Hi guys,
I need some guidance thinking through whether as part of trading up to a new house it makes any sense at all for us to consider holding onto our existing house as a long term "investment". I have been through Brendan's key post on this topic but my circumstances differ somewhat from his example so Im not sure Im thinking everything through clearly
Background
Calculations
Following the logic applied in Brendan's key post I have the following breakdown of annual net profitability if we were to keep our existing house to rent (in Brendan's example he compares the house net profitability in a sell vs sell and take loan to take cover negative equity scenario but given we would pay off negative equity using savings that doesn't apply)
Rental profit before interest: 6926 (rent is approx 800 per month)
Mortgage interest at 3%: 7680
Tax:1867
Net profit(loss)after tax: -2621
From a cash flow perspective when I take capital repayments into account the negative cash flow per month is approx 678 and 8141 per annum.
Decision Making
At a negative cash flow of 8141 p.a it would take approx. just 4 years of us keeping the house and renting it to reach the same 30k outlay that we would have to take from our existing savings to cover the negative equity if we were to sell.
There is also an opportunity cost of keeping the house in that we would not be able to save on a regular basis - the cash flowing into the rented house would effectively be an investment.
Overall it seems to me that the key factor in evaluating whether to keep the house or not is the original amount we paid for it and the impact that original price now has on our monthly mortgage costs. (Theoretically) If we were to sell the house now and pay off the negative equity within 4 years we would have saved enough to buy back the house at a much lower price than we originally paid for it and the resulting mortgage cost at that point would be a little lower than the rental rate so at least at that point we'd have an investment that would be approaching profitable on an ongoing basis
Advice
Any thoughts on the above - from my perspective I feel like I haven't got a good handle on the key criteria to be taken into account when making a decision to sell vs keep and rent. Am I evaluating the opportunity costs correctly when considering a "keep the house as investment even though it will be a significant cash flow drain and hope that over the long term it appreciates back to where we bought it" vs just sell it and take the hit on the negative equity
I need some guidance thinking through whether as part of trading up to a new house it makes any sense at all for us to consider holding onto our existing house as a long term "investment". I have been through Brendan's key post on this topic but my circumstances differ somewhat from his example so Im not sure Im thinking everything through clearly
Background
- We have an existing private residence and we are planning on trading up
- Existing residence is likely in negative equity to the tune of 23-30k
- Current house value is likely 190k
- Existing residence is on a tracker mortgage at ECB+0.75%
- As part of trading up we do have the savings to pay off the negative equity on our existing home if needs be
- If we keep the house and rent it out the rent will not cover the mortgage repayments and associated costs but we do have the income to cover the negative cash flow impact (and the bank have already factored this into our mortgage approval for a new mortgage)
Calculations
Following the logic applied in Brendan's key post I have the following breakdown of annual net profitability if we were to keep our existing house to rent (in Brendan's example he compares the house net profitability in a sell vs sell and take loan to take cover negative equity scenario but given we would pay off negative equity using savings that doesn't apply)
Rental profit before interest: 6926 (rent is approx 800 per month)
Mortgage interest at 3%: 7680
Tax:1867
Net profit(loss)after tax: -2621
From a cash flow perspective when I take capital repayments into account the negative cash flow per month is approx 678 and 8141 per annum.
Decision Making
At a negative cash flow of 8141 p.a it would take approx. just 4 years of us keeping the house and renting it to reach the same 30k outlay that we would have to take from our existing savings to cover the negative equity if we were to sell.
There is also an opportunity cost of keeping the house in that we would not be able to save on a regular basis - the cash flowing into the rented house would effectively be an investment.
Overall it seems to me that the key factor in evaluating whether to keep the house or not is the original amount we paid for it and the impact that original price now has on our monthly mortgage costs. (Theoretically) If we were to sell the house now and pay off the negative equity within 4 years we would have saved enough to buy back the house at a much lower price than we originally paid for it and the resulting mortgage cost at that point would be a little lower than the rental rate so at least at that point we'd have an investment that would be approaching profitable on an ongoing basis
Advice
Any thoughts on the above - from my perspective I feel like I haven't got a good handle on the key criteria to be taken into account when making a decision to sell vs keep and rent. Am I evaluating the opportunity costs correctly when considering a "keep the house as investment even though it will be a significant cash flow drain and hope that over the long term it appreciates back to where we bought it" vs just sell it and take the hit on the negative equity