Trading up and keeping PPR as Rental for Future

[DublinHead54]

Age: 33
Spouse’s/Partner's age: 32

Annual gross income from employment or profession: E135k (private sector) annual bonus 10%
Annual gross income spouse: E100k (private sector) annual bonus 10 to 20%
Monthly take home pay: E 11k
Expenditure pattern: General Savers but not overly strict

Rough estimate of value of home: E500k
Mortgage on home: E420k
Mortgage provider:
Type of mortgage: Fixed 2.6% expiring April 2021 - 1800pcm

Interest rate : 2.6%

Other borrowings: None.

Do you pay off your full credit card balance each month? No credit Cards

Savings and investments:
~4k monthly into regular saver accounts. I was overpaying mortgage by 500pcm but stopped recently to fund deposit.
~60k across instant access, regular savers and a small amount in shares that I am waiting until next tax year to sell.


Do you have a pension scheme?
Yes, company contributes 10%, I currently contribute nothing, I have a few other schemes from abroad totally around 100k.
Spouse 7.5% contribution pot is only around 15k.

Do you own any investment or other property? Yes, but just gone sale agreed, should net 45k post tax.

Ages of children: First is due early next year.

Other policies: No

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

- Due to the expanding family, we are looking to move to a house in the Dublin area, the price will be 600k to 800K (very top end of budget) and we will use all our liquidity to put a 20% deposit down.
- I am planning to keep the apartment (initially), is this too much risk? I would initially be carrying ~.0.8-1m in mortgage debt. The property I own is in the Grand Canal area and still has strong rental demand, I have estimated I will be cashflow negative between 2.5 to 5k per year initially. Our lifestyles are very manageable within our monthly income, however the childcare costs will add to that, so I am estimating monthly savings to drop by about 1500.

- My main question is that should I sell straight away as soon as I purchase a house or give it a few years to build up a bit more equity in the property? I think that purely on a numerical reason I should sell and not have the hassle of being a landlord but COVID has changed my mind. I think ultimately we will move rural to the likes of Waterford or Wexford and keeping the apartment in Dublin would be great to have to use for commuting when only required to be in the office a few days a week.

 

[_OkGo_]

So you know you will be cashflow negative which is fine because you can afford it but is the rental actually profitable to you? You will be carrying 500k of mortgage debt because of the rental. Assuming a similar 2.6% rate, it costs you €13k in interest. After all expenses and tax, would the rental net more than €13k. Even if it is slightly above €13k, do you really want all of that hassle to gain €1-2k gross. It is disproportionately high risk compared to your salary. With bonuses, you are taking home in excess of €250k, do you really want to tie up €500k to potentially make a risky <1% of your salary?

Besides, you will be cutting it fine to purchase anything above 600k. You almost have the 120k deposit savings, shares to sell and property sale profits but you will also need to pay solicitors, stamp duty, furniture costs etc. But if the house you like is upwards of 700k, then how long before you €140k deposits plus costs (budget for 20k).

Get rid of the apartment, buy the PPR you want now and then in a few years when you plan to move rural, reevaluate your finances and see does it make sense to then invest in a Dublin rental when your rural PPR would probably be less than €400k for the equivalent standard. The rental won't make sense until you have a lot more equity in your property

You are in a very similar situation to this thread. Salaries and property values are higher but I think you will end up coming to the same conclusion

 

[moneymakeover]

Why are you buying now in Dublin
If you think you want to live in Waterford

 

[sharkattack]

Don't have advice as such but just wanted to congratulate OP. Buying his/her 3rd house with a joint net income of 11k a month plus bonus and still only 32. I don't think you have anything to worry about no matter what patch you choose.

 

[DublinHead54]

So you know you will be cashflow negative which is fine because you can afford it but is the rental actually profitable to you? You will be carrying 500k of mortgage debt because of the rental. Assuming a similar 2.6% rate, it costs you €13k in interest. After all expenses and tax, would the rental net more than €13k. Even if it is slightly above €13k, do you really want all of that hassle to gain €1-2k gross. It is disproportionately high risk compared to your salary. With bonuses, you are taking home in excess of €250k, do you really want to tie up €500k to potentially make a risky <1% of your salary?

Besides, you will be cutting it fine to purchase anything above 600k. You almost have the 120k deposit savings, shares to sell and property sale profits but you will also need to pay solicitors, stamp duty, furniture costs etc. But if the house you like is upwards of 700k, then how long before you €140k deposits plus costs (budget for 20k).

Get rid of the apartment, buy the PPR you want now and then in a few years when you plan to move rural, reevaluate your finances and see does it make sense to then invest in a Dublin rental when your rural PPR would probably be less than €400k for the equivalent standard. The rental won't make sense until you have a lot more equity in your property

You are in a very similar situation to this thread. Salaries and property values are higher but I think you will end up coming to the same conclusion

This makes complete sense and what I am currently weighing up. I will have the costs and deposits sorted as we have a few more months savings plus bonuses to come in, but yes it will use up all liquidity. However, I should be building ~10k in Equity per year. I think although child care costs will be factor, we will still have some excess capital coming in over the next few years to overpay on the mortgage and build up safety nets again.

Why are you buying now in Dublin
If you think you want to live in Waterford

Due to Covid working remote and only commuting to the office a few times a month is likely to be a possibility. However this is unlikely to play out officially in my area of work for a few years and with kids to consider I am not sure I actually want to live down there but it is an option.

Don't have advice as such but just wanted to congratulate OP. Buying his/her 3rd house with a joint net income of 11k a month plus bonus and still only 32. I don't think you have anything to worry about no matter what patch you choose.

Thank you, I had some good budgeting instilled into me from an early age.

 

[_OkGo_]

However, I should be building ~10k in Equity per year.

True but if the net gain is not greater than the interest from the mortgage, then the equity is all coming from your salary. It could be costing you €11k of net salary to get €10k of equity. It would be like putting your savings in a deposit with a guaranteed loss. This is all hypothetical obviously and only you can put some real numbers to rental and expenses but you would have something like 17-18% equity in the your total property assets so it would be unlikely to be profitable unless the rents are very good.

Another thought is whether the apartment currently has a gain if sold. If sold now, you get the benefit of the cgt exemption on PPR. If you keep it and sell in 5-10 years, this gain will have some level of cgt due which further devalues the equity you think you are building in it.

 

[DublinHead54]

True but if the net gain is not greater than the interest from the mortgage, then the equity is all coming from your salary. It could be costing you €11k of net salary to get €10k of equity. It would be like putting your savings in a deposit with a guaranteed loss. This is all hypothetical obviously and only you can put some real numbers to rental and expenses but you would have something like 17-18% equity in the your total property assets so it would be unlikely to be profitable unless the rents are very good.

Another thought is whether the apartment currently has a gain if sold. If sold now, you get the benefit of the cgt exemption on PPR. If you keep it and sell in 5-10 years, this gain will have some level of cgt due which further devalues the equity you think you are building in it.

Thanks OkGo, I hadn't considered fully the Equity vs Cost of Salary. I paid at the very top end of the value for the property and I think right now I would be selling at a loss, but equally I can't predict when or if the value will fully recover. Based on the below and an Equity of 10k per year, I would be ~4k better off. I did the numbers with a conservative rental income based on the area and the apartment spec, but in Covid it is all up in the air.

If we do keep the apartment the rough strategy is to focus overpaying on the apartment mortgage rather than the new PPR to the point the apartment is cashflow positive. I will reevaluate each year, as our work life develops. This strategy would rather than overpaying into our pensions etc.

I think based on our incomes initially including childcare we can afford it. I really don't want the hassle of trying to sell our apartment and also buy somewhere with a new born. Also our boiler just packed in so one of the most expensive costs of being a landlord will be taken upfront!

I am just finding it hard to build wealth in Ireland, and I still think owning a property will pay off in the long run. I am taking the approach of running it as a business that is loss making in its first few years. However, I am also conscious that having a family will incur costs I have not even considered.

Apartment
Rental Income	26,400.00
Expenses	5,000.00
Interest	10,903.98
Taxable Income	10,496.02
Tax @ 52%	5,457.93
Mortgage Payments	21,852.00
Cashflow	- 5,909.93

 

[Sarenco]

If we do keep the apartment the rough strategy is to focus overpaying on the apartment mortgage rather than the new PPR to the point the apartment is cashflow positive

That would be a bad idea. Interest on the PPR mortgage is not deductible for tax purposes so that is the mortgage you should prioritise paying down first.

You are projecting an after-tax profit of €5,000 pa by keeping the apartment as a rental.

If you simply cashed out the €80k equity in the apartment and put it towards the house purchase, you would save around €2,000 pa in interest.

Is the €3,000 pa differential sufficient reward for all the risk and hassle of running a property rental business?

The rental would also be cash flow negative and this would appear to restrict you from maximising your pension contributions (which I would suggest is the best way to build wealth in Ireland).

 

[Sarenco]

I really don't want the hassle of trying to sell our apartment and also buy somewhere with a new born.

Buying and selling property is certainly stressful. No doubt about it!

Could I suggest that you park the trading up decision until after your arrival in the new year?

 

[_OkGo_]

If you simply cashed out the €80k equity in the apartment and put it towards the house purchase, you would save around €2,000 pa in interest.

Is the €3,000 pa differential sufficient reward for all the risk and hassle of running a property rental business?

Is it not worse than that though? To retain the apt as a rental (scenario 1), the OP is paying 23.4k in total interest. If OP moves to a 600k or 800k PPR, they only pay 10.4/15.6k interest. So lets assume they buy a really nice 800k PPR, they would be paying 7.8k less interest. The apt on its own is only generating 5k net so they are down 3k when viewed from their total financial position

Value	Scenario 1	Scenario 2	Scenario 3
PPR	600	600	800
Rental	500	0	0
Total	1100	600	800
Debt
Mortgage PPR	480	400	600
Mortgage Rental	420	-	-
Total	900	400	600
Interest	23.4	10.4	15.6
Extra interest
vs scenario 2	13
vs scenario 3	7.8

The rental would also be cash flow negative and this would appear to restrict you from maximising your pension contributions (which I would suggest is the best way to build wealth in Ireland).

I would take this approach too. Keep it simple, buy the nice house to suits your needs and increase your pension contributions. Review your situation in a few years if you still want to be a landlord

Separate question as well that may be relevant to OP's decision, how do banks view mortgage rates that were obtained as PPR but are now used as rental? Are mortgage holders contractually obliged to inform them of the change and can they then increase the interest rate closer to BTL rates? I assume that somewhere in the T&C's of a loan offer that the interest rate is based on the property being used as a PPR

 

[Sarenco]

Is it not worse than that though? To retain the apt as a rental (scenario 1), the OP is paying 23.4k in total interest. If OP moves to a 600k or 800k PPR, they only pay 10.4/15.6k interest. So lets assume they buy a really nice 800k PPR, they would be paying 7.8k less interest. The apt on its own is only generating 5k net so they are down 3k when viewed from their total financial position

Sorry, I can't follow your logic.

The way I look at it, the OP has €80k of equity in the apartment.

The choice is whether to deploy that capital in a risky business venture that might net an after-tax profit of around €5k pa or to cash out the equity and use it as part of the purchase price for the new PPR, thereby saving around €2k pa in interest payments on money he would otherwise have to borrow.

I assume that somewhere in the T&C's of a loan offer that the interest rate is based on the property being used as a PPR

Not generally. Danske had a provision to that effect in their T&C's but they were very much an outlier.

 

[_OkGo_]

So my logic is that it is not just the interest saved on the 80k equity. There is actually 300k of additional debt to maintain both properties so it is not just a 2k interest saved but rather a 7.8k saved by not having the extra 300k of borrowing.

In other words, yearly net salary is 132k plus 5k from rental but this comes at a cost of 23.4k interest. Basically their salary is at 113.6k before a single euro goes towards equity in either property.
Or, they can live in an 800k PPR with net salary of 132k at a cost of 15.6k interest. In this case, their salary is at 116.4k when they start contributing to equity. This scenario gets better if they buy for less than 800k

They would be roughly 3k better off by not dealing with the rental at all while also having the benefit of living in a nicer 800k PPR.

 

[DublinHead54]

Buying and selling property is certainly stressful. No doubt about it!

Could I suggest that you park the trading up decision until after your arrival in the new year?

Apologies I should have clarified, that this move would be done between March-August 21. I am just currently planning ahead, regardless of the scenario I end up choosing. I plan to be in a position where I don't have to sell the apartment before buying a house which we should be. This will ultimately remove any time pressure and as work life after COVID becomes clearer we may choose to move further out rather than buying in Dublin.

Thank you both @Sarenco and @_OkGo_ for the helpful insight, you have definitely provided additional viewpoints I had not previously considered to get the full financial picture.

Regarding the mortgage interest on PPR not being deductible, I wanted to pay off apartment quicker to turn it cashflow positive, but I see from a total asset perspective this would result in paying more interest.

 

[DublinHead54]

They would be roughly 3k better off by not dealing with the rental at all while also having the benefit of living in a nicer 800k PPR.

I have already regretted setting the upper bound of the myhome search at 800k! The difference in houses is quite substantial.

 

[Peanuts20]

There is another question here to consider, do you want the hassle of being a landlord? Also, with Covid and homeworking, is the demand for rental properties in that area going to continue, especially as new schemes come on line. Personally, unless you are intending on being a professional landlord and do nothing else, I'd sell.

 

[Gordon Gekko]

We look at a lot of these but there’s an aspect that doesn’t sit particularly well with me. Are we oversimplifying things and not comparing like with like?

The interest saving on home mortgage repayments that you don’t have is finite in that it has a fixed term and reduces to zero over time.

Rental income, on the other hand, is perpetual and, in theory, can exist and grow forever.

So the capital value of the latter is far greater than that of the former.

We look at these things through the prism of this year, but next year the jaws widen just a little and then a little bit more the year after.

We simply say “two grand saved versus two grand of risky income, sell it”, but one is forever and somewhat inflation-linked, while the other is decreasing each year.

I guess I’m not comfortable with the maths of it.

 

[DublinHead54]

There is another question here to consider, do you want the hassle of being a landlord? Also, with Covid and homeworking, is the demand for rental properties in that area going to continue, especially as new schemes come on line. Personally, unless you are intending on being a professional landlord and do nothing else, I'd sell.

I have been a landlord for the last 5 years, and had a relatively good experience. I live in a well built and managed apartment complex, I put in a high-quality bathroom, new floors, repaired outdoor space and soon to be a new boiler. I don't foresee there to be any major repairs required in the next few years. The apartment now stands out against the others available in the complex due to these upgrades so would be a more attractive option to similar at the same price point. On the rental potential, the apartment is located very close to the big Tech companies and close to all the amenities of Ballsbridge and a 20-minute walk to town. My understanding is that the tech companies even though have put work from home in place until July they will have to wfh in Ireland due to tax reasons from the end of the year. It is a two-bed apartment, so space for a home office. However, to account for the risk I reduced the rent in my calculations and included 5k annual expenses to account for management fees etc.

We look at a lot of these but there’s an aspect that doesn’t sit particularly well with me. Are we oversimplifying things and not comparing like with like?

The interest saving on home mortgage repayments that you don’t have is finite in that it has a fixed term and reduces to zero over time.

Gordon, I have considered it that way without doing the full maths I surmised it in my head simply as short term pain for long term gain. I have it in my head that for the first 10 years the apartment would be cashflow negative, then it turns positive and eventually I will have an asset of 500k with an income of ~30k (before tax). I am thinking off the future as I don't expect my income levels to remain consistent for the next 30 years until retirement.

 

[_OkGo_]

Are we oversimplifying things and not comparing like with like?

That is very true and we are simplifying it to year one and as OP has stated, he could treat it like a business that is loss making for the first few years knowing it will eventually be profitable. Based on the OP's cash flow, there is certainly scope for it to turn a nice profit.

I suppose one could go a step further and use the calculations above to estimate the total equity % at which the rental is break even or profitable (from total financial perspective) knowing that from there on it would have a positive impact on their wealth. While understanding that all equity up to that xx% is coming from your salary gives the OP a clear target and vision. With OP's salary, they could probably aggressively pay down PPR for 2-3 years to reach that number quickly ( probably in the 25-30% range) and from there on, the rental is marginally profitable and only a cash flow problem which they can handle

Getting the cheapest possible interest rate always helps too. UB are offering 2.2% 5 year fixed for high value mortgages above €300k so that will change the scenarios above.

I have been a landlord for the last 5 years, and had a relatively good experience.

Knowing this, you are already comfortable with all the risks of renting and you have the salary to fund your plans so then I think it boils down to whether you want to:
a) live in a 600k PPR while building your wealth with the rental or
b) live in the nicer 800k property that would give you other non-financial benefits, e.g. more space, better location, access to schools etc

At least you are in a healthy financial position to make that choice

 

[Sarenco]

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.

 

[DublinHead54]

Thanks all,

I am definitely looking at it from a point in time / short term vs long term.

I believe I can afford an 800k PPR on a monthly basis (2.5kpcm based on a 2.6% 640k deposit) and the banks are willing to lend that amount. Whilst I can afford the monthly payments, I don't have the Liquidity pool required currently to purchase + costs + safety net. I will get closer to it through another 6-12 months savings plus upcoming bonus. We have the option to approach family for a loan / gift but up to now we haven't had to and I would prefer to not to.