Sell or keep Investment Property

tunnellight

Registered User
Messages
21
Age:40
Spouse’s/Partner's age:42

Annual gross income from employment or profession: 80,000
Annual gross income of spouse: 90,000

Monthly take-home pay €3,600 ( take some parental leave )

Type of employment: Employee

In general are you:

(b) saving? ~500 per month

Rough estimate of value of home €650,000
Amount outstanding on your mortgage: €470,000
What interest rate are you paying? 2.3%

Other borrowings – Mortgage on second property , €213,000

Do you pay off your full credit card balance each month? N/A
If not, what is the balance on your credit card? N/A

Savings and investments: €10,000 savings

Do you have a pension scheme? Yes , 5% employer contribution , 10% by me , ~50K in pot

Do you own any investment or other property? Yes , apartment worth ~ 230K

Ages of children: 5 & 7 , childcare 400 per month

Life insurance: Yes 240K in event of death


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

I have an apartment , bought in 2007 for 310K . On a tracker mortgage of ECB 2.15%
It is rented at €1K per month , max allowable under RTB rules , but significantly ( 35% or so ) under market rates.
Mortgage repayment is €1,130 , Interest portion at the moment is €435 per month , service charges are €600 pa .
After tax is paid , the negative annual cashflow to me is ~€3,000.
My tenants are good , very little hassle , but obviously things crop up from time to time , calls re washing machines etc -

I am a reluctant landlord , I have been renting out the property for the last ten years or so , as I couldn't sell due to negative equity.
I could sell now , and would probably clear 10/20K ( I am not sure how much of an effect the below market rent , will have on the sales price )

I wonder would I financially be better off to increase my pension contribution by the amount I am putting towards the mortgage on the rental.

The things stopping me are

* If I die , age 66 , my kids get nothing from my pension. If I had the apartment , they would inherit that.
* If I put a little extra towards the rental apartment mortage , I could quite easily have it cleared in 15 years time , allowing me to cut back to part time work , in my mid fifties

The issues I forsee are

* Risk of interest rates rising - though I think I can mitigate this by offsetting agaisnt tax bill
* Potentioal govt legislation on the right of landlord to sell

Any opinions ?
 

NoRegretsCoyote

Registered User
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3,486
* If I die , age 66 , my kids get nothing from my pension.
I think it gets inherited minus a flat tax of 30%, but open to correction on this.

Do you have a pension scheme? Yes , 5% employer contribution , 10% by me , ~50K in pot
This is a pretty low pension for someone of your age and income. You are missing out on tax relief on contributions by topping up your mortgage like this.


Your tracker rate is not great either. I would sell up and prioritise the pension.
 

Paul O Mahoney

Registered User
Messages
1,384
I'd get rid of it , looking at your figures itll wipe its face, and as you'll have a few bob extra annually beef up your pension by the maximum amount.
 

Duke of Marmalade

Registered User
Messages
3,485
I think it gets inherited minus a flat tax of 30%, but open to correction on this.
Just on this narrow aspect. Let us say the choice is between paying €100 off your mortgage and net €100 into your pension. The net €100 is in fact €167 gross. Death at 66. €100 inherited in case of mortgage and €117 (167 x (1 - 30%) in case of pension.
On your tracker mortgage rate, do you mean ECB + 2.15%; that seems very high.
 

tunnellight

Registered User
Messages
21
Thanks for the replies guys .
Yes , the tracker is not good rate . It is ECB + 2.15%.
Am I being over simplistic when I look at it like below .....
It is reasonable to think I will have a gross rental income of say 15k from this in 20years when the mortgage is paid off .=I would be aged 60.
Cost to me is 3.5k pa.
If I want to save enough to buy an annuity that will give me 15k pa , and I plug into a passion calculator , I've got to save 25% salary , so 20k pa , after tax , 10k pa every year until I'm 65.

I know there is more risk , more uncertainties with the property, but am I missing something on the sums
 

Sarenco

Registered User
Messages
7,016
Based on the numbers you have given us, the after-tax profit on the rental seems to be less than €3,000 per annum.

IMO that’s an insufficient reward for all the risks and hassle involved with running a property rental business.

In your shoes, I would sell the rental property, apply any equity that is released against the PPR mortgage and start maximising tax-relieved pension contributions for both yourself and your spouse.
 

tunnellight

Registered User
Messages
21
Based on the numbers you have given us, the after-tax profit on the rental seems to be less than €3,000 per annum.

IMO that’s an insufficient reward for all the risks and hassle involved with running a property rental business.

In your shoes, I would sell the rental property, apply any equity that is released against the PPR mortgage and start maximising tax-relieved pension contributions for both yourself and your spouse.
It's worse - it's actually an after tax loss of 3k
 

Gordon Gekko

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5,895
No, Sarenco’s numbers are correct.

I’d look at it another way…there’s an after-tax return of around €3,000 a year on the OP’s circa €17,000 of equity in the property. That’s a return of almost 18% per annum…after tax!

Plus any future uplift in the value of the property is sheltered from CGT up to its original cost.
 

Duke of Marmalade

Registered User
Messages
3,485
I’d look at it another way…there’s an after-tax return of around €3,000 a year on the OP’s circa €17,000 of equity in the property. That’s a return of almost 18% per annum…after tax!
Not sure that is the best way to look at it. Imagine that the equity in the property was only €1 then the return on equity would be near infinite.
 

Gordon Gekko

Registered User
Messages
5,895
Not sure that is the best way to look at it. Imagine that the equity in the property was only €1 then the return on equity would be near infinite.
It would, so with a long-ish term time horizon, why would you sell it.

Of course, prices could fall, but with a near infinite return on equity that’s exactly how to look at it.

Would you prefer €1 or €3,000 a year after tax in perpetuity?

Obviously the latter is not without risk, but in order to earn returns, you have to take some risk.

That mix changes over time though as the mortgage is paid down.
 

Sarenco

Registered User
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7,016
It's worse - it's actually an after tax loss of 3k
Be careful not to confuse profit and cash flow - bear in mind that at this stage the larger part of each mortgage payment is a repayment of capital (aka saving).

@Gordon Gekko is absolutely correct when he says that the rental is currently producing an excellent return on equity and any uplift in the rental's value would be tax-free up to the original cost.

However, a rogue tenant or a major repair job could put you in real financial difficulty. IMO it's simply not worth the risk - having regard for your overall financial position.

Therefore, in your shoes, I would sell the rental and concentrate on properly funding your pension.
 

Gordon Gekko

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5,895
I don’t disagree with Sarenco’s analysis at all.

I just think that an after-tax return of 17.64% per annum is adequate compensation for those risks.

But the analysis will change over time as the debt is paid down.

With €170,000 of income coming into the household, I’m struggling to see why it has to be an “either/or” in terms of your pension funds versus the investment property. Where’s all the money going? I’m just surprised that €3,000 a year of a ‘subsidy’ (which it isn’t) or €250 a month is moving the dial.
 

Duke of Marmalade

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3,485
I take @Gordon Gekko 's point that why don't you have both?
Now I want to sort out this confusion on your cash flow. In terms of the property it seems to be currently c. negative €5k being €3k net profit less €8k mortgage principle repayments. But then we see that you have 500 p.m. savings so I am taking this to be your true net "cash flow".
Now I am making the assumption that you will want to keep up this "nest egg" 500 p.m. (possibly as an allowance for depreciation of 2 cars) so that in pension vs property terms we are talking about a negative cash flow of €5k to play with. This will increase over time as the tax relief on interest falls so to approximate for this let's say €5.5k p.a. at stake.
From the figures given I estimate the outstanding term on the mortgage to be 20 years.
Choice:
(1) Continue current arrangement: at age 66 you have a property worth €340k (allowing for 2% inflation and netting for cgt) and mortgage paid off plus a pension fund worth net c €30k (€6.5k invested for 6 years after mortgage paid off) i.e. a total of €370k
(2) Pay into pension:
Gross pension payment: c.€9k
Pension fund at retirement c. €530k (assuming 6% p.a. return)
Tax free lump sum: c.€130k
Remaining pension (taxed at 48% ) c€200k, (taxed at 24%) c. €300k
Total €330k (if taxed at 48%) or €430k (if taxed at 24%)

The unquantifiables are obviously:
CGT - a sale of the property would incur CGT though retaining it for your estate avoids that
house price inflation
growth in pension fund assets
some estate planning advantages with your ARF
hassle factor of owning an investment property
The biggie is what marginal tax rate do you envisage paying on your pension?

I'm afraid I have to abstain in my vote:confused:
 
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tunnellight

Registered User
Messages
21
Thanks guys .
To address a few questions .....small pension pot is due to fact that I only started it three years ago , was getting house deposit together until then , and prioritised that . I intend ramping the % up now , as just recently completed house renovations - this took all free cash flow .

As for the relatively small amount of outflow for the investment property , this is true , and is not a major burden .
My fear is of the unknown , costly repairs required , or potential Govt legislation making it harder for LL to sell , interest rate rises in future.

If I thought I could stay as is , with current great tenants , I would keep the property , but I'd be afraid of getting bad tenants in the future.
I'd find that so stressful.

I actually rang an estate agent today , and it seems it may fetch a little higher price than I had thought .

I envisage paying 20% tax rate on pension . Don't forsee wanting or need ing more than 35k pa if mortgage has been paid off
 

NiallSparky

Registered User
Messages
36
I think you also have to consider that this property has been burdensome for you for some time due to being in negative equity. Property prices are quite high at the moment, would you not kick yourself if you were to hold on to the place (for quite a limited return vs pension investment) and it fall back into negative equity in a couple of years time if prices were to fall?
 

tunnellight

Registered User
Messages
21
I think you also have to consider that this property has been burdensome for you for some time due to being in negative equity. Property prices are quite high at the moment, would you not kick yourself if you were to hold on to the place (for quite a limited return vs pension investment) and it fall back into negative equity in a couple of years time if prices were to fall?
This x 100.
I have made my decision , it is going.
I guess I just wanted to make sure I wasn't missing some big financial trick by selling.
The peace of mind I will gain by offloading this burden is worth a lot more than any potential upside.
I really am not looking forward to serving notice to my lovely tenants , but I guess this just shows to me that I am not cut out to be a landlord.

Thanks all for taking the time to read , and comment.
 
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