Cheap apartment as investment - where's the catch?

CiniO

Just wondering.

Take an example of something like that:
http://www.daft.ie/sales/3-midland-court-longford-town-longford/1032304/

3 bedroom, very spacious (90sq.m) apartment in the Longford town centre for 25k.
Currently leased at €350 a month.

So quick calculations:
€350 x 12 = €4200 per annum rent income.

Let's subtract management fee (i'm guessing in the worst case around €1.5k)
Property tax - €90.
Insurance - €200 ??? (more, less???)

so €4200 - 1500 - 90 - 200 = €2410

€2410 - that's profit per annum (before tax), which comes up as 9.64% AER on your 25k investment.

Comparing to bank deposit where you'd struggle to get 1% AER, it looks too good to be true.

Where's the catch?

snubbleste

It's in Longford.

Cuddlesworth

Your assuming there is 0% risk. Your figures are based on a best case scenario assuming no rent problems, repair costs or empty periods.

kyogger

To be honest, I would rather let my €25k earn 1% in the bank than earn 10% for the headache of managing a property and its tenants in Longford.

handlemaster

one broken door or cooker doesnt leave you with much. I think you would want it for around 15k to take the risk

sunnysoutheast

CiniO wrote: »

Just wondering.

Take an example of something like that:
http://www.daft.ie/sales/3-midland-court-longford-town-longford/1032304/

3 bedroom, very spacious (90sq.m) apartment in the Longford town centre for 25k.
Currently leased at €350 a month.

So quick calculations:
€350 x 12 = €4200 per annum rent income.

Let's subtract management fee (i'm guessing in the worst case around €1.5k)
Property tax - €90.
Insurance - €200 ??? (more, less???)

so €4200 - 1500 - 90 - 200 = €2410

€2410 - that's profit per annum (before tax), which comes up as 9.64% AER on your 25k investment.

Comparing to bank deposit where you'd struggle to get 1% AER, it looks too good to be true.

Where's the catch?

LPT is not deductible. However capital allowances would reduce amt chargeable to IC and PRSI, not USC.

In my view big issues would be low numbers of owners paying management fees plus general tenant hassle, one nonpayer for a few months would wipe out any gain. What is the exit strategy?

These days it is trivially easy to make 10% on financial markets with income reinvested, why bother with this.

cython

sunnysoutheast wrote: »

LPT is not deductible. However capital allowances would reduce amt chargeable to IC and PRSI, not USC.

In my view big issues would be low numbers of owners paying management fees plus general tenant hassle, one nonpayer for a few months would wipe out any gain. What is the exit strategy?

These days it is trivially easy to make 10% on financial markets with income reinvested, why bother with this.

Look again at the nature of the deductions - the OP is deducting expenses from their income, not listing tax deductibles. That said, I'd agree with a lot of the sentiment expressed before this, in that while the percentages look good, the unforeseen expenses are the real potential killer here, and said percentages could dwindle very quickly.

sunnysoutheast

cython wrote: »

Look again at the nature of the deductions - the OP is deducting expenses from their income, not listing tax deductibles. That said, I'd agree with a lot of the sentiment expressed before this, in that while the percentages look good, the unforeseen expenses are the real potential killer here, and said percentages could dwindle very quickly.

I think the OP is calculating the profit from the rental activity which is the amount chargeable to tax. They included LPT which is not allowable (which I should have said, not deductible) but omitted capital allowances, which are allowable vs IC and PRSI but not USC.

garhjw

I wouldn't buy potatoes in Longford, let alone an apartment.

OP, you need to look at how many properties are currently available in londpgford. How long does it take to rent them out. What is the average tenancy length. Are you willing to accept rent allowance? Risk is too high in my opinion.

Money would be better in the bank as others have said

CiniO

snubbleste wrote: »

It's in Longford.

Heh, since they built bypass from N5 to N4 I haven't actually been in the town.
Is there anything wrong with Longford?
Besides, it was just an example.
There's good few more apartments in similar price range around the country, with possiblity of similar rent intake.
But I have a feeling, that if something looks too good to be true....

CiniO

Cuddlesworth wrote: »

Your assuming there is 0% risk. Your figures are based on a best case scenario assuming no rent problems, repair costs or empty periods.

handlemaster wrote: »

one broken door or cooker doesnt leave you with much. I think you would want it for around 15k to take the risk

So you are saying that because property value is low, rent is low, then possible expanses might make it not worth it.
Like if you are renting a house for 1k a month, a broken cooker for 500 is only 0.5 month rent, but here a broken cooker would be pretty much 2 months rent gone.

Well that's a fair valid argument.

But what's people experience on maintenance cost of rental properties here in Ireland?
I have few small properties rented abroad, and I must say for the last 5 years it cost me feck all in maintenance cost (one washing machine and one bucket of paint)
Probably all depends on tenants I suppose.

IWillFindYou

Nothing wrong with Longford, and fair enough it has tenants currently but is there generally much demand for 1-bed apartments there? What if it lay vacant for a few months a year?

CiniO

sunnysoutheast wrote: »

LPT is not deductible. However capital allowances would reduce amt chargeable to IC and PRSI, not USC.

Well I just showed pre-tax figure to make it clearer, as everyone's tax circumstances might be different, depending on your tax credits, employment income etc...

In my view big issues would be low numbers of owners paying management fees

That's interesting point.
Does this make some apartments in Ireland so cheap, because they are in buildings where most apartment owners don't bother paying management fees?
What happens to properties like that?

plus general tenant hassle, one nonpayer for a few months would wipe out any gain. What is the exit strategy?

Well it's all about finding a trustworthy tenant.
Possibly sometimes even better to charge less rent but get reasonable people.

These days it is trivially easy to make 10% on financial markets with income reinvested, why bother with this.

Could you point me out in any direction to easily make 10% on financial markets?

CIARAN_BOYLE

CiniO wrote: »

Heh, since they built bypass from N5 to N4 I haven't actually been in the town.
Is there anything wrong with Longford?
Besides, it was just an example.
There's good few more apartments in similar price range around the country, with possiblity of similar rent intake.
But I have a feeling, that if something looks too good to be true....

Managing rental property can a chore more so if you don't live in the area as with a problem tenant you could have to visit regularly to deal with minor issues.

Therefore if you are not in Longford your profit will be eaten up by gas bils travelling up and down doubly so as motor cannot be claimed for as an expense.

If you live in Longford or wherever that is one thing but otherwise?

CiniO

cython wrote: »

Look again at the nature of the deductions - the OP is deducting expenses from their income, not listing tax deductibles. That said, I'd agree with a lot of the sentiment expressed before this, in that while the percentages look good, the unforeseen expenses are the real potential killer here, and said percentages could dwindle very quickly.

I looked at it from following perspective.

I currently rent a house here in Mayo.
House is worth about 100k. (that's what similar houses were sold recently in the area).
Yet I pay just over €400 in rent per month.

So when I see that for property worth 25k, you can have €350 in rent, then it looks like extremely good offer.

Looks like my landlord is risking even more, as possible defect in f.e. boiler or something more serious could cost him half year rent.

CiniO

garhjw wrote: »

I wouldn't buy potatoes in Longford, let alone an apartment.

OP, you need to look at how many properties are currently available in londpgford. How long does it take to rent them out. What is the average tenancy length. Are you willing to accept rent allowance? Risk is too high in my opinion.

Money would be better in the bank as others have said

In bank with 1.5% interest and 41% DIRT you are talking about 220 euro profit per year. At least that fully secure.
But I'd imagine you'd need to do really bad not to get more from renting such apartment

tabby aspreme

Would it be an option to rent it to the council long-term, and let them maintain it.

Baby01032012

tabby aspreme wrote: »

Would it be an option to rent it to the council long-term, and let them maintain it.

Councils don't maintain private houses.

I had a house in Longford with the council RAS scheme. Council puts in whoever they like, landlord has no say. Then the tenant disappeared after taking every appliance in the house and then some. As soon as the council found out they ended the lease immediately.

delaney001

Would someone mind clarifying for me. Is rental income on a property fully taxable or can part of it (75%) be claimed back against interest paid on the mortgage used to purchase said property?

CIARAN_BOYLE

delaney001 wrote: »

Would someone mind clarifying for me. Is rental income on a property fully taxable or can part of it (75%) be claimed back against interest paid on the mortgage used to purchase said property?

75% of the mortgage can be claimed as an expenses as can 100% of other relevant expenses involved in letting the property.

Baby01032012

CIARAN_BOYLE wrote: »

75% of the mortgage can be claimed as an expenses as can 100% of other relevant expenses involved in letting the property.

75% of mortgage interest can be written off against the rental income. Pre letting expenses are not deductible. Only expense incurred during the tenancy. Wear and tear capital allowances on furniture, appliances can also be used to reduce income liable to tax, at the rate of 12.5% per annun.

daveyeh

LONGFORD.

That's why.

The_Conductor

CiniO wrote: »

€2410 - profit per annum (before tax)

Where's the catch?

The catch is your net after tax from this- is in the region of €1,300-€1,400 per annum- and for this you have to take care of the property and your tenant. It is very poor recompense for what can be quite a bit of work......... Remember- you don't get paid for any time or personal work you put into the property- only for services you buy from registered service providers........

If you look at the raw ROI- it looks great- but when you drill down into the figures- it really isn't worth anyone's while........

Uncle Ben

CiniO wrote: »

Just wondering.

Take an example of something like that:
http://www.daft.ie/sales/3-midland-court-longford-town-longford/1032304/

3 bedroom, very spacious (90sq.m) apartment in the Longford town centre for 25k.
Currently leased at €350 a month.

So quick calculations:
€350 x 12 = €4200 per annum rent income.

Let's subtract management fee (i'm guessing in the worst case around €1.5k)
Property tax - €90.
Insurance - €200 ??? (more, less???)

so €4200 - 1500 - 90 - 200 = €2410

€2410 - that's profit per annum (before tax), which comes up as 9.64% AER on your 25k investment.

Comparing to bank deposit where you'd struggle to get 1% AER, it looks too good to be true.

Where's the catch?

Take a drive to Leitrim, Roscommon or Longford and drive into all these estates and have a very good look. You won't be too long seeing the 'catch'. And I say that as someone who lives and works in the midlands.

delaney001

Thanks very much for that. Thought I read that it was gone since 1st of January, but obviously that was a different scheme.

One other question. If the 75% of the interest was for example €5,000, and rental income was €20,000. Would the €5,000 be deductible from the €20,000 pre tax or from the tax owed i.e €8,000 (@40%)

CIARAN_BOYLE

delaney001 wrote: »

Thanks very much for that. Thought I read that it was gone since 1st of January, but obviously that was a different scheme.

One other question. If the 75% of the interest was for example €5,000, and rental income was €20,000. Would the €5,000 be deductible from the €20,000 pre tax or from the tax owed i.e €8,000 (@40%)

You claim as an expense (deductible against the 20k) not as a credit.

The_Conductor

delaney001 wrote: »

Thanks very much for that. Thought I read that it was gone since 1st of January, but obviously that was a different scheme.

One other question. If the 75% of the interest was for example €5,000, and rental income was €20,000. Would the €5,000 be deductible from the €20,000 pre tax or from the tax owed i.e €8,000 (@40%)

Ciaran Boyle is right.
Aka- 75% of it is an allowable expense- so 75% of 5k is 3750- so your taxable rental income reduces by 3750 (if its 20k- it falls to 16,250). This taxable income- is taxed at your marginal rate- and includes USC, PRSI etc now- so the effective tax rate on it is over 50%.......