Sell rental property to fund new build?

Age
38
Spouse 40

Annual gross income
Approx 90000 (base salary just 64,000)
Spouse: approx 55000 + 1 child's allowance

Monthly take-home pay
3290
Spouse 2900

Monthly costs of note
Paying 160 per week child care, 400 per month rent

Type of employment
Private Sector
Spouse: Primary School Teacher, permanent since 2005

Savings
We are saving 1500 - 1800 a month

Rough estimate of value of home
N/A we rent a property @400per month

Other borrowings
None

Do you pay off your full credit card balance each month?
Yes

Savings and investments:

Pension scheme
Fund 78000. I contribute 4%, my employer 10%, so approx 730 per month.
Spouse: INTO AVC fund value 21,000, approx 120 per month

Children
1 child, 18 months old, hope to add another sometime soon

Life insurance:
Just minimum cover on mortgage

Additional Context

• We need to move out of the rented property, it's not suitable for a young child really anyway and we hope to build a house on a site available to us
• The cost of the new build will be somewhere between 250000 - 300000
• From initial investigations we could get a second mortgage of between 100000-150000
• The low rent we are paying has allowed us to amass the savings we have to date

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

Hoping to get opinions on

• Overall financial health
• Would a second mortgage of 100000+ be taking on too much debt
• Should we consider selling rental property

Moonfleet said:

Should we consider selling rental property

Click to expand...

On this specific question, how much are you putting into it every year to fund the Mortgage after tax? I'm guessing your repayments are around 1,000 per month and your tax position is up to date?

You might get more direct answers if you provide a little more information.

I updated the info above with the monthly mortgage repayments which are 1019. Yes, our tax position is up to date. I'm not sure if that answers your question or not, please let me know any further details I can provide

You'll get conflicting views on the investment property. My 2 cents: if my quick calculations are correct it's costing you a few hundred a month out of your pocket, after rent is taxed, to pay the mortgage?
After tax and interest your yield can't be more than about 2%, while you'd be borrowing at close to 3% to borrow money to build. So it's a classic case of spending money to speculate on property price increases. If you believe the apartment will increase substantially in value, then hold onto it. On a positive note there is room for a large increase before you'd trigger a capital gains tax liability on sale.

I don't think you'd have huge borrowings, but you would be completely exposed to the property market, and things would get tight if you had vacant periods on the rental property.

PTSB have a tracker portability option, where you could move your tracker to the new mortgage, but they add 1% to the rate. You don't have a super low rate, but it would mean you'd have a fixed margin over ECB.

Thanks for your input RedOnion. I'm pretty financially clueless but trying to improve. I'll update with more accurate figures re. yield when I get them, but I think you're correct.
I'd be confident enough than in the short term the value of the apartment will rise somewhat, it's a nice property in an in-demand area, but there are more similar properties nearby coming on stream for approx 260000, which would obviously be competition and I guess would indicate a ceiling for any rise in value of my property?
If I was fortunate enough to be able to sell the rental property for the amount outstanding on the mortgage would it make the decision as to sell or not clearer, in your opinion?

I'll ask you the same question another way. If you didn't own the apartment, and someone offered it to you now for 238k, at a tracker rate, I bet you wouldn't touch it? There's a huge psychological element to making a decision to sell something at a loss - what if you miss out on a massive increase? It's easier to do nothing.

There's another element to this to consider. You gave a site, and 200k. If you don't already have planning, realistically you already have enough cash for 12 months: i.e. you'll get house well beyond water tight stage. You need the money for electrical, plumbing, kitchen etc. So would you rent it for another 12 months (or even 6 if the location supports short term lets) and sell when you need the money?

Hopefully others will chip in with their advice.

Apartment aside, you're in a great position to have such strong savings. At 18 months you realise how much money children can suck up - that continues!

I'd have a look at your life / illness insurance in case something were to happen to one of you. People tend to have no insurance at all, it be over insured, so talk it through with a good financial planner. Or do a separate post specific to that in the insurance forum and you might get some guidance.

Clear up decisions around mortgage, and set out a plan for retirement. I wouldn't be pushed about increasing pension contributions until you've a very manageable Mortgage, but don't leave it too late.

Thanks again RedOnion for your thoughts, plenty to think about. You're right, I wouldn't buy the apartment myself at that price, but then I'm still rattled at how my first dip into the property market went!

I hope it's ok to bump this, I have some more detailed figures and would like to see if these change any opinions given earlier concerning selling or holding on to the apartment

I spoke with my accountant and he informed me that over this tax year and the next will see a jump in the amount of tax we'll owe from rental income since, we were carrying forward significant rental and capital losses which will be gone in the next two tax years. Over the last few years we typically receive a small refund from revenue when we submit our returns

So taking tax year 2019 for example, assuming the current interest rate remains, the current rental income of 1250 per month is achieved, and say interest of 4000 euro paid off mortgage that year, we're looking at
15000 (rental income)
- 3000 (estate maintenance and management company charges)
- 500 (maintenance bills)
- 3000 tax relief on interest (4000 x 0.75)
----------------------------------------------------
8500 taxable income => approx 4000 tax bill per year or about 330 per month

This is for an apartment of estimated value of 210000, remaining mortgage of approx 235000 @ ECB + 1.68, in an area of strong rents but sale prices for apartments rising very slowly

Thanks

You're paying down 8k per year in capital?
In two years you will have to start paying tax at 4k per year.

You will presumably be equity positive by then due to the reduced loan and the increase in property prices and you can sell net profit.

By keeping the apartment for two years you get to utilise your losses.

Selling now I guess those losses are gone.

First things first

Moonfleet said:

• Would a second mortgage of 100000+ be taking on too much debt

Click to expand...

No. You would easily be able to meet the repayments, your loan to value on your home would be well under 40%. A permanent primary school teacher has completely secure employment, its not clear how secure the other spouse employment is, but unless there is a particular concern, I would think anyone who earns €90k in the private sector will probably not become unemployed long term.

That is the most important matter.

The second question is

Moonfleet said:

• Should we consider selling rental property

Click to expand...

Well you should always keep an investment under review, however I think that you should not sell this one at this time.

You are making a profit of €4,500 after tax on a negative investment.

From a cashflow point of view as far as I understand your post

Cash In €15,000

Cash out Mortgage €12,228 Maintenance etc €3,500, Tax €4,000 Total €19,728

Negative Cashflow €4,728. You can easily cover this cash flow from your salaries.

There is one more issue.

RedOnion said:

If you didn't own the apartment, and someone offered it to you now for 238k, at a tracker rate, I bet you wouldn't touch it? There's a huge psychological element to making a decision to sell something at a loss - what if you miss out on a massive increase? It's easier to do nothing.

Click to expand...

This is misguided.

The only choice they have is to sell now at a loss of circa €30,000, which would have to be financed, we have no idea how.

or

Keep the apartment and make a profit of over €4k per annum. They will have to cash flow that to the extent of €4,800 pa.

In my opinion its an easy choice. Opinions aside they cannot sell the apartment without increasing their debt.

There doesn't seem to be much logic in crystallising a capital loss by selling an investment if you don't have to.

Retaining the mortgage on the rental apartment would presumably limit the amount that you could borrow for the new build but that doesn't seem to an issue from what you've told us.

All told, it would seem to make sense to keep the rental, at least until you are back in a positive equity scenario and then you can reassess.

cremeegg said:

This is misguided.

The only choice they have is to sell now at a loss of circa €30,000, which would have to be financed, we have no idea how.

Click to expand...

Cremeegg, I completely agree with you, if that were what I had said.

However, my post is taken out of context. my post was a direct reply to the OPs hypothetical question "If I was fortunate enough to be able to sell the rental property for the amount outstanding on the mortgage..."

I never said they should sell with a shortfall on their mortgage.

You'd probably still disagree with me in that hypothetical situation, which is fair enough too.

Sorry that I haven't replied recently, I wasn't in a position to do so.

So, it appears my current position isn't bad relatively speaking. However I do have to bear in mind that the rent we are taking in for the apartment is ridiculously high at the moment, it was as low as €750 euro p/m at one stage. This, along with working for a European multi national, makes me nervous about how different our situation would be if we had a second mortgage and the country was feeling the negative effects of tax harmonisation, a major global stock market crash or Brexit

Anyway, thanks all for your input, it is very helpful for someone as financially ignorant as me.

One thing you didn't ask advice on was the new property. Please don't built a McMansion for a family of 2 + 2.

HaHa, hopefully not!
However I'm interested in what you mean by the word McMansion here. Are you using it in the typical way to describe an oversized house, built on a prominent site with no effort made to integrate it with its surroundings, with non vernacular proportions and finishes or since we're on askaboutmoney, are you using it in a purely financial sense and advising us not to put too much money into a house, probably too big for our needs, creating too much debt?

Moonfleet said:

Are you using it in the typical way to describe an oversized house, built on a prominent site with no effort made to integrate it with its surroundings, with non vernacular proportions and finishes or since we're on askaboutmoney, are you using it in a purely financial sense and advising us not to put too much money into a house, probably too big for our needs, creating too much debt?

Click to expand...

I would think that Bronte means 'all of the above'

I mean that the average family is now 2 + 2 and kids don't stay at home forever and that building a 4 or 5 bedroom home with 4 ensuites and another toilet plus a play room and a games room and a dining room that will never be used is stupid. Think outside the box and built something that is comfortable, easy to heat, putting the money into insulation and not having 5 bathrooms to spend your entire life cleaning is stupid. Having closed rooms to save on heating or to wait decoration until you get the money that I've seen in many cases is crazy. If you want advice about interior layout of a house I can supply that too. I've lived in mansions and tiny apartments so fire ahead. Nothing worse then being stone cold in a lovely house that you don't want to spend any more on oil in the winter.

Edit: with a one acre garden that will drive you insane to cut. But shure it looks lovely.

Moonfleet, have you talked to your bank about moving the tracker onto your new house?
In other words can you sell the apartment, cover the loss out of your savings and keep the tracker on the new house?

If you crunch those numbers you may be better off, notwithstanding the fact that you would be crystallizing a capital loss.
There's also something to be said for minimising your borrowing; debt limits your options in life.