Case study Selling house, becoming landlord or leaving it vacant?

MaybeLandlord

Registered User
Messages
4
Age: 34
Spouse’s/Partner's age: 32

Annual gross income from employment or profession: 90k
Annual gross income of spouse: 32k

Monthly take-home pay:
6200 net between the two of us after tax, heath insurance contributions and pension contributions, including AVCs (taken from salary directly)

Type of employment: Private employers, full time

In general are you:
Saving - around 2800-3000e per month.

Rough estimate of value of home: 300k
Amount outstanding on your mortgage: 125k over 22 years

What interest rate are you paying? 3.5% , paying 679 euro per month at the moment

Other borrowings – car loans/personal loans

None

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

Savings and investments:
120k savings. Recently sold all investments (shares) in preparation of buying new house

Do you have a pension scheme?
110k in pension pot (defined contribution)
6% employer contributions + 5% own contribution + around 600 euros/month AVC

Only 1k in my wife's pension pot (she just started pensionable job).
11% employer contributions + 6% own.

Do you own any investment or other property? No

Ages of children: No children but planning to have from next year

Life insurance: Just the one coming with mortgage

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

We're in the process of trading up to a new house for various reasons. We're in the fortunate position where we got mortgage approval without having to sell current house. This was initially to be able to reduce the stress of moving, by allowing a few weeks between closing on new house and selling existing house. That said, given existing market property market and the fact we're approaching winter which is a bad period to sell, we've been running into the possibility to potentially use the existing property as an investment property, instead of selling it.

We're not big spenders by nature, our ultimate dream would be to retire early - a few years before the normal retirement age.

We'd like some additional opinion here as we're completely new to being a landlord, and have been reading nightmare stories about being a small landlord... All of my knowledge is based on reading this forum, propertypin, and some books.

Existing house: Large 3-bed terraced house in Meath, it was bought in 2014 for 230k, and therefore if we hold it for at least 7 years (until 2021), we would not pay CGT on it as an investment property. Current value is 300k.

It would be going at 1800-1900e / month on the rental market at the moment based on estate agent and similar properties in the same estate.

We're either planning to sell it in the next 6-9 months, or to rent it out at least until 2021 (7 year period to avoid paying CGT).

New house (where we're moving to): 475k , deposit of 95k (20%) from savings. Mortgage: 380k over 30 years at 3.2% => 1650e per month (actual cost: interest around 1000e per month in first month).


Scenario 1: We put the existing house on rental market, at least until 2021 (and review market at that point)


Assumptions (conservative):

1. Renting for 11 months out of 12 per year (1 month vacancy per year)

2. 10% management fees (we want an agent being the main contact for the tenants to avoid any hassle, we're very busy with our jobs - I'm reading that this usually cost 10% of rent)

3. 2000e/year expenses (insurances including rental income protection, repairs, ...)

4. Tax paid at 51% on rental income.

5. Rent income is likely going to drop in a few years time as supply increase, assuming a more realistic 1500e/month, instead of current 1800-1900 e/month.

6. Average of 350e/ month in interest to simplify (actually dropping as capital repayment are made)

=> ~average of 4250 euros gain after tax per year / 12 = 354 euros net per month from renting out the house, mostly going in capital reduction through mortgage repayment. Potentially higher on short term as rent are higher.
- Actual gain may be higher, as we would put most of this money to cap AVC to 20% of our gross salary (extra 12k per year in AVC, which is almost the full gross rental income) to minimize tax intake, and this is aligned with our overall life goal of retiring as early as possible.
- Assuming a property price increase of 4% per year over next 4 years, the property would be worth around 350k (that's equivalent to an extra gain of 1041 e per month, on top of rental income).


Scenario 2: We sell existing house in next 6-9 months.

Make an immediate gain of 300-230=70k (minus fees) and free up deposit put initially in 2014 and overpayments: around 175k cash in total. Put 150k of this as overpayment on new house:
475k - 95k initial deposit - 150k = mortgage of 230k over 30 years.
Mortgage: 230k over 30 years => 1000e per month at 3.2% (actual cost: interest around 620e per month in first year).

Net rental income from scenario 1 are almost equal to the extra cost of keeping existing house in extra interest repayment on new house. The only advantage of scenario 1 vs scenario 2 is around the capital increase which would account for more than 1000e/month extra if increase by 4% per year. Obviously, if property price market drop, scenario 1 is not as attractive.

Scenario 3:

Not fully considering this until writing this post, but we could actually also leave existing house vacant until 2021 and then sell it, given that most of the gain in scenario 1 are from property appreciation rather than rent income (the 51% tax is the killer here, no wonder there is a rental crisis). Obviously less hassle with potential bad tenants, less wear and tears, and less exposed to government policies in this area, that seem to go against landlords year after year.

Scenario 4:

Put money in other form of investments, but I'm more nervous about putting 150k as ETF / stock market than in a property as this is more opaque / less tangible to me. Also I think the return on property will be higher in next 4 years than stock market.
 

Sarenco

Registered User
Messages
6,853
the 51% tax is the killer here, no wonder there is a rental crisis.
It's actually even worse than that.

Because 20% of mortgage interest payments and LPT are non-deductible expenses, you will probably find that the taxman will actually take something closer to 70% of your projected (net) rental profits.

If I was in your shoes, I would definitely cash out the equity in your existing PPR and take out a lower mortgage (or make a lump sum overpayment depending on the timing) on your new PPR. You should also be able to get a lower mortgage rate with a lower LTV.

You would still have plenty of exposure to the Irish property market relative to your incomes and other assets.
 

RedOnion

can edit posts
Messages
6,027
Choice of keeping:
>500k in mortgages, exposure of 775k to property market. 2329 minimum in monthly repayments

Or selling:
230k mortgage, 475k exposure to property (PPR only), and some savings in the bank. <50% LTV mortgage @2.75% over 30 years is 940 per month.

If you're considering starting a family, I'd be considering selling. With mortgage repayments under 1k, on your salary, options up a lot of choices.
 

galway_blow_in

Registered User
Messages
1,779
your income is very high so it doesnt look great from a renting out POV to be honest , taxed to the eyeballs
 

moneymakeover

Registered User
Messages
697
On the other hand

Interest deductions will return to 100% in the next few years

You have a tax liability because you have an asset

Why offload an asset?
 

RedOnion

can edit posts
Messages
6,027
Another way of looking at this is if you didn't already own the house, would you buy it as an investment? I've ignored CGT here which might factor into your thinking.

If you had 175k in cash and your new house and 380k Mortgage, would you consider borrowing another 125k to invest in a 300k house that after tax will be cashflow negative?

Or pay most of the 175k off the mortgage?

If the answer is an absolute yes, you'd buy it, then keep it. If not, work through the reasons you wouldn't and you'll answer the question yourself.
 

llgon

Registered User
Messages
587
Because it would enable the OP to substantially reduce his liabilities (mortgage debt) and dramatically improve his cash-flow.

The OP doesn't need to improve his cash-flow, it looks clear that he is seeking a good investment for his cash.
 

Sarenco

Registered User
Messages
6,853
The OP doesn't need to improve his cash-flow, it looks clear that he is seeking a good investment for his cash.

And the better after-tax return, ignoring any possible capital gains or losses, would be achieved by applying the existing home equity against his new PPR mortgage.

There's also far lower risk with that option - not least because of the cash-flow position.
 

MaybeLandlord

Registered User
Messages
4
Thank you all. I think we are heading to sell the current house to minimize risk, in particular as I do not see anything going in favor of landlord in current budget announced today. We may rent it if we do not achieve the asking price.

One aspect around cash-flow tough. We could take an interest-only mortgage on the house (as the plan was to offload the house in 4 years anyways). It does not change much in term of overall risk, but that means a few hundreds per month in addition to salary which covers the extra mortgage repayments on new house, essentially a positive cash-flow, if I'm not mistaken.
 

llgon

Registered User
Messages
587
If you decide not to sell soon I don't see why you think you should try to improve cash-flow. You are currently saving more than enough to cover increased mortgage payments. Instead of reducing a mortgage you are paying 3.5% interest on, what benefit will you get by going interest only?
 

MaybeLandlord

Registered User
Messages
4
decide not to sell soon I don't see why you think you should try to improve cash-flow. You are currently saving more than enough to cover increased mortgage payments. Instead of reducing a mortgage

I agree in current situation. I believe some of the posters above alluded to a potential cash-flow problem if things go sour (bad tenant, losing job, etc).

That said, the main advantage of going interest only would be to use the money to diversify from property market, instead of using sum of money to pay down mortgage.
 

Sarenco

Registered User
Messages
6,853
Going interest only won't reduce your exposure to the property market - it just defers repayment of the mortgage.

Are any mainstream lenders actually doing interest-only loans at the moment?

You're right though - there's nothing in today's budget for residential landlords.

Given the decision to reduce the CGT exemption holding period from 7 to 4 years, you would probably be well advised to list your current PPR for sale ASAP - try and get out ahead of the pack.
 

MaybeLandlord

Registered User
Messages
4
It's a tough decision. Are you mainly recommending to sell now to reduce risk in term or property price / bad tenant? Is there anything else I'm missing.

I took another look tonight, and again aligned with our goal of retiring as early as we can with a modest but liveable income:

- Take all the extra money from rental -> put it in AVC to max out 20% contributions. That significantly reduces the tax paid on that money. 8-10k per year in AVC over 4 years. (40k)
(I know that it's not on that money in particular as opposed to our full income, but for some reasons we find it comfortable to think that we end up with same level of living as now from our salaries, while significantly contributing extra AVC through rental income cash flow.)

- Assuming a conservative 4% property price increase over the next 4 years (300k->350k => 50k)

- Extra interest cost in mortgage on new house over 4 years by delaying making a lump sum of 150k: 20k

=> we're better off by 40k + 50k - 20k = 70k after 4 years by keeping existing property and renting it out. 1458 per month after tax better off. We could even push this further by then making a lump sum payment of 200k (instead of 150k if we sell now) on mortgage in 4 years time (that knocks off mortgage duration by 3 years in total compared to making lump sum of 150k immediately).
 

Sarenco

Registered User
Messages
6,853
No, I am recommending that you sell so you can use the home equity in the purchase of your new PPR. That will reduce the size of the mortgage you will need and that should provide a better after-tax return on your capital, ignoring any possible capital gains or losses.

You won't get tax relief on contributing rental income to a pension and retaining your existing house as a rental will reduce, not increase, your cash flow.

FWIW, I don't think 4% pa capital appreciation is a particularly conservative assumption - over the very long term property prices basically track inflation.
 

RedOnion

can edit posts
Messages
6,027
In the OP, you're making 2 conflicting assumptions:
1. That supply will increase and rents will fall, and
2. That property prices will rise.

I don't want to speculate on what'll happen with property prices, but the above statements are at odds with each other. If rents fall, so too will property prices (all other things being equal and all that!)
 
Top