Should I sell 2nd house on tracker rate

[Max2017]

Hi.

I am looking for advice regarding selling a 2nd house on a tracker rate of .6 above ecb with BOS. It was rented for a number of years but now tenants have moved out and I am thinking of selling. We originally lived in it for 10 years but bought 2nd house 2014. It was rented for €1200 a month but could get more I would expect if rented again(1500)

Value of house 330,000(paid 310000 in 2003)
Mortgage 180000 @ .6%. €770 a month.

2nd house we are living in. Value approx 480,000. Mortgage 260,000. Rate 3.2% ulster bank. €1600 a month

Age 39
Partner age 35 (no kids)
Income €60,000-public sector
Partner €100,000. Private sector.


My question is am I better off selling the investment property and putting lump sum off current mortgage. We are not looking at moving from this house.

I am paying nearly half of rental income over to revenue so the tracker mortgage is of no benefit to me really. I have wrote to pepper/bos looking for a discount if i sold but was shot down. I am thinking that I don't really need the hassle of being a landlord into the future.

Advice would be appreciated.

 

[michaelm]

My question is am I better off selling the investment property and putting lump sum off current mortgage . . I am paying nearly half of rental income over to revenue so the tracker mortgage is of no benefit to me really . . I am thinking that I don't really need the hassle of being a landlord into the future.

I think you've answered your own question. If it was me I would sell and simplify my life.

 

[cremeegg]

Only you know how much hassle it is for you to be a landlord. Leaving that aside.

You have €180,000 of the banks money at 0.6% pa interest and you have invested it at 5.45%. That is a fantastic deal.

With €160k combined income and no kids you may not need the money or grief of being a landlord, but it widens your income base. If anything were to happen to you employment prospects or your partners, it would be nice to have an alternative source of income.

Yes you have to pay tax on the income, but you have to pay tax on all income. That's not really an argument.

The cashflow benefit to you in the short term of the investment is nil, but you are paying down the mortgage each month. It time you will have the full value of the property.

As this was your home, the CGT on sale will be less than on any other investment property.

I would certainly keep it. And keep the decision under review. If the value of the property increased, or if the interest rate you are paying increased, then it might be time to sell. Strangely both of these things could happen together in the next few years.

 

[Bronte]

I wouldn't sell. You'll be very glad you have it the day the mortgage ends. If you pay down your current mortgage you may end up then spending your savings now, when you have it locked away in the second property it's unlikely to happen.

What hassle have you had as a landlord?

 

[Brendan Burgess]

Here are the numbers:

As you have a gross income of €160k, it's unlikely that this €2k is worth the hassle.

From a CGT point of view, any increase in value will be taxed at a much reduced rate. For example, if you sell in after 7 more years, the CGT will be half of the going rate. That does make it quite attractive.

While BoS is not doing deals, this could change. At some stage they may sell off their portfolio and the buyer might give you a discount.

A second house is handy. It's probably inconceivable to you now,but some couples do separate. Having one mortgage free home is difficult to split. Having two homes with mortgages is much easier to deal with. I know many couples who have separated who would have loved to have a second property.

On balance, if it's not that much hassle, hold onto it, but keep it under review.

Yes you have to pay tax on the income, but you have to pay tax on all income. That's not really an argument.

It is an argument for two reasons. He should judge the investment on the after-tax income. But the alternative of paying off his home mortgage is like getting tax-free income. There is no tax on the savings of 3.2% interest paid.

Brendan

 

[michaelm]

A second house is handy. It's probably inconceivable to you now,but some couples do separate. Having one mortgage free home is difficult to split. Having two homes with mortgages is much easier to deal with. I know many couples who have separated who would have loved to have a second property.

I'm not sure a possible future separation is a strong reason to hang on to a property. Perhaps a bit like keeping your name to simplify things post divorce. May prove self-fulfilling.

 

[Sarenco]

As you have a gross income of €160k, it's unlikely that this €2k is worth the hassle.

Whatever about the hassle, I can't see how such a slim projected margin could possibly justify the myriad of risks associated with retaining the rental property.

Tenant default, interest rate rises, house price deflation, adverse tax and/or regulatory changes, increased rent controls, etc, are all very real risks.

If I was in the OP's position, I would definitely sell the rental property and apply the proceeds against the PPR mortgage.

 

[Bronte]

Here are the numbers:

The 5K interest cost of the equity, is this the first time you put that in the table? What's the logic on that? (I realise you get the figure from his equity of 150K @3.2% but why?

OP should use the 2K profit each year to built up a major repair fund. Or use it to overpay his home mortgage annually.

Also one should be aware that at a certain age taxes can be different. And there may be no PRSI etc. When you're over 65 (?) you have a larger allowance. You'll also probably not be making as much so your rental income may not be taxed at the higher rate.

 

[Brendan Burgess]

The 5K interest cost of the equity, is this the first time you put that in the table? What's the logic on that? (I realise you get the figure from his equity of 150K @3.2% but why?

Some people simply deduct the actual interest from the rent and say : "that is my profit" and it certainly is for tax purposes.

But when you have borrowings elsewhere, they are a real cost which he could reduce by selling the property.

Brendan

 

[Brendan Burgess]

I'm not sure a possible future separation is a strong reason to hang on to a property.

Agree fully, it is not a strong enough reason, on its own. But there are some reasons for selling the property and there are some reasons for keeping it. This is a good reason for keeping it.

Brendan

 

[cremeegg]

Brendan,

The €2,000 figure you calculate is after allowing for the opportunity cost of not reducing his home mortgage.

So its not a measure of profit, its a measure of how much MORE PROFIT AFTER TAX he would get from keeping the property.

I agree with your figures, but its important for a reader to realise that the conclusion, €2,000, is how much better off he would by keeping the property than by doing the next best thing.

Cremeegg

 

[Brendan Burgess]

OK, I thought it was clear, but I can see how the terminology is wrong and is confusing people. Does this explain it better?

Or is it just simpler to say

Your profit after tax is €7,000.

However, if you pay off your mortgage with the equity you would save €5,000.

So you are better off by €2,000 keeping the property.

 

[Sarenco]

I agree with your figures, but its important for a reader to realise that the conclusion, €2,000, is how much better off he is projected to be by keeping the property than by doing the next best thing.

I don't mean to sound pedantic but there's no certainty that the OP would be better off by €2,000 by keeping the rental - that's the projected margin over the return on paying down the PPR mortgage.

One or more of the various risks identified above could turn up and upset the projections - perhaps dramatically so.

 

[cremeegg]

I don't mean to sound pedantic but there's no certainty that the OP would be better off by €2,000 by keeping the rental - that's the projected margin over the return on paying down the PPR mortgage.

One or more of the various risks identified above could turn up and upset the projections - perhaps dramatically so.

It is true that the savings from repaying the mortgage are guaranteed, while the rental profit is just a projection.

I do think that Brendan's allowance of €3,000 for costs and vacancies builds in a certain resilience to the projection.

However if we look at the intangibles beyond Brendan's figures there is the possibility for capital gain in holding the property.

For every 1% the value of the property increases in the next 4 years the OP will make €3,300 tax free. This could well turn out to be a very significant gain.

 

[Sarenco]

It is true that the savings from repaying the mortgage are guaranteed, while the rental profit is just a projection.

That's really my main point - where there is only a marginal projected difference between a guaranteed return and a risky return, I would take the guaranteed return every time.

However if we look at the intangibles beyond Brendan's figures there is the possibility for capital gain in holding the property.

For sure. There is also, of course, the possibility of a capital loss over the holding period.