Trading up and keeping PPR as Rental for Future

Gordon Gekko

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Hi @Gordon Gekko

It's a point in time comparison.

The various inputs (rents, mortgage outstanding, etc.) are dynamic so if you run the same analysis again in, say, five years time you will get a different result.

Bear in mind that the mortgage balance on the rental also reduces over time. Taken on its own, that is likely to reduce the advantage of maintaining the rental relative to paying off the PPR mortgage over time.

I think that the best approach would be to build a proper model for these scenarios which plots various ‘points in time’ based on certain assumptions.

I do think though that there’s a fundamental error in our analysis of these cases.

The interest saved in respect of the smaller PPR mortgage decreases to zero over a fixed period of time.

The rental income, on the other hand, should increase over time and should exist forever.

If I crudely compare the €2,000 that I could save this year on my PPR mortgage versus the €2,000 that I might make from a rental property, it’s not a valid comparison. One is shrinking and the other is growing; is it not a ludicrous comparison?
 

Gordon Gekko

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Put another way, “things” tend to be valued on the basis of the present value of their future cash-flows.

How can an inflation-proofed and growing perpetual income stream be worth less than a decreasing income stream that has a finite lifespan?

Intuitively, if both yield, say, €2,000 a year today, the rental income is worth way more.
 

Ndiddy

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with a baby due early next year, if this coincides with purchase, won't the banks consider your purchasing power diminished if partner is on maternity leave and then take the child into account for calculating affordability?
 

_OkGo_

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Put another way, “things” tend to be valued on the basis of the present value of their future cash-flows.

How can an inflation-proofed and growing perpetual income stream be worth less than a decreasing income stream that has a finite lifespan?

Intuitively, if both yield, say, €2,000 a year today, the rental income is worth way more.

That is a fair point but in this instance it is not a straight €2k gained vs €2k saved. The rental income does not translate to rental profit because of the large overall debt and low initial equity, roughly 18% - 200k/1.1m. Depending on interest rates and rental income/costs etc, it would not be a net contributor to their wealth until their total equity is somewhere at or above 30-35%. The sooner they add that 100-150k of equity from their own salary the better but in the meantime it is high risk for very low reward.

I think that the best approach would be to build a proper model for these scenarios which plots various ‘points in time’ based on certain assumptions.

That is exactly what is needed, even at 5 year intervals it would give a good indication of how it could benefit overall by keeping or selling.
 

Sarenco

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I think that the best approach would be to build a proper model for these scenarios which plots various ‘points in time’ based on certain assumptions.
Predicting future interest rates, rents, taxes, etc., is fraught with difficulty.

IMO the far better approach is to review an investment from time to time - on the basis of the facts that are known at that time.

A rental property can obviously be acquired or a PPR mortgage can be paid down at a later point in time - there is no logical reason to make the decision for "all time" based on some projection of an unknowable future.
 

_OkGo_

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Predicting future interest rates, rents, taxes, etc., is fraught with difficulty.

Yes it is but at least it would give you a sense of risk and highlight some key indicators as to stay invested or sell up. It should be reviewed regularly based on factual info but you can also be prepared for different scenarios in 5 years such as: Reduced rent, increased interest/costs, reduced salary, changes to personal expenses such as additional childcare. You can even model the positive impacts, maybe a sudden increase of xx% in houses prices would justify cashing in on the capital gain instead of holding out for rental income

Planning for those scenarios would give you confidence to make the right decisions at any stage to keep or sell so that it is not the 'all time' decision. OP does not have to stay invested for the next 25 years but they can prepare for a few warning signs that if ......... happens, its time to sell
 

Sarenco

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Yes it is but at least it would give you a sense of risk and highlight some key indicators as to stay invested or sell up.
It's really not rocket science.

Either the capital tied up in the rental is producing a sufficiently higher after-tax profit than the interest savings that could be achieved by cashing out the equity and applying against the PPR mortgage. Or it's not.

There's really no need to model scenarios - it's a simply question of fact that can be revisited at regular intervals.
 

_OkGo_

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I disagree, it's not rocket science to plan for a few simple scenarios either. It would be foolish not to know the risks involved when you are potentially taking on 900k of debt.

There is an obvious cash flow risk because they will use up all of their liquidity in the process. What if their salaries are reduced temporarily or for an extended period? There is a simple way to limit that risk by taking out longer term mortgages to reduce the minimum payments in case of a salary drop while planning to overpay if salaries remain constant.

It's not just the 80k that impacts the decision, its total debt and total equity, interest rates and more. OP is comfortable with some risk now knowing that investing in their total equity will make it profitable in a few years so it's fairly reasonable to plan 4 or 5 years ahead. If the decision was based on today's facts only then its a definite sell. But if the OP has a longer term plan and is aware of the risks then they should keep it
 

Sarenco

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You can identify risks today, without any artificial modelling of an unknowable future.

The OP's decision is really very simple - is the projected €3,000 pa differential in keeping the apartment as a rental as compared with cashing out the €80k equity and applying as part purchase of the new PPR sufficient reward for all the risk and hassle of running a property rental business?

The decision can only be made on the basis of today's known facts. The future fact pattern is unknowable.
 

Gordon Gekko

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I’m not sure about that.

If the interest on my PPR mortgage is €X today and my rental income is €Y, I can be pretty confident that as time passes, X will decrease and Y will endure and in all likelihood increase.
 

_OkGo_

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The decision can only be made on the basis of today's known facts. The future fact pattern is unknowable.

By that logic, why would anyone ever invest in a pension? You don't know it will grow, you make assumptions and assume that you'll still be around to benefit from it.

How does it not make sense to plan for a few simple scenarios? It would be ridiculous not to. And there are a few knowable facts such as fixed interest rates that help you plan for 3/5 years time. How would it be a bad thing to know that if the SVR at the end of the fixed period goes up for some unknown reason that it would make sense to sell up? You don't need to know why it has gone up, only that this venture is not viable at interest rates above x.x%
 

Dublinbay12

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Things moved a little faster than expected and we found a house and went sale agreed (pending survey). I am now in the very real situation of making a decision regarding the apartment. In the short term baby is on the way, childcare costs won't start until 2022, spouse is on paid maternity leave for the majority 2021.

The figures in post 1 largely still hold, the new mortgage will be ~2300 pcm and current mortgage is 1800 pcm. I expect there to be ~3 months of paying double mortgage in the short-term.

I have roughly calculated that the apartment will be running with a slight positive cashflow on a monthly basis with an annual tax bill of 5k vs capital appreciation of 10k. There won't be a significant decrease in the tax bill until the mortgage is paid down significantly. I have based this on quite a low rent reflecting demand post COVID, but ultimately I can afford the 500pcm.

I think the rental environment for the apartment is better than the current selling environment. Ideally, it would be cashflow neutral, but that isn't the case. I also think our savings would not need to be as aggressive going forward, so can point more cash towards paying down mortgages to a better level.

Starting point our LTI is 4.18 but after 5 years (with no overpayment) it will be 3.73.

I still like the idea of eventually having an asset that is producing an income stream, vs what else could I do with that money given that in Ireland it is basically overfund pension or overpay mortgage.
 

Sarenco

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The figures in post 1 largely still hold
Are you sure that's the case?

Clearing rents have fallen back quite a bit in the docklands over the last quarter.
 

Dublinbay12

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Are you sure that's the case?

Clearing rents have fallen back quite a bit in the docklands over the last quarter.

Yes, my first post did not mention rents.

My apartment is technically not the Docklands and on average rents in my development have always been significantly less than those in the docklands.

Regardless, the rent pcm I have used in calculations reflected the low end and is not a million miles away the average quote in the OW report, and is in line with asking rents in my development. I do think my apartment will achieve the higher end of the market given location in, larger outside space and it has been refurbished.

Obviously the lower rent the less compelling of an argument there is to keep. However, I do think rents will bounce back as I am aware that the epxectation is the big tech companies will require their staff to work remotely for Ireland rather than their home country in 2022.
 

Sarenco

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Fair enough.

I'm seeing a lot of 2-beds apartments in D2/4 that would have rented for €2,200+ pre-COVID that are now struggling to achieve much more than €1,800pm.

Maybe you're right and rents will recover rapidly. I guess time will tell.
 

Blackrock1

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Things moved a little faster than expected and we found a house and went sale agreed (pending survey). I am now in the very real situation of making a decision regarding the apartment. In the short term baby is on the way, childcare costs won't start until 2022, spouse is on paid maternity leave for the majority 2021.

The figures in post 1 largely still hold, the new mortgage will be ~2300 pcm and current mortgage is 1800 pcm. I expect there to be ~3 months of paying double mortgage in the short-term.

I have roughly calculated that the apartment will be running with a slight positive cashflow on a monthly basis with an annual tax bill of 5k vs capital appreciation of 10k. There won't be a significant decrease in the tax bill until the mortgage is paid down significantly. I have based this on quite a low rent reflecting demand post COVID, but ultimately I can afford the 500pcm.

I think the rental environment for the apartment is better than the current selling environment. Ideally, it would be cashflow neutral, but that isn't the case. I also think our savings would not need to be as aggressive going forward, so can point more cash towards paying down mortgages to a better level.

Starting point our LTI is 4.18 but after 5 years (with no overpayment) it will be 3.73.

I still like the idea of eventually having an asset that is producing an income stream, vs what else could I do with that money given that in Ireland it is basically overfund pension or overpay mortgage.

Given that you arent making any payments into your own pension apart from employer contributions is this an either or scenario? because you can put another 10k in tax free give or take for this year (you will have missed the deadline for last year i think).

Id wager thats a better investment.

We were in a similar situation and we sold the apartment, and spent more on the house, 3 years later im satisfied that we made the correct decision but everyones circumstances are different.

theres also the changes that will come over the next decade, you may decide to have more than one child, if thats the case both of you working full time in senior roles becomes less and less appealing, and even if you do child care costs (full time) for multiple kids is expensive.
 

Dublinbay12

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Given that you arent making any payments into your own pension apart from employer contributions is this an either or scenario? because you can put another 10k in tax free give or take for this year (you will have missed the deadline for last year i think).

Id wager thats a better investment.

We were in a similar situation and we sold the apartment, and spent more on the house, 3 years later im satisfied that we made the correct decision but everyones circumstances are different.

theres also the changes that will come over the next decade, you may decide to have more than one child, if thats the case both of you working full time in senior roles becomes less and less appealing, and even if you do child care costs (full time) for multiple kids is expensive.

The house we have purchased which coincidently is in Blackrock will suffice for a growing family, and struck the right balance of size, location, price etc. I haven't focused too much on pension if I am honest. I think the best solution is to weather the storm and review the situation in a few years. As stated we won't have to save as aggressively and can start directing cash savings towards overpayment of mortgages and additional pension funding.

I hear you on that last part, I will need to sit down and effectively plan how much we will need in retirement.
 

presidenttttt

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Good thread, as suggested by someone on the somewhat similar query I had. Enjoying the debate about making the decision based on the snapshot or the long-term.

I would ask how relevant age is in the equation too? If young, and lucky enough to have a decent income, how do you account for the investment property and the fact it will sooner or later be cash positive, potentially very cash positive, for a period well in excess of the "short-term-pain"? OP may have this paid off at 45. The maths and perspective might be very different for someone expecting final mortgage payment at 65 years old?

I also wondered if OP expects salary to increase? For young high earners can they foresee their pension hitting the €2.0M limit? IF there if there is a possibility of OP maxing the pension in later life anyway does that change the usual logic of building DC pensions ASAP, and therefore encourage investment (not necessarily in property).
 

NoRegretsCoyote

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For young high earners can they foresee their pension hitting the €2.0M limit?

Over a thirty year horizon it's likely that it will be increased.

Maybe not in real terms, but I wouldn't start planning based on a number until you are 75% to the prevailing SFT and/or in your 50s.
 
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