Key Post Should I keep my old home as an investment?

Discussion in 'Mortgages and buying and selling homes' started by Brendan Burgess, 16 Mar 2010.

  1. Brendan Burgess

    Brendan Burgess Founder

    This may well be of academic interest to most people as they won’t be able to afford to buy a new house without selling their own. But for those who do have the option, here are the issues to consider

    A typical question
    I have a house worth €300k on which I have an €80k mortgage.

    I have €100k on deposit and I am borrowing €500k to buy a house for €600k.

    I don’t need to sell my old house. Should I keep it as an investment?

    If you don’t sell your house…
    House values|€900k
    If you sell your old house and pay off the loan
    house value|600k

    Look at it as a separate investment decision…

    If you owned a house worth €600k with a mortgage of €280k, do you think that borrowing €300k to buy an investment property would be a good idea?

    Evaluate this like any other borrow to invest decision.

    What is your view of medium and long term property prices?
    What is the rental yield on the property?
    Does the rent less expenses cover the interest on the loan?

    A common mistake which people make is as follows:
    I can get rent of €800 a month.
    The repayments on my €80k mortgage are only €100 a month.
    So I am making a profit of €700 a month.

    If you sell the house, you can pay €220k off your mortgage, so you will save interest on €300k. You must compare the rental income with the cost of borrowing €300k.

    If the new mortgage is costing you 4%, then the real cost of keeping the property is €12,000 per year or €1,000 per month.

    What are the risks?
    You may find it difficult to rent out the house.
    You may get a difficult tenant who doesn’t pay rent and wrecks the house.
    House prices may fall.
    Interest rates may rise.

    Or you might be unlucky enough to get hit by all 4 of these factors

    Are you comfortable with the level of borrowing?
    Borrowing to invest is risky.
    You have to be able to handle the repayments on the loan if the income from the investment is not as good as you had planned.
    What happens if you lose your job?

    Having such high borrowings restricts your capacity to borrow more. If you have borrowings of €280k on a house worth €600k, and you need to borrow for something else, the banks will be far more likely to lend to you than if you have €580k worth of borrowings. You might need to borrow in the future to fund a career break, to build an extension or to buy a holiday home. Having a low level of borrowings is a great place to be.

    A €600k exposure to the property market is enough for most people
    If house prices rise over the medium or longer term, you will benefit anyway from the increase in value of your home. The additional return on the €300k might not be worth the risk.

    If you are prepared to borrow to invest, are there better investment options?
    It is more tax efficient to invest in your pension. If you are not maximising your pension contributions, you should consider doing so.

    Income Tax consequences of retaining your home as an investment

    Let’s say that the rental income is €800 per month| €9,000
    The interest paid will be say 5% of €80k or €4,000
    You can claim tax relief on only 75% of this| €3,000
    So your taxable income will be |€6,000
    Assuming a 50% tax rate|€3,000
    Although you should view yourself as having a €300,000 mortgage, you can only claim tax relief on the existing mortgage. So the profit and loss could well be

    Rental income|€9,000
    Interest @5% of €300,000|15,000
    Stamp duty clawback
    If you got First Time Buyer's relief when you bought your house and you sell within 5 years (check), you will have to pay stamp duty.

    Capital Gains Tax consequences of retaining your existing home as an investment

    Any capital gain on your home is tax free. So let’s say he bought it for €200k ten years ago. You have a tax-free capital gain of €100k.

    Now let’s say that you hold it for a further ten years and sell it for its current value of €300k. Revenue will split the gain over the 20 years and so half the gain or €50k will be subject to CGT at 25%. So, lthough you will have no real gain for the next ten years, you will end up with a Capital Gains Tax bill.

    If you are prepared to invest €900k in property, consider trading up to a €900k home
    You will have a much nicer house.
    Any gain will be exempt from CGT.
    This would make particular sense if you are planning to trade up again in the next ten years. Trading up higher than planned now will save you a lot in stamp duty and transaction costs.

    The big downside of this is that if things get tough financially, you can’t sell your €300k investment.

    Lifestyle and other issues
    Managing a property is work. If you enjoy this type of work and have the time for it, this won't be a problem. But if you have a busy life, you may not have the time for managing your property and it will suffer.

    There are also hassles with the PTRB and making tax returns.

    This is an update of this thread from 2004
  2. Brendan Burgess

    Brendan Burgess Founder

    Arguments put forward in favour of keeping your property as an investment

    The house is my pension
    As of March 2010, it is still much more tax efficient to invest through a pension fund.

    I have already paid the stamp duty and acquisition costs.

    My kids can stay in it when they go to college
    This is only really valid if the kids are within a few years of going to college and the house is conveniently located close to the college they are going to.

    I have a very cheap tracker mortgage which I would lose if I sell the house.
    Probably only relevant if you have a fairly large mortgage.

    Property prices are artificially low now and are bound to recover – especially if you take a long term view
    Many are predicting that house prices will fall further. But in reality, no one can predict property prices.

    If you do decide to keep your house as an investment...

    Pay off your new home mortgage before you pay off the investment mortgage. You get tax relief on 75% of the interest that you pay, whereas you will probably get no tax relief on the interest being paid on your home. If possible, try to get the investment mortgage on an interest only basis and make bigger repayments off your home mortgage.

    If you change your mind and decide to sell, sell it within 12 months of moving out for CGT purposes.
  3. Howitzer

    Howitzer Frequent Poster

    I can't believe the amount of people who don't get this. In an "uncertain" market the definate liability outways the potential gain.

    In fact the issue may be worse (or better) than you describe. CGT is now 25%. A couple of years ago it was 20%. 15 years ago it was 40%. Who knows what it will be in 10/20 years time. The rate you use to determine your liability is the one in use at the time.

    What you do know is that your liability if you sell now, or within 12 months, is 0%.
  4. Brendan Burgess

    Brendan Burgess Founder


    Your reply got me thinking. Is there an argument for keeping a house which has not increased in value?

    Example 1 - no increase in value

    Say I bought five years ago for €300k and it's still worth €300k.

    Let's say I sell it after 5 years for €400k.

    The gain will be €100k, but the apportioned gain will be only €50k.

    So the effective rate of CGT is 12.5%.

    Example 2 - fall in value

    Cost 2 years ago| €400k
    Value today|€300k
    Sell in 5 years for |€400k
    So there is no Capital Gain.

    It's probably academic as anyone who has lost €100k over the past two years would not be able to hold onto their house as an investment and buy a new house.
  5. Howitzer

    Howitzer Frequent Poster

    Well, as you say, the issue is fairly academic now except for those with a lot of equity still in the property at todays value.

    What isn't academic to someone with a large amount of equity is the tax free gain they could accrue today. You're not presented with many situations like that very often.

    Which brings another point along the same lines. Your example assumes no increase in values yet still results in a CGT liability at the prevailing rate of the day. If the property was to DECREASE in value over the period you would also have a CGT liability.

    The amount of times I made these particular points on this forum in response to this exact same question getting posed over and over again just beggars belief.

    Well at least it wasn't my money.
  6. Brendan Burgess

    Brendan Burgess Founder

    Hi Howitzer

    If you provide a link to a particularly good post on the topic, I will include it.
  7. Robinbanks01

    Robinbanks01 Registered User

    Looking for a bit of advice on options on moving/selling or renting current house?

    Original Loan Amount 317,500.00

    Product Tracker Variable ECB + 1.25%

    Loan Term 35 Years

    Maturity 04-Oct-2041

    Mortgage Repayment 1,160.00

    Interest Rate 2.750%

    Outstanding Balance 281,268.13

    House Value € 150,000

    Negative Equity € 130,000

    Joint Income € 110,000

    No other personal loans

    Had been overpaying Mortgage by € 700 a month but decided to switch into savings account. Hope to have about € 50,000 saved by 2015

    Could we possibly rent current house and get second mortgage?