Useful spreadsheet re sell/retain property question

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Gordon Gekko

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The attached spreadsheet might be helpful in the context of a sell/retain question.

The mortgage is a tracker and the tenant is long-term in nature.
 

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  • Case V & Cashflow.xlsx
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Hi Gordon

A very good idea, although I am not sure I like your approach

I would have two columns Keep Property Sell Property

And show the impact on profit and cash flow.


And it's important to highlight how the profit is the income less the interest, and not the income less the mortgage payment which includes capital.

Brendan
 
Thanks Brendan

I look at the return on capital and compare it with (say) home mortgage debt.

So as the equity in the property grows, the return drops. At 5.5% now vs the 2.5% mortgage, it’s pretty clear-cut.

But as time marches on, it becomes less clear cut.
 
Excellent spreadsheet Gordon.

I wonder if the capital deployed figure is the estimated market value less the mortgage.

Should the market value be reduced by any capital gains tax payable on sale.

To what extent should you look ahead at the likely changes in market value. While no one can tell the future, it is hard not to have an opinion on the trend in property prices.
 
Hi cremegg / Brendan,

I agree that it could be simplified.

I’ve just taken the most recent sale of a similar property per the Register vs the outstanding mortgage.

There is no CGT payable in this case but it’s a good point.

Gordon
 
Nice spreadsheet Gordon.

One thing....to account for vacant periods would it not be better to calculate annual rent as monthly rent x 10 instead of 12?
 
Firefly said:
Nice spreadsheet Gordon.

One thing....to account for vacant periods would it not be better to calculate annual rent as monthly rent x 10 instead of 12?
Click to expand...

Potentially, yes.

In my circumstances, I have someone who’s in for the long-haul so I don’t think of things in those terms.

It’s also a sellers market (certainly in urban areas); you’d be hard pressed to have two months of vacancy.
 
Hi Gordon

A few (very) small points:-
  1. You can deduct 80% of qualifying interest payments for 2017;
  2. If you include a deduction for capital allowances in calculating your return on capital figure, I think you should add the full qualifying expenditure to your capital deployed figure; and
  3. I also think you should take the additional mortgage protection premiums on the (larger) PPR mortgage into account.
 
Sarenco said:
Hi Gordon

A few (very) small points:-
  1. You can deduct 80% of qualifying interest payments for 2017;
  2. If you include a deduction for capital allowances in calculating your return on capital figure, I think you should add the full qualifying expenditure to your capital deployed figure; and
  3. I also think you should take the additional mortgage protection premiums on the (larger) PPR mortgage into account.
Click to expand...

Hi Sarenco,

Thanks for the feedback.

The 75% was based on the 2016 return, but you’re dead right. Having said that, it’s immaterial in this case but may not be for other people.

With regard to the capital allowances, I haven’t included them in the return on capital calculation, only in the tax computation.

In relation to the PPR mortgage protection, I tend to look at that in the context of the PPR when analysing its “cost of capital” and what can be saved by paying it down. The effect is negligible enough though; if the premiums could be reduced (which I suspect isn’t possible as the policy is cheap and in situ), it might save circa €160 a year.

Gordon
 
Gordon Gekko said:
With regard to the capital allowances, I haven’t included them in the return on capital calculation, only in the tax computation.
Click to expand...
But doesn't the tax calculation (indirectly) feed into your return on capital figure?

I'm conscious that the other two points are trivial in the context of your calculation - I was thinking more in terms of the "precedent value" of your (very helpful) spreadsheet.
 
Sarenco said:
But doesn't the tax calculation (indirectly) feed into your return on capital figure?

I'm conscious that the other two points are trivial in the context of your calculation - I was thinking more in terms of the "precedent value" of your (very helpful) spreadsheet.
Click to expand...

Hmmm...I don’t think it does. Yes there’s a tax deduction but I don’t think that hits the return on capital. It’s very relevant that the €8,000 of assets were existing stuff from its time as a PPR. Ongoing capital expenditure should feed into the return on capital but the €1,000 of repairs probably cover everything. The €1,000 is actually prudent; touch wood it hasn’t been the smell of that (ever).

The genesis of the spreadsheet was an analysis I was doing in relation to a plan to accelerate the repayment of the home mortgage. I place huge value on the optionality that being mortgage free at (say) 50 gives someone. With no debt, there is scope for major flexibility.
 
Sarenco,

What I did thereafter was look at the debt that I’m carrying as a result of not having the equity in the investment property. That’s at 2.5%. I did think about the mortgage protection, but I think it’s a red herring as the policy can’t really be adjusted.

What can’t be modelled is house price movement, which could be up or down. Personally I think that with supply and demand as they are, I’m content, but it’s a consideration. Tax (i.e. CGT) also needs to be included when it becomes relevant. But I just take the current value per the Register and the latest mortgage statement. If my return hits 2.5% or close to 2.5%, the trigger may be pulled. But then it has sentimental value too as my daughter was born there (not actually there!) and she still talk about it fondly.

Thanks.

Gordon
 
Gordon Gekko said:
Hmmm...I don’t think it does. Yes there’s a tax deduction but I don’t think that hits the return on capital. It’s very relevant that the €8,000 of assets were existing stuff from its time as a PPR.
Click to expand...
But isn't the €8k producing an element of your rental return? I don't see how you can ignore it on the one hand (in determining your capital deployed figure) and yet account for an element of that capital expenditure as a deductible expense on the other (in determining your after-tax return)?

The provision for repairs and maintenance is surely a separate issue.
Gordon Gekko said:
I did think about the mortgage protection, but I think it’s a red herring as the policy can’t really be adjusted.
Click to expand...
Couldn't you take out a new policy to reflect the lower PPR mortgage?

Incidentally, I think your basic approach is spot on - I'm really just nitpicking around the edges.
 
Sarenco said:
But isn't the €8k producing an element of your rental return? I don't see how you can ignore it on the one hand (in determining your capital deployed figure) and yet account for an element of that capital expenditure as a deductible expense on the other (in determining your after-tax return)?

The provision for repairs and maintenance is surely a separate issue.

Couldn't you take out a new policy to reflect the lower PPR mortgage?

Incidentally, I think your basic approach is spot on - I'm really just nitpicking around the edges.
Click to expand...

I agree that if I’d had to go out and spend €8k, I’d include it in my calculation. And as and when things need to be replaced, I will. However, this was stuff that was originally used in my PPR, which originally cost €16k, and which would have been dumped otherwise. But I agree with your suggestion generally.

Regarding the life policy, the fact that I’m older means that the net effect would be negligible, but yes, it’s something that should be looked at.

The big takeaway for me is that notwithstanding the strength of yields, trackers are a gamechanger. It’s hard to see how borrowing at 4/4.5% can make a property investment work.
 
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