Why are landlords obsessed with getting market rents?

[presidenttttt]

1. Lenders want higher interest rates for longer loans
2. Your numbers suggest 2.3% capital gain per year, fair, but you ignore capital gains tax
3. Your gross rent profit of 600 a month will not cover the repairs, renovations.
4. One bad tenant and your 120 year investment is dead in the water

An investors priority is profit. The idea of financial engineering is at least creative, but unless it gives investors a return that reflects the risk and competes with alternatives then it will not be a solution, though our government would like to spin this as another lever. That is why investors talk about market rent being important…To go full circle to the thread…

 

[Fortune]

L

What is the net profit that a landlord can expect to make these days in the current market, the one that is apparently seeing them leave in droves?
Then compare that to a scheme with very low mortgage repayments coupled with low rents (but say perhaps 50% above the mortgage repayment).

Let's move these goalpost up 50%.

Overage property value in Ireland is €420,656.
Assume 20% deposit.
Average rent is €2,053pm or €24,636pa

A quick glance at mortgage rates and I can see a rate of 5.2% for a BTL. We'll assume our landlord wants a 20 year term.
Repayments are €2,258.26, so straight away, that's cashflow negative. After tax (assumed to be 52%), the net income is €3,537 for the year. In year one, our landlord will have to make up a cashflow shortfall of €6,000 in year 1. Doesn't seem too appealing.

Now, to look at your example, with it's very landlord friendly mortgage plus 50% rent. We'll assume the 150 year tem will increase the mortgage rate by 20%, giving a rate for our landlord of 6.24%. That would mean a monthly repayment of €1,750 and a rent of €2,625pm. Here, we find our first issue. You've increased rents by 28% and made things much worse for our renters. Meanwhile, our landlord is now getting higher rent, and makes a net profit for the year of €5,041. Seems good so far, if they can get anyone to pay the rent....

However, if we assume both versions of our landlord want to sell up after 20 years, the true picture emerges. We'll ignore any wear and tear and renovations, and assume the rent and interest rates are constant (because I'm too lazy at this point to have them vary). Landlord A, with his 20 year mortgage, has received after tax rents totalling €138k but had to repay €542k to the bank. Assuming 3%pa increase in property value, their net proceeds after CGT are €648k.

Landlord B has received after tax rents of €101k due to their higher interest rate lower capital repayment; their first payment only repaid €0.15 of the amount borrowed, and their last payment at the end of the 20 years repaid €0.53. Landlord A paid €205k interest while B paid €420k). On selling the house, they have the same sale price and CGT but still have to repay the outstanding mortgage of €336k.

So landlord A, despite having to deal with the shortfall in income each month, still come out far ahead of Landlord B working under your rules despite giving a generous 50% margin over the mortgage payment.

 

[Sister Sara]

1. Lenders want higher interest rates for longer loans

True, but in this case the landlord (on a 30yr term of the 120yr loan) will only be liable on effectively €90,000 of the loan.

Your numbers suggest 2.3% capital gain per year, fair, but you ignore capital gains tax

Well apply it then, and tell me if its decent return or not? If not, what is a decent return?

Your gross rent profit of 600 a month will not cover the repairs, renovations.

I'm goinf to have to call you out on that! Are you seriously suggesting landlords are paying in excess of €600 a month in repairs and rennovations? You are kidding!
Even if you are not, lets allow for €1,000 a month tax allowable deductions for necessary repairs and renovations.

I live in a house. My monthly repairs and rennovations come nowhere near this!

One bad tenant and your 120 year investment is dead in the water

That is the same for any investment then? a 10yr, 20yr et al.

 

[Fortune]

A €300,000 investment of Coca-Cola (a €300bn company) will get you 0.001% share ownership.

It will give you around 4,780 individual shares in the company while can be sold of entireley seperately of each other, unlike a house where you only own part of one house and can't partially sell it.

Instead of taking a €360,000 mortgage (100% for ease of reference) over 30yrs, the mortgage is spread over 100yrs - effectively a €90,000 mortgage over 30yrs.

This makes no sense whatsoever.

 

[Fortune]

True, but in this case the landlord (on a 30yr term of the 120yr loan) will only be liable on effectively €90,000 of the loan.

That's not how numbers work.

 

[rungun]

2. There is a cohort of wanna-be FTB's caught in the rental trap of not being able to save because of high rents. This cohort of individuals, co-habiting couples, and families, to be offered first preference to purchase a property where the landlord is signalling an intent to sell the property. Some tax sweeteners for the exiting landlord and the wanna-FTB's to make the process as smooth and quick as possible.
Such a scheme would significantly reduce the underbelly of FTB demand caught in the rental trap.

The Irish public still crave a 3 bedroom house. All this would do is provide another Government subsidy to a lucky few and make absolutely no difference to supply.

The only answer is more rental supply, which itself requires a great many policy changes, albeit Ireland is building a decent amount of housing currently.

 

[Sister Sara]

That's not how numbers work.

Its called financial engineering. You have heard of off-book accounting? Quantatitive Easing? Currency devaluation? etc?

Try this, the State raises €1.5bn from the bond markets for the going 10yr rate 2.8% or whatever it is.

The State offloads that to private financial institutions to manage the 120yr loan (mortgage) and rental scheme. The State effectively subsiding cheap loans for the rental investment market.

The mortgage providers can then provide loans to investors for the exclusive investment in providing rental properties. So your landlord who wants to buy a €420,656 property less 20% deposit = mortgage loan of €336524.80. *Although im being told by AIB that loan amounts should be less than 70%, so €294,459.20.

Monthly repayments of €2,033.84. Average rent is €2053pm.

That is a an average yearly profit of €229.92 on an average priced home with average rents. Not a good deal.

Instead - under the 120yr (this is reflective of the durable use of the house, not the lifetime of the investor) €1.5bn fund for the loan (mortgage scheme) that is exclusive to the provision of rental accommodation. The financial lenders can effectively reduce the repayment to an equivilent of a loan that is 1/4 of €294459.20 loan, or about €75,000 plus the interest.

The mortgage repayments reduce dramatically to around €850.00pm. The condition for this preferential loan to landlords is that the rents charged cannot exceed, say 50% of the loan repayment. (€850 + 50% (€425)) = €1275pm.

Thats a €5,100 annual gain for the landlord compared to €229.92

The landlord makes more profit, and the dweller has a real viable competitive alternative to having to buying their own home - much more expensive. The rent has fallen by nearly €800pm!

After 30yrs, the landlord retires and sells the property (designated as a rental). The property (and rent) has near doubled in value to €800,000 and the landlord receives €800,000 less the outstanding remainder of the 120yr mortgage (294,459.20 - 75,000 leaving 219,459.20 to pay on the house).

A cool €580,000 odd subject to CGT.

Second 30yr cycle: A new landlord arrives and pays a 30% deposit of the new price €800,000*20% = €240,000 to the bank that lends €560,000 to the landlord over 30yrs. Except! by virtue of the €1.5bn fund, the bank only charges repayments equvilant of 1/4 of that €560,000. In effect a mortgage of €140,000. The condition for this preferential loan to landlords is that the rents charged cannot exceed, say 50% of the loan repayment. (€1700 + 50% (€850)) = €2550pm.

And the cycle contines for a third and fourth generation yielding the financial instiution profits on the loans, the landlord significant returns on investment and tenants, affordable and real alternative to buying.

All for the cost of €1.5bn plus interest on the State.

 

[Fortune]

Its called financial engineering. You have heard of off-book accounting? Quantatitive Easing? Currency devaluation? etc?

A landlord can't go to bank and get a 300k loan but only pay interest on 90k of it.

That is a an average yearly profit of €229.92 on an average priced home with average rents.

No it isn't. That's cashflow.

The financial lenders can effectively reduce the repayment to an equivilent of a loan that is 1/4 of €294459.20 loan, or about €75,000 plus the interest.

Can you set out, with workings, how you believe this works? Who is paying the interest on the other €221k of the loan?

The mortgage repayments reduce dramatically to around €850.00pm

Who's paying the rest of it?

Thats a €5,100 annual gain for the landlord compared to €229.92

Again, this is cashflow, not gain

The rent has fallen by nearly €800pm!

Only if the magic free money your plan requires is given by someone else

The property (and rent) has near doubled in value

How has the rent doubled if you have linked it to the mortgage repayments?

the landlord receives €800,000 less the outstanding remainder of the 120yr mortgage (294,459.20 - 75,000 leaving 219,459.20 to pay on the house).

You've ignored CGT and most of the interest on the loan.

Except! by virtue of the €1.5bn fund, the bank only charges repayments equvilant of 1/4 of that €560,000. In effect a mortgage of €140,000.

Ok, so you're saying the government is paying ¾ of the interest for buy to lets, giving free use of that capital to the landlord while allowing them to keep 100% of the income and 100% of the capital appreciation, and the 120 year term is a red herring as each landlord only gets a 30 year term. Quite brilliant. A great use of my taxes to transfer wealth from both the renter and the taxpayer to the landlords (and a little to the banks), with no benefit to the government, who also have to repay the borrowing with further raids on the public purse, as all the positive cashflow accrues to the landlord (well, the bank gets a small cut too). It sounds alike you've invented social housing that the government never actually owns but pays for and, for no discernable reason whatsoever, lines the pockets of a few landlords.

 

[Fortune]

And the cycle contines for a third and fourth generation yielding the financial instiution profits on the loans, the landlord significant returns on investment and tenants, affordable and real alternative to buying.

All for the cost of €1.5bn plus interest on the State.

Why is there any need to involve a landlord on this scenario?

 

[Sister Sara]

A landlord can't go to bank and get a 300k loan but only pay interest on 90k of it.

Under a subsidized scheme supported by the government raising €1.5bn they can, most definitely. To be clear, and my fault, the repayments on the loan are as they would be to an effective €90k.

Can you set out, with workings, how you believe this works? Who is paying the interest on the other €221k of the loan?

The interest is absorbed by the State raising €1.5bn on the markets for properties tied to this scheme.

How has the rent doubled if you have linked it to the mortgage repayments?

The landlord, presumably will try to maximise the profit under the available conditions of the scheme

A great use of my taxes to transfer wealth

Yes. It is. We have done it for decades for the farming, agriculture sector. We subsidise flood defences for towns and villages to protect their homes and businesses. We subsidised the catering industry by dropping VAT rates. We invest in capital infrastructure. We found billions upon billions to counter the effect of the Covid crisis, the banking crisis.

We now have a housing crisis. This is one way to alleviate some of the pressure points in that sector providing opportunity for landlords to stay in the sector, protect tenants with affordable rents and provide a real alternative to the owner-occupy market.

Why is there any need to involve a landlord on this scenario?

Somebody has to manage the property for vetting prospective tenants, repairs and renovations for property.

 

[Bronte]

As a long term poster on here I think I’m entitled to give an award. This thread is hereby proclaimed Bonkers thread of the decade.

 

[AlbacoreA]

The Irish public still crave a 3 bedroom house

Exactly Forget landlords.

We've basically got a post WW2 housing crisis. We need to build emergency style housing.

Forget fancy windows, bathrooms a thousand regulations. Build waterproof dry with basic facilities. With central community facilities. Some sort of mini bus linking it to near by towns etc.

 

[Brendan Burgess]

That's all folks