are in regeneration areas. This is not necessarily a bad thing but as the developers have factored the tax breaks into the price, it may take longer for any substantial capital appreciation.

Section 23 relief really only applies people with more than one rental property.

Section 23 have tax breaks for owner occupiers. So if you sell you own house in Dublin and live in the apt , it could be worth while.

I would go with the non section 23 if i was in your position.
 
Couldn't agree more with SB. By their very definition Section 23 properties are a depreciating asset (if average house price increase is, say for argument 0%, then the price of the property goes down by the amount of the tax break that is used up in that year)
 
Hi DeBarr

I actually know the area in which you are thinking of buying.

There is absolutely no comparison with the non section and the Section 23 apartments across the river. This BVH development is much nicer and far more popular as it is quite private, low density and very accessible to everywhere. Maintenance/Service Charges are much lower too(the others are in the region of 1K p.a whereas this is €400 due to the fact there are no lifts etc..)

The only thing is - I believe you are a little optimistic in believing you might get €650 per month rent. I have a 4 bed house in that development and actually get €650 rent pcm.

I believe the demand being strong for rental in that particular area is partially due to the fact that a lot of tenants are on the move from the other bigger apartment blocks (S. 23) and are moving because of noise. Its location, within walking distance of Lake Region is an asset too. That being said tenants have an absolute great choice now, design standards and furnishings are extremely high and bargaining power is definitely on their side.

I am told that all the units in BVH are just sold out now so that in itself is reassuring.

Hope this helps,
 
Hi folks,

Thanks a million for taking the time to reply. Armada, as it's our first foray into property investment it's very reassuring to read your post. Also we know a builder (not involved in any of the developements bar snagging) in the New Ross area and he has said the quality of workmanship of the development we are looking at is far better than the S23 ones across the river.

We're hoping to close in the next week or so. I thought €650 pcm was optimistic also but we've had 2 calls from prospective tenants in the last week and they seem happy with the rent and want to view as soon as it's ready (Aparently the foreman is being contacted all the time by people looking to rent in this development - that's how they got our number). Also went to an EA in the town and they said they'd rent it at the same price (although if we can get the right tenenats without an EA we will).

Thanks a million again for all the replies.
 
I too know this area very well and have property there though not in BVH. I agree with the other posters re section 23 as regards the op's position. A few additional points for you to consider re the rental market generally in New Ross. The rental market in New Ross is heavily dependent on the immigrant population which stands at about 2300 in a total population of about 7500 ( a local auctioneer is on record as having said that ). There are many developments coming on stream over the next few years; 63 apartments are being built as part of the river valley development, 140 houses have just started in Millbanks, 53 apartments are under way opposite the Dunbrody ship. There are two more developments within 100 yards of Lakeregion, Deerpark ( well under way ) and one across the road from Deerpark (I can't remember the name of it but the signage is up) There are also substantial plans for at least two more sites in the Rosbercon area which haven't gone to planning stage yet but they will - I know the developers! I honestly think it is reaching saturation point - park your car somewhere in the town some evening and have a good walk around the new apartment developments ( i have done it ) - amazing how many of the units are vacant.
 
Hi demoivre

Many thanks for your informative post on the rental market in New Ross. I agree - the number of developments is staggering in the town and the reliance on immigrant workers is pretty high (Both prospective tenants that have contacted us are Polish). I'm comfortable though that the apartment we are buying is in a low-key, quiet, private development with good access to everything. The fact that a lot of the Section 23's may be vacant and there are a number of propspective tenants ringing us before ours is even ready is a good sign.

Still, all in all, I recognise that property investment is a risk and I feel comfortable with the level we're taking on given the price we're paying.... the apartment is a long-term investment (mostly for the kids) so we're in for the long haul....

Thanks again
 
Hi again,

"The rental market in New Ross is heavily dependent on the immigrant population"



I do agree with Demoivre's post. The Eastern European population accounts for a lot of rentals in New Ross. I have in fact Polish in my house in BVH (and in other properties) and find them exemplary tenants.

I think this particular development is small enough and has the right mix of other house types in it, that it will differ from a lot of the other developments- its location is exceptional, out of town overlooking the river(and The Gardai !) and yet within five mins walk of the main shopping area and the main Hotel.

155k is indeed small money for a 2 bed apt anywhere and I believe it is the perfect starter property for DeBarr to invest in given his local family connections. Forget Section 23. Close your Sale.

Good Luck!!
 
The figures given in the example cited by the original poster are an almost perfect illustration of the common and irrational phenomenon where builders\developers seem able to take almost all the benefit of the S23 incentive, and where buyers seem happier to give money to a builder up front rather than to give maybe the same or less to the taxman in instalments.

If the apartment is selling at €225k, it is reasonable to assume a S23 allowance of 80% of this, or €180k

The S23 allowance has a value equivalent to the tax saving. If you could use it immediately (i.e. if you have a huge rental income), then at assumed tax rate 40%, it has a value of 40% of 180k or €72k. Of course, even with a big rental income, you would pay for it up front, and mightn't get to use it until paying tax (up to 12 months later), so the max real value might be more like 40% of €175,000 - say €70,000.

In the present example, the difference in price between the two apartments (i.e. the cost of S.23 relief assuming the apartments were otherwise of equal value) is €70,000.
QED
 
Sweet, somebody whose gone to the bother of doing the Maths.

So using your figures, if property were to stagnate or 'soft land' as it's being called, then after year 1 the value of the S23 property would be 225K - (70k/10) (I believe 10% of the tax bit can be claimed each year) = 218K. (not including buying fees and maintenance charges)

Not a great return for anyone on an interest only mortgage that only just covers the mortgage.
 
Thanks for all the informative posts. We're gonna go ahead with the purchase of the non-section 23 and should close this week.
 
Just thought I’d update this thread to let you know how we’re getting on so far.

We fired ahead with the purchase of the non-Section 23 apartment and managed to let it out for €600 per month – we lowered our rental expectations against our letting agents advise (originally €650 per month) rather than waiting for a higher rent and having it vacant. Our tenants are from Poland and we couldn’t be happier with them - they really look after the place and are very reliable. We are on an interest only mortgage for the first 5 years and currently the rent covers the mortgage plus expenses so we are happy with that – obviously this may change as rates rise but as we mentioned in the original mail we are comfortable with that. We intend to hang on to the place to partly fund our pension, kids education etc so we will (hopefully) hang on to it for another 15 years or so.

For info we’ve also kept an eye on the Section 23 apartments in the town which continue to be built and the prices seem to have risen at a much lower rate than ours. The current value of our apartment in the meantime has risen by 12% based on one recently being sold. This I would attribute to the area and quality of the development and the fact that we did not overpay for “potential” tax reliefs which we can’t use because this is our only investment property.

Overall things are going well (so far) and the experience has been positive. So a big thanks to all the posters who explained the details of section 23 properties to us and also to those who replied and had already invested in the area.
 
I think there is a flaw in the argument regarding the depreciation of the S.23 benefit over the ten years.

My understanding is that if a S.23 property changes hands in the first ten years, then all of the allowance passes to the new owner, although having less time to avail of it. So the new owner still gets the 80% allowance in the example quoted above.

That obviously has implications for the original owner, because any relief actually used would be lost, but if it is the original owner's only property, then the chances are he has used little / if any of the allowance anyway.

I'm not putting an argurment out in favour of S.23 in the case of the O.P. because I don't know the town, but maybe the arguments against S.23 are not as cut and dry as outlined in previous posts.
 
My understanding is that the 10 year rule would not be a problem to the new owner as any unused allowance at the end of the 10 years could be carried forward (indefinitely) for w/o against Irish rental income.
 
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