Buy investment property or buy first home ?

Ipro

Hi Guys Looking for some advice regarding future planning.

A little about me.
Im 25 living and working in Dublin.
Income: 30K a year (Just started)
Assets: One Apartment in the midlands rented at €600 PM Value 60-70K ( No mortgage)

Currently renting in Dublin 500€ per month.

Ideally I'd like to build a property portfolio. A while back I came into some money but was unemployed. The bank wouldn't have given me a mortgage on that basis so i felt the best thing to do was to buy a property cash (my budget only allowed me to buy in the midlands).

Going forward I see my self staying in Dublin for the next few years but am undeiceded what to do with regards property.

Should my next step be to buy somewhere for myself to live in Dublin or should I carry on renting and purchase a BTL.

If I take a mortgage for my own place will this make it difficult to get a BTL mortgage for an investment property a few months later

similarly If I take a BTL mortgage for an investment property would this make it difficult to get a mortgage for my own place.

Im hoping to try and get some kind 2bedroom apartment for about 100/120k in Dublin and looking to move forward with this in about 6/12 months ( I will be employment longer so the bank will look more favorably on me and I also expect house property prices to fall slightly towards the start of next year.

I know exactly what I want to do , I'm just unsure what order to go about it.

I had originally planned to buy a 2nd investment property this time with a mortgage however I seen on a thread today that the bank will not take any income from rental into account when applying for a mortgage for my own place :-(

athtrasna

Not sure where you'll get a 2 bed apartment in that price bracket. Certainly nowhere central

johnnyskeleton

It is impossible to say unless we know the specifics of each property, but in general terms, all other things being equal, etc, you are better off buying and paying off your principle private residence before loooking into an investment property.

Why?

Well, let's say that you rent for €500 and your cash sum could buy an investment property outright which rents at €600, or you could put it against a residential property with a mortgage repayment of €100. Effectively, this assumes that there is a perfect relationship between rent and property prices across the board, which there isn't.

On this basis, your rent goes out of your after tax income and you will have to pay tax on the rental income, with no deduction for interest relief. The net effect is that your monthly after tax income is severely curtailed.

If on the other hand you purchase a one bed with an extra €100 in mortgage payments (or a two bed with a €600 mortgage payment, with a room rented under the rent a room scheme) then you only pay €100 out of your after tax income, and don't have to pay the extra tax on the €600 a month in rental income which, at the higher rate, is a pretty large expense. There are also the costs of renting, such as paying an accountant and registerring with PRTB, the risk of a tenant causing damage or not paying their rent etc.

There are practical factors that might sway this either way - some places rent better relative to purchase price than others, maybe you won't get a loan for the property where you want to live etc, property prices may go down in one area but up in another etc. Some people do this sort of thing because they don't want to sell a family home but can't live there for work etc, so they rent it out and then rent elsewhere temporarily.

But as a general rule, to own an investment property while at the same time paying rent makes no sense from a tax perspective.

ted1

I'd go for a two bed and rent out one room, Tax wise it works out best. As demonstrated Property portfolios aren't Always great things to have. Your also about 3 years late to the table. Lots of people who bought 3 years ago have seen capital appreciation. Your now buying investment property when it's price has risen,

MouseTail

I would buy a 2 bed in Dublin and rent out a room as suggested. To do that you will probably need to sell the Midlands property. I know that's not what you want to hear, but you aren't asset or income rich enough to do otherwise with current lending criteria.

Ipro

athtrasna wrote: »

Not sure where you'll get a 2 bed apartment in that price bracket. Certainly nowhere central

I was hoping in 12 months or so that I could get somewhere in a lower priced area on the outskirts of Dublin like D15/24 two bed for that price could be achievable , it's not a forever home I'd probably sell and climb the ladder after 5 years or so or possibly keep it as a rental depending on the financial viability

MouseTail wrote: »

I would buy a 2 bed in Dublin and rent out a room as suggested. To do that you will probably need to sell the Midlands property. I know that's not what you want to hear, but you aren't asset or income rich enough to do otherwise with current lending criteria.

The midlands property is loan free and was bought to avail of CGT relief so I had planned to keep it for at least 7 years and possibly put it up as security against another investment property to get the ball rolling.

Although buying an apartment in Dublin and renting a room out under rent a room makes sense tax wise I'm not all that too keen on sharing my apartment with someone , I like my own space and my current living arrangement allows for that.

At the time I felt I couldn't afford a place in Dublin but that it would be a better idea to buy in the midlands this gave me capital appreciation and also a rental income which I use towards my rent in Dublin .

This was the better option to leaving the money as cash. I was unsure about future employment prospects and did what I thought was the safest thing to do at the time.

athtrasna

Ipro wrote: »

I was hoping in 12 months or so that I could get somewhere in a lower priced area on the outskirts of Dublin like D15/24 two bed for that price could be achievable , it's not a forever home I'd probably sell and climb the ladder after 5 years or so or possibly keep it as a rental depending on the financial viability

In my development in D15 that budget would get you a one bed at the moment. Prices here are going up not down. Just because an area is on the outskirts it doesn't mean property is massively cheaper. Access to the M50, hospitals, Institutes of Technology, sporting campuses, large companies, large shopping centres. All of these help drive demand in D15 and 24 and it's growing.

I think you'll need to look further afield again to get a decent two bed or as others have said sell your other apartment. Rental income won't be taken into account when calculating your max mortgage. As a non first time buyer you will also need a 20% deposit.

Ipro

Just to clarify my original post when I say carry on renting I mean carry on renting untill I buy my own place.


Ideally I'd like to use the midlands property as collateral to get another btl in about 6 months , followed by going to the bank for a residential mortgage.

I suppose it would be nice to know what way lending works as in my original thought would be that I'm more likely to get approved for personal mortgage if I have two properties rented out

Oppose to applying for a btl when I only have one property rented out .

Do banks loan for btl if the only property I own isint my PPR ?

Ipro

athtrasna wrote: »

In my development in D15 that budget would get you a one bed at the moment. Prices here are going up not down. Just because an area is on the outskirts it doesn't mean property is massively cheaper. Access to the M50, hospitals, Institutes of Technology, sporting campuses, large companies, large shopping centres. All of these help drive demand in D15 and 24 and it's growing.

I think you'll need to look further afield again to get a decent two bed or as others have said sell your other apartment. Rental income won't be taken into account when calculating your max mortgage. As a non first time buyer you will also need a 20% deposit.

Thanks for ruining my day !

So it's true that rental income is not taken into account when applying for a mortgage ? I find this hard to believe but it's the second time I've heard it today :-/

In that case it's of no benifit to increase my income through means of rental income prior to applying for a personal mortgage.

Your right on apartment prices in those areas they have been going up and up the last while and it would be a one bed I'd have to look at , I had just hoped that if they came down a little I might get a 2bed. I'm predicting a small fall in prices due to no CGT /CB rules nothing drastic

johnnyskeleton wrote: »

It is impossible to say unless we know the specifics of each property, but in general terms, all other things being equal, etc, you are better off buying and paying off your principle private residence before loooking into an investment property.

Why?

Well, let's say that you rent for €500 and your cash sum could buy an investment property outright which rents at €600, or you could put it against a residential property with a mortgage repayment of €100. Effectively, this assumes that there is a perfect relationship between rent and property prices across the board, which there isn't.

On this basis, your rent goes out of your after tax income and you will have to pay tax on the rental income, with no deduction for interest relief. The net effect is that your monthly after tax income is severely curtailed.

If on the other hand you purchase a one bed with an extra €100 in mortgage payments (or a two bed with a €600 mortgage payment, with a room rented under the rent a room scheme) then you only pay €100 out of your after tax income, and don't have to pay the extra tax on the €600 a month in rental income which, at the higher rate, is a pretty large expense. There are also the costs of renting, such as paying an accountant and registerring with PRTB, the risk of a tenant causing damage or not paying their rent etc.

There are practical factors that might sway this either way - some places rent better relative to purchase price than others, maybe you won't get a loan for the property where you want to live etc, property prices may go down in one area but up in another etc. Some people do this sort of thing because they don't want to sell a family home but can't live there for work etc, so they rent it out and then rent elsewhere temporarily.

But as a general rule, to own an investment property while at the same time paying rent makes no sense from a tax perspective.

I agree with this for the most part however i feel this would not apply to me as
A. Midlands property has capital gains relief
B. I wouldn't rent a room out in my PPR
C. As far as I know mortgage interest relief is not available to anyone who takes a mortgage out post 31/12/12

ted1

OP if I was you I'd hold off on getting a property and instead use the money the money to get an MBA. You'll sound find your earning more than 30k and then in a better position

Fol20

If your going for a bt, I believe you need a 30pc deposit.

OreaM

athtrasna wrote: »

In my development in D15 that budget would get you a one bed at the moment. Prices here are going up not down. Just because an area is on the outskirts it doesn't mean property is massively cheaper. Access to the M50, hospitals, Institutes of Technology, sporting campuses, large companies, large shopping centres. All of these help drive demand in D15 and 24 and it's growing.

I think you'll need to look further afield again to get a decent two bed or as others have said sell your other apartment. Rental income won't be taken into account when calculating your max mortgage. As a non first time buyer you will also need a 20% deposit.

If the mortgage is made for investment, does the rental income part still applies ?

Ipro

ted1 wrote: »

OP if I was you I'd hold off on getting a property and instead use the money the money to get an MBA. You'll sound find your earning more than 30k and then in a better position

I'm on an internship at the moment in a field I'm quite passionate about. A MBA wouldn't really be my thing I'd hate to spend years in college and working some 100k a year job to find out I'm unhappy.
I'd actually much rather be on a lower income and have freedom , flexibility less stress.

Ideally I'll build a property portfolio as time goes on , it's something I really like , I enjoy meeting tenants , fixing things when they go wrong etc. a lot of people aren't cut out for that , their aren't passionate about it and thus call it a nightmare job. Those are in it for the money and not for the enjoyment.

I'd just like to play a game for a few years and see how many I can buy , if I get bored I can always sell up and buy shares :-)

Provided I don't go into negative equity of course

Fol20 wrote: »

If your going for a bt, I believe you need a 30pc deposit.

Yes this is correct , although I think I may be able to release equity from the midlands property in lieu of the 30%

Have to ask a Brooker about that

Fol20

Ipro wrote: »

Yes this is correct , although I think I may be able to release equity from the midlands property in lieu of the 30%

Have to ask a Brooker about that

I always thought releasing equity was a retirement type of thing. Are you able to raise funds that way when your young?

Ipro

Fol20 wrote: »

I always thought releasing equity was a retirement type of thing. Are you able to raise funds that way when your young?

It's quite popular abroad in terms of leveraging. I'd imagine it's the same here. The property gets used as collateral they give you 70% loan on the btl and the remaining 30% is borrowed on the previous property that's in positive equity.

It would be great to get clarification from someone as to if it works similarly over here

Michael D Not Higgins

Ipro wrote: »

Yes this is correct , although I think I may be able to release equity from the midlands property in lieu of the 30%

Have to ask a Brooker about that

Were you to release equity, you would effectively get a mortgage on the midlands flat. You say the place is worth about 60k so you'd have to mortgage half of it to get the deposit for a 100k flat in Dublin.

Your income is about 30k so you can borrow max 105k. But now you have a 30k mortgage so you can borrow 75k, plus the 30k deposit means you just about afford the 100k flat in Dublin. This is the most you can afford right now.

rogue_spender

Ipro wrote: »

Just to clarify my original post when I say carry on renting I mean carry on renting untill I buy my own place.


Ideally I'd like to use the midlands property as collateral to get another btl in about 6 months , followed by going to the bank for a residential mortgage.

I suppose it would be nice to know what way lending works as in my original thought would be that I'm more likely to get approved for personal mortgage if I have two properties rented out

Oppose to applying for a btl when I only have one property rented out .

Do banks loan for btl if the only property I own isint my PPR ?

I cant see the bank seeing a lot of security in an apartment in the midlands

relax carry on

Ipro wrote: »

C. As far as I know mortgage interest relief is not available to anyone who takes a mortgage out post 31/12/12

Think you might be confusing mortgage interest relief on borrowings for a residential property and allowing a landlord to deduct 75% of the mortgage interest on a rented property against their rental income.

Mortgage interest relief is gone alright for new borrowers who are purchasing a property. The 75% deduction for mortgage interest against rental income is still there. It usually forms the biggest deduction for landlords in reducing their tax liability. Without the interest deduction the rental income from your first property must attract a fair bit of tax.

Ipro

Michael D Not Higgins wrote: »

Were you to release equity, you would effectively get a mortgage on the midlands flat. You say the place is worth about 60k so you'd have to mortgage half of it to get the deposit for a 100k flat in Dublin.

Your income is about 30k so you can borrow max 105k. But now you have a 30k mortgage so you can borrow 75k, plus the 30k deposit means you just about afford the 100k flat in Dublin. This is the most you can afford right now.

Exactly , your correct. But is it wise to go ahead and go about it this way ? I don't mind buying something run down I just want another property. Renovations can be made down the line.

Would a bank see this as a reasonable approach from myself?

relax carry on wrote: »

Think you might be confusing mortgage interest relief on borrowings for a residential property and allowing a landlord to deduct 75% of the mortgage interest on a rented property against their rental income.

Mortgage interest relief is gone alright for new borrowers who are purchasing a property. The 75% deduction for mortgage interest against rental income is still there. It usually forms the biggest deduction for landlords in reducing their tax liability. Without the interest deduction the rental income from your first property must attract a fair bit of tax.

Yes , I understand all of the above but the poster was suggesting I'd be better availing of a residential mortgage to avail of interest relief, my point being to the poster that this relief no longer applied to residential mortgages.

But yes I'm fully aware 75% of the interest can be written off on a btl ,

for the time being anyway

ixus

You're 25, doing an internship at 30k per annum?

Internship = no mortgage.

Permanent employment over extended period with history of saving from your wages needed in majority of cases.

You're looking to leverage up with another btl plus a primary residence within 12months? No bank will go for this. If you were on a 100k permanent you'd find this difficult to do.

Michael D Not Higgins

Ipro wrote: »

Exactly , your correct. But is it wise to go ahead and go about it this way ? I don't mind buying something run down I just want another property. Renovations can be made down the line.

Would a bank see this as a reasonable approach from myself?

No I don't think it's wise. There's only 44 places on daft at 100k and lower for Dublin which are a combination of small terraces and flats in bad areas of Finglas and Ballymun, some burned out houses in bad areas of Tallaght, some flats in Balbriggan and some other random stuff like empty sites. Honestly I think it would be a terrible idea.

snubbleste

Am I hearing things?
Property ladder, forever home, capital appreciation...

johnnyskeleton

Ipro wrote: »

I agree with this for the most part however i feel this would not apply to me as
A. Midlands property has capital gains relief
B. I wouldn't rent a room out in my PPR
C. As far as I know mortgage interest relief is not available to anyone who takes a mortgage out post 31/12/12

A. Capital gains relief is only of relevance if the property has gone up in price. Has it? If so, well done, you can sell for a profit (albeit a taxable profit) or you can hope it goes up even more over the next six years and then claim a super tax free scoop.

Some people might think that even if you were to buy somewhere in dublin now and lose the tax relief, you might get better capital appreciation. Im not saying this is the case, I dont know the midlands market very well and many people think dublin will go down. But if dublin prices go up slightly while they remain flat in the midlands, your cgt is meaningless (As there is no capital gain). You will also be selling at a time when everyone else who has the same idea as you wants to sell.

B. Thats fine. I was just using the two options as suggested examples for the purpose of illustration. The point being that if you both pay and receiev €X rent per month you are liable to pay tax on that, and in your scenario its at the higher rate of tax with no tax relief for mortgage interest etc. So if selling would reduce your monthly payment for where you live by the same €600 as you get in rent, then you save c. €280 in less tax prsi etc each month.

Thats the point I want to make, sorry if it wasnt clear. A simpler way of saying it might be that getting €600 in rent while paying €500 is not a profit of €100, it is a loss of c. €180 when tax is taken into account.

C. The interest relief referred to is that landlords can write 75% of their mortgage interest off against their rental income. So if your investment property was purchased with a mortgage and you paid €400 pm interest on it, you would reduce your taxable income by half (€300). This doesnt apply to you, so there is even less of a reason to do what you suggest from a financial/fiscal point of view.

You seem like a nice person and clearly want to do what is best for yourself which is admirable. So please dont take offence at my above posts. I know nothing about your specific properties and there are all sorts of factors, personal, emotional etc for people to do what you are doing. But it seems to be a purely financial arrangement on your part and what Im trying to explain is that you will end up paying more tax this way and putting PPR before investments makes much more sense.

As others have poibted out the rental income may not factored in by banks and your borrowings on a new investment would also reduce the amount you could borrow on a PPR. So even if you dont want to sell the midlands property for personal reasons, you should focus on building up a deposit for the PPR (IMO).

Ipro wrote: »

I'd just like to play a game for a few years and see how many I can buy , if I get bored I can always sell up and buy shares :-)

Provided I don't go into negative equity of course

Is it a game or an investment you want? Because I and other posters have been advising on the presumption that you wanted a steer on how best to use your money for your own benefit.

But if you want to play amateur speculator/landlord, 8 years after banks stopped allowing people to play that game because it was a game they were losing, and the banks are happy to take a punt on you, knock yourself out.

Ipro

ixus wrote: »

You're 25, doing an internship at 30k per annum?

Internship = no mortgage.

Permanent employment over extended period with history of saving from your wages needed in majority of cases.

You're looking to leverage up with another btl plus a primary residence within 12months? No bank will go for this. If you were on a 100k permanent you'd find this difficult to do.

I'm doing an internship in terms of me being on a full time pernament contract but am being given in house training as they want me to take another position that will be comming up in the future. It's not an outright internship or classed as an internship by the company I work for.

But yeah I wouldn't be expecting any wage increase for at least another 12 months and even at that I'm not sure on what kinda increase I might be entitled to. I didn't want to ask about figures , it sounded like a great oppertunity and I wanted to come across as great full and not money hungry.


Also I have a history of savings , I bought a house cash 8 months ago sure. Some money was a small lump some but the majority had been saved prior to unemployment and I'm back saving again now. Theirs only a small few months with a gap of savings that coincides with my unemployment

Michael D Not Higgins wrote: »

No I don't think it's wise. There's only 44 places on daft at 100k and lower for Dublin which are a combination of small terraces and flats in bad areas of Finglas and Ballymun, some burned out houses in bad areas of Tallaght, some flats in Balbriggan and some other random stuff like empty sites. Honestly I think it would be a terrible idea.

Thanks for sharing your opinion Michael.

If I could pick up a 2bed apt around the square in tallaght later on down the road if prices fell would you still have the same opinion?

johnnyskeleton wrote: »

A. Capital gains relief is only of relevance if the property has gone up in price. Has it? If so, well done, you can sell for a profit (albeit a taxable profit) or you can hope it goes up even more over the next six years and then claim a super tax free scoop.

Some people might think that even if you were to buy somewhere in dublin now and lose the tax relief, you might get better capital appreciation. Im not saying this is the case, I dont know the midlands market very well and many people think dublin will go down. But if dublin prices go up slightly while they remain flat in the midlands, your cgt is meaningless (As there is no capital gain). You will also be selling at a time when everyone else who has the same idea as you wants to sell.

B. Thats fine. I was just using the two options as suggested examples for the purpose of illustration. The point being that if you both pay and receiev €X rent per month you are liable to pay tax on that, and in your scenario its at the higher rate of tax with no tax relief for mortgage interest etc. So if selling would reduce your monthly payment for where you live by the same €600 as you get in rent, then you save c. €280 in less tax prsi etc each month.

Thats the point I want to make, sorry if it wasnt clear. A simpler way of saying it might be that getting €600 in rent while paying €500 is not a profit of €100, it is a loss of c. €180 when tax is taken into account.

C. The interest relief referred to is that landlords can write 75% of their mortgage interest off against their rental income. So if your investment property was purchased with a mortgage and you paid €400 pm interest on it, you would reduce your taxable income by half (€300). This doesnt apply to you, so there is even less of a reason to do what you suggest from a financial/fiscal point of view.

You seem like a nice person and clearly want to do what is best for yourself which is admirable. So please dont take offence at my above posts. I know nothing about your specific properties and there are all sorts of factors, personal, emotional etc for people to do what you are doing. But it seems to be a purely financial arrangement on your part and what Im trying to explain is that you will end up paying more tax this way and putting PPR before investments makes much more sense.

As others have poibted out the rental income may not factored in by banks and your borrowings on a new investment would also reduce the amount you could borrow on a PPR. So even if you dont want to sell the midlands property for personal reasons, you should focus on building up a deposit for the PPR (IMO).

Thank you for sharing your thoughts.

I'll certinaly take it into consideration when deciding what to do. The first thing I want to do is save up a bit more money.

Also I just recently started my job so I think it's best to be in this for at least 12 months prior to applying ?

athtrasna

Mod note:

Ipro please use the multi quote button rather than start a new post for each reply. Thanks

Ipro

athtrasna wrote: »

Mod note:

Ipro please use the multi quote button rather than start a new post for each reply. Thanks

I don't know where the multi quote button is. :-(
I'm on the touch/mobile site is this feature available on the touch site ?

ixus

Well done on saving that amount at your age.

If you ever intend on running your own business in the near future, maybe it would be better to keep saving so you can get up and running faster. Easier to get business loan if cash rich as opposed to leveraged up. Just a thought

athtrasna

Ipro wrote: »

I don't know where the multi quote button is. :-(
I'm on the touch/mobile site is this feature available on the touch site ?

It's available on the full site. It looked like you were on the full site as you double quoted a post in a single reply. I have merged your previous replies where they were posted successively, it makes it easier to keep track of who's saying what.

If you're on the touch site there's always the option to switch to the full site at the bottom of the page. You can switch back by clicking the "touch site" option at the bottom of the home page.