Second home: Go for it or not!

suave.4u

Hi Guys,

I have 30K left on my first mortgage. I recently received an inheritance amount of 80K and I am planning to close off my mortgage.

With the rest 50K, I was thinking of getting a new home, change my residence and put the old one for rent.

The interest rate on the first one was in the range of 3.4-4.3% but for the second house it will be bit higher.

The market is good in our area and I should be able to get a good rent on the first house.
Is buying a second home a good idea (most likely the mortgage rate this time will be 6%+ and I am not sure whether it will be profitable in the long run).

All help appreciated!

Regards,

Moonbeam

suave.4u wrote: »

Hi Guys,

I have 30K left on my first mortgage. I recently received an inheritance amount of 80K and I am planning to close off my mortgage.

With the rest 50K, I was thinking of getting a new home, change my residence and put the old one for rent.

The interest rate on the first one was in the range of 3.4-4.3% but for the second house it will be bit higher.

The market is good in our area and I should be able to get a good rent on the first house.
Is buying a second home a good idea (most likely the mortgage rate this time will be 6%+ and I am not sure whether it will be profitable in the long run).

All help appreciated!

Regards,

Have a look at the associated costs especially the tax on rental income ,depending on your earnings it could be at the higher rate . I would also mortgage the house been rented as you can claim some interest relief .

December2012

Look into keeping your current mortgage and using the other money as deposit. That way you could keep your low rate on your first property, and then borrow less for your second property.

DubCount

OP. Don't restrict yourself to your existing house as an investment property. You could sell your existing house and buy a different property - maybe a cheaper property, or a property with a better rental yield (annual rent divided by cost of property). Although your area may have goo rents, there may be better rental yield in other areas.

As a general rule, if the Rental Yield is less than the mortgage interest rate, then I don't think its a good investment. If the interest rate is 6%, I would want a rental yield of at least 7.5%.

You should also look at a projected monthly cash flow. Even if it is making a profit (rent greater than interest payments), capital payments on the mortgage may make your cash outflows (mortgage payments, tax, maintenance, PRTB Registration, insurance etc.) greater than your cash inflows (rent).

Good luck - I hope it works out for you whatever you decide

VincePP

Have you checked interest rates? 6% is in sub prime area.

With a low loan to value mortgage you'll get a rate close to 3%.

Pkiernan

Why would you pay off a 3% loan to take on a 6% loan?

matt-dublin

Buy a gaf in Bulgaria!

Only kidding but if I had a few bob I would seriously look at an apartment in albufeira, great rental market all year round and a great place to go to. Flights are cheap and you not really need a car to get around

The_Conductor

In the current climate- with so much economic uncertainty- and the threat of seismic shifts in the Irish property market- I'd be hardpressed to suggest to anyone anything other than pay off all existing loans and debts- and sit on whatever liquidity you have over.

As you may be aware- the ECB liquidity statement for banks in the Community (not just the Eurozone) came out yesterday. The main lenders in Ireland and the UK came off exceptionally poorly. You may find that lending in the short to medium term- is on fairly onerous terms.

As for 6% being subprime territory? AIB and BOI have plenty of products at these type rates- as do all the RBS subsidiaries. Its significantly higher than most people are offered- it is however, firmly there among their offerings.

Advising you to hold off- is wholly aside from the amount of work being a landlord entails (if you do it properly)- and indeed- the fact that the rental income will be taxed (after allowable costs) at your marginal rate. There is nothing to say that it'll be a sane economic suggestion.

You cannot, and will not, be allowed to remortgage house 1 to buy house 2- and claim the new mortgage interest on house 1 as a cost towards your tax bill. It would perhaps make sense (financially for you) if you were- but the manner in which the property you're proposing to let out- has its mortgage largely paid off- means the main cost centre you can put towards it- mortgage interest- doesn't exist. Many people get caught out by this.

Bigus

There's loss of tax free benefits, implications on your current home.

If your current home is worth more than you paid for it and you sell it now for more , that financial gain to you is completely tax free at the moment.

If you rent your current home out you incrementally lose that tax free status , you need to talk to an expert on tax first.

newacc2015

You might be better off selling the first house. As if you rent it you will lose the capital gains tax exemption of it no longer being a PPR. What is the yield you would get? Ie the house is worth x amount and the yearly rent would be x amount. There is houses still for sell in parts of Dublin with a 10-12.5% yield.

My two cents is you may be better off selling your first house, capitalise the gain tax free if there is one. Buy a new house on a low interest rate as a PPR and see if you want an investment property. BOI does investor mortgages with a LTV of 75% and a interest rate of around 4.8%. It makes no sense paying interest on your mortgage and having a mortgage free rental property with a massive tax bill. You are probably better off taking your gain from your first house and getting a mortgage as small as possible on your new PPR

pc7

How big a mortgage are you thinking?
What age bracket are you?
What sector do you work in?
Lots to consider, it can be difficult being a landlord, one bad tenant can cause you to be seriously at risk.
You really need to weigh it all up.

Pawwed Rig

There is not enough info in your post to advise you. In particular your age would be important. You should also be considering the structure of your investment as minimising taxable income and avoiding tax at 52% would be the critical considerations.

VincePP

There's a lot of hassle in renting a single property let alone the tax implications.

Why not sell current house, get 50% mortgage on new house (you'll gey a rate of 3.1%) and then invest the balance in a REIT - property backed fund.

Remember any "profit" from sale of your home is tax free, but once it becomes a rental, tax implications come into the calculation. I think though its based on increase in value from when you start renting it.

ted1

Tbh I wouldn't be arsed if I was you . Live mortgage free, dump what you were paying on your mortgage into a pension fund but keep a bit back and travel more

Diarmuid

Diversification in assets is something you should consider

suave.4u

Thank you Guys.

-How big a mortgage are you thinking:
The new house is close to 300K. Was thinking of a mortgage of atleast 260K.

What age bracket are you?
- 35 years old (spouseworking and a kid)

What sector do you work in?
- into IT

I do have diversification in my mind.I am already contributing into a pension fund.
Never tried anything else till now, always thought property is the best option.

The_Conductor

Just to reiterate- whichever property you propose to let out (your current property- or the one you're proposing to purchase) should be the one that is mortgaged- as 75% of mortgage interest is the major cost against which you can shelter your rental income from the taxman- however, you can't retrospectively mortgage the property for this purpose- unless its for improvement purposes.

I think people are being overly discouraging, a trend that appears to be running through this forum a lot recently when people talk about renting out their property.

With the place being mortgage free and even if he pays 50% tax on the entire rent at say 1200 per month that's still over 7000 a year profit into his pocket. To out that into perspective you would need over 600000 euro on deposit in a saving account to make that sort of money and you would then lose 33% in dirt. The rental income is basically guaranteed for the foreseeable future, you can't say that about other investments and I'd imagine you would have to go into a somewhat risky investment to be clearing over 7k a year after capital gains tax.

Then there is the fact you are getting the rental income profit instantly every month not waiting years for it (if at all). The money from rent can be instantly invested to make more money on that or just put into the highest interest savings account available if you don't want to risk it in an investment.

Michael D Not Higgins

Kaylin Raspy Snake wrote: »

With the place being mortgage free and even if he pays 50% tax on the entire rent at say 1200 per month that's still over 7000 a year profit into his pocket.

That's ignoring rental yield, maintenance costs, other costs such as registration fees, property tax, the cost of having a non-paying tenant for a year while you battle them in the RTB, etc. There are far less risky ways to invest money.

Michael D Not Higgins

Michael D Not Higgins wrote: »

That's ignoring rental yield, maintenance costs, other costs such as registration fees, property tax, the cost of having a non-paying tenant for a year while you battle them in the RTB, etc. There are far less risky ways to invest money.

Most costs can be claimed against tax as can maintenance. As for the non-paying tenant steps need to be taken to ensure this won't happen and if things are done correctly and carefully the risk is significantly reduced. Renting the rooms seperately for example rather than the full house almost eliminates the risk. I would disagree on there being less risky ways that can be as profitable and money upfront also which can then be reinvested. Remember you can very short term invest the entire rent also or leave it sitting in a savings account making a bit of interest as the tax is only paid once a year.

matt-dublin

Michael D Not Higgins wrote: »

That's ignoring rental yield, maintenance costs, other costs such as registration fees, property tax, the cost of having a non-paying tenant for a year while you battle them in the RTB, etc. There are far less risky ways to invest money.

Everything there except property tax s tax deductible.

I did it in my PPR for two years and paid less than €1000 tax due to deductions from interest, insurances, management fees etc.

Michael D Not Higgins

Deductible doesn't mean free though, you're just getting your maintenance et al. at a tax discount of 50 percent. If your maintenance was 5,000 and your income from rent was 10,000, there's still a tax bill on 5,000, then your profit goes from 5,000 where there's no maintenance to 2,500 where there is maintenance.

Michael D Not Higgins

Kaylin Raspy Snake wrote: »

Renting the rooms seperately for example rather than the full house almost eliminates the risk.

It absolutely does not as has been shown in a couple of cases that went through the RTB and courts. You've brought this up many times but I'll keep reminding you that the system isn't set up to allow landlords to dodge their responsibilities with loopholes.

matt-dublin

Michael D Not Higgins wrote: »

Deductible doesn't mean free though, you're just getting your maintenance et al. at a tax discount of 50 percent. If your maintenance was 5,000 and your income from rent was 10,000, there's still a tax bill on 5,000, then your profit goes from 5,000 where there's no maintenance to 2,500 where there is maintenance.

You don't need to explain it to me or be condescending I'm fully versed thanks.

On €16k rental income I only paid €896 tax as in practice I only have €1900 odd profit after expenses and deductions

noel100

Tried this last year
6k left on mortgage
Wanted to borrow 55k on existing house + savings to purchase a Irish holiday home..
Went to every bank got approval in principle from my own mortgage provider PTSB no one else.
Went to draw down the mortgage turned down as this was classed as an investment property and under rules of the bailout they couldn't lend for a investment property. Loads of criteria came up area of property wasn't on approved list. Investment property. Etc anything to get out of giving loan on a house that was virtually paid off.
I could borrow the money for a car or extension 55k no issue or send my kids to college.

The_Conductor

Plus- keep in mind- he will have a PPR clear of mortgage versus living in a second property- on which he has to pay a mortgage from his after tax income.......

If you sit down and do the sums on what he is proposing- it really doesn't add up in my eyes.

If he didn't have the cost of a fresh mortgage on a new PPR to contend with- it would be a lot easier to definitively say yay or nay- however, the fact that he has to take out a fresh mortgage to buy the property he now proposes to live in- completely and utterly changes the dynamics of the proposition.

It is not that the rented property will be mortgages (other than the small amount o/s on it)- its a whole new mortgage on the new property (which is not the property the OP is proposing to let)- versus living in a mortgage free PPR..........

The OP needs to sit down with a tax consultant for a session.

The_Conductor

matt-dublin wrote: »

You don't need to explain it to me or be condescending I'm fully versed thanks.

On €16k rental income I only paid €896 tax as in practice I only have €1900 odd profit after expenses and deductions

And in the OP's case- he'll also have mortgage interest to pay on the property he now proposes to live in- and none (or very little) on the property he proposes to let out. You probably had a reasonable mortgage on the property you let- the OP doesn't........

Michael D Not Higgins

matt-dublin wrote: »

You don't need to explain it to me or be condescending I'm fully versed thanks.

On €16k rental income I only paid €896 tax as in practice I only have €1900 odd profit after expenses and deductions

Sorry, I wasn't meaning to be condescending. I am just spelling it out for people who also read these forums who don't know how the taxes work.

matt-dublin

The_Conductor wrote: »

Plus- keep in mind- he will have a PPR clear of mortgage versus living in a second property- on which he has to pay a mortgage from his after tax income.......

If you sit down and do the sums on what he is proposing- it really doesn't add up in my eyes.

If he didn't have the cost of a fresh mortgage on a new PPR to contend with- it would be a lot easier to definitively say yay or nay- however, the fact that he has to take out a fresh mortgage to buy the property he now proposes to live in- completely and utterly changes the dynamics of the proposition.

It is not that the rented property will be mortgages (other than the small amount o/s on it)- its a whole new mortgage on the new property (which is not the property the OP is proposing to let)- versus living in a mortgage free PPR..........

The OP needs to sit down with a tax consultant for a session.

it wouldn't really be worth while doing unless your were mortgaging on the new property as 75% the interest is tax deductible on top of the life insurances.

If you're a cash purchaser than the benefit would be a max of 5-6k a year in your pocket.

Being a landlord is only worthwhile if you're borrowing for the investment. Keep it for 7 years and then sell at a profit as I think capital gains is offset at that stage

Michael D Not Higgins

Michael D Not Higgins wrote: »

It absolutely does not as has been shown in a couple of cases that went through the RTB and courts. You've brought this up many times but I'll keep reminding you that the system isn't set up to allow landlords to dodge their responsibilities with loopholes.

While I still stand by my opinions about these people being licencees etc I'm not referring to this in the above statement as I know people will argue with me over it.

What I meant is having the rent coming from 3 sources (preferably strangers to each other) mitigates a lot of the risk of losing your months rent. There is a small chance one person might not pay but in this instance you still get 2/3 of the rent. Also people in shared houses very rarely see it as a long term thing so you are much less likely to have people seeing it as "home" and digging their heals in and not paying rent for what ever reason etc. People are much more likely to stay a while and move on to be replaced with a similar person who again stays a while and moves on (a while being 1-3 years sort of time scale).

Young professionals starting out who will stay until their wages go up a bit, they buy, they move in with a partner etc would be the demographic I'd be going for. The people being fully fledged tenants doesn't change any of the above.

matt-dublin wrote: »

Being a landlord is only worthwhile if you're borrowing for the investment. Keep it for 7 years and then sell at a profit as I think capital gains is offset at that stage

I disagree on that, I'd rather be profiting on the rent than after tax than be spending the profit on a mortgage.

matt-dublin

The_Conductor wrote: »

And in the OP's case- he'll also have mortgage interest to pay on the property he now proposes to live in- and none (or very little) on the property he proposes to let out. You probably had a reasonable mortgage on the property you let- the OP doesn't........

He could remortgage the existing property to purchase the new one.

The_Conductor

matt-dublin wrote: »

Being a landlord is only worthwhile if you're borrowing for the investment. Keep it for 7 years and then sell at a profit as I think capital gains is offset at that stage

Not the case for the OP- his 'investment property' is his current PPR which he is proposing to let- and buy a new PPR with a fresh mortgage........

So- he'd have a whole new mortgage to pay from his net income..........

Its a complete non-runner from a tax perspective.

The_Conductor

matt-dublin wrote: »

He could remortgage the existing property to purchase the new one.

Not anymore you can't- Revenue cracked down on this (believe you me- I tried......)
The rules were all changed. Equity release on property 1 would only qualify for relief in specific circumstances (determined by what you use the equity for).

Michael D Not Higgins

Kaylin Raspy Snake wrote: »

While I still stand by my opinions about these people being licencees etc I'm not referring to this in the above statement as I know people will argue with me over it.

What I meant is having the rent coming from 3 sources (preferably strangers to each other) mitigates a lot of the risk of losing your months rent. There is a small chance one person might not pay but in this instance you still get 2/3 of the rent. Also people in shared houses very rarely see it as a long term thing so you are much less likely to have people seeing it as "home" and digging their heals in and not paying rent for what ever reason etc. People are much more likely to stay a while and move on to be replaced with a similar person who again stays a while and moves on (a while being 1-3 years sort of time scale).

Young professionals starting out who will stay until their wages go up a bit, they buy, they move in with a partner etc would be the demographic I'd be going for. The people being fully fledged tenants doesn't change any of the above.

I'd expect a lower yield from that situation then, with the revolving door of tenants. Standard calculations are 11 months of the year but you might have to do your sums for less than this in the above situation.

Kaylin Raspy Snake wrote: »

I disagree on that, I'd rather be profiting on the rent than after tax than be spending the profit on a mortgage.

This only makes sense if the rental yield is high enough. If a 250k house makes a 7% yield of 1500/month, and you're paying the full 50% tax on it then you net is 3.5%. If you could sell the house and invest it into your pension or another fund which attracts lower tax, you're much more likely to outperform the return on the house.

Michael D Not Higgins

Michael D Not Higgins wrote: »

I'd expect a lower yield from that situation then, with the revolving door of tenants. Standard calculations are 11 months of the year but you might have to do your sums for less than this in the above situation.

In the current climate I'd be accounting for almost if not 100% occupancy for the full 12 months. Rooms in houseshares are snapped up at a crazy rate. As an example I'm 3 years in my current house and in that time both other bedrooms have changed person twice and its resulted in less than half a month of lost rent (well only half a month of 1/3 of the rent actually) for the LL in the 3 years and remember things were a lot quieter for a lot of that 3 years. Thing is the only reason he even lost half a month is I lined up someone for the room through work to save me the hassle of daft and he wasn't ready to move in for half a month and the LL agreed to not ask for rent for the period. Had it gone on daft it would have been filled in a day.

Michael D Not Higgins

Kaylin Raspy Snake wrote: »

In the current climate I'd be accounting for almost if not 100% occupancy for the full 12 months. Rooms in houseshares are snapped up at a crazy rate. As an example I'm 3 years in my current house and in that time both other bedrooms have changed person twice and its resulted in less than half a month of lost rent for the LL in the 3 years and remember things were a lot quieter for a lot of that 3 years. Thing is the only reason he even lost half a month is I lined up someone for the room through work to save me the hassle of daft and he wasn't ready to move in for half a month and the LL agreed to not ask for rent for the period. Had it gone on daft it would have been filled in a day.

This still ignores the second part of my post. Even with 100% occupancy, a house is likely a bad investment for return. Apartments have a higher yield and other investments have a similar or better return with lower taxes.

Michael D Not Higgins

Michael D Not Higgins wrote: »

This still ignores the second part of my post. Even with 100% occupancy, a house is likely a bad investment for return. Apartments have a higher yield and other investments have a similar or better return with lower taxes.

If it was such a bad investment why do so many people invest in it? I'm not saying it's guaranteed profit by any means and you have to be smart and on top of everything but in this scenario where the op would have no mortgage on the property then after the tax is paid it's basically all profit and profit going into your account every month not waiting years for a return or having it tied up and unreachable if you need it.

Michael D Not Higgins

Kaylin Raspy Snake wrote: »

If it was such a bad investment why do so many people invest in it? I'm not saying it's guaranteed profit by any means and you have to be smart and on top of everything but in this scenario where the op would have no mortgage on the property then after the tax is paid it's basically all profit and profit going into your account every month not waiting years for a return or having it tied up and unreachable if you need it.

If it was such a good investment why are so many landlords selling up? The stock on daft for instance has dropped over 75% since 2010, with the inflow of properties at roughly half the level of 2010.

Sure the supply side has hit sales too, the stock for sale is down 60% from its highest point. But inflow is up from previous years, it's just the demand is so high it's stripping the available houses from the market.

Pawwed Rig

Personally I think pension funds are better investments than property for many people but property investments are easier to understand.

Pawwed Rig

Pawwed Rig wrote: »

Personally I think pension funds are better investments than property for many people but property investments are easier to understand.

It's a very very long term investment though, you can't get the money until you retire. Not much good if you want access to your money in the short or medium term.

ted1

Kaylin Raspy Snake wrote: »

I think people are being overly discouraging, a trend that appears to be running through this forum a lot recently when people talk about renting out their property.

With the place being mortgage free and even if he pays 50% tax on the entire rent at say 1200 per month that's still over 7000 a year profit into his pocket. To out that into perspective you would need over 600000 euro on deposit in a saving account to make that sort of money and you would then lose 33% in dirt. The rental income is basically guaranteed for the foreseeable future, you can't say that about other investments and I'd imagine you would have to go into a somewhat risky investment to be clearing over 7k a year after capital gains tax.

Then there is the fact you are getting the rental income profit instantly every month not waiting years for it (if at all). The money from rent can be instantly invested to make more money on that or just put into the highest interest savings account available if you don't want to risk it in an investment.

Wow you are way off. Profit is after all costs , the property isn't free and can devalue , it's not maintenance free either

Pawwed Rig

Kaylin Raspy Snake wrote: »

It's a very very long term investment though, you can't get the money until you retire. Not much good if you want access to your money in the short or medium term.

Agreed but many ime see the rental property as a retirement income and they are happy to just meet ( or even top up) their costs until the mortgage is paid down. So 20-30 years before you see a decent income stream. IMO if you are not getting some sort of return from day 1 it is a bad investment.

The_Conductor

Its very hard to justify borrowing money at not insignificant risk- when you have outstanding debts that you could pay down- at no risk whatsoever. I.e. say the OP is paying 4% on his current mortgage (not improbable)- the opportunity cost of not paying this down- is an immediate 4%- before any risk cost is added into the equation.

Looking at this purely from a financial perspective- as an investment- it only makes sense if a reasonable return on investment can be achieved (by whatever means- however, in an Irish context- the only avenue open to landlords- is via the tax system).

If the entire series of transactions could be managed in a tax efficient manner- the details of which he/she would have to discuss both with an accountant and a solicitor- then by all means go ahead and do your best to use the tax system to your best advantage. If- on the other hand- you're going to be treated in a penal manner by Revenue- forget it........

It really does boil down to this simple question. Can the OP make it work from a tax perspective- yay or nay. He/she needs to get proper advice from competent professionals before they sit down and make a decision.

Proper planning now- to legitimately and legally avoid tax later- is key.

suave.4u

The_Conductor wrote: »

Its very hard to justify borrowing money at not insignificant risk- when you have outstanding debts that you could pay down- at no risk whatsoever. I.e. say the OP is paying 4% on his current mortgage (not improbable)- the opportunity cost of not paying this down- is an immediate 4%- before any risk cost is added into the equation.

Looking at this purely from a financial perspective- as an investment- it only makes sense if a reasonable return on investment can be achieved (by whatever means- however, in an Irish context- the only avenue open to landlords- is via the tax system).

If the entire series of transactions could be managed in a tax efficient manner- the details of which he/she would have to discuss both with an accountant and a solicitor- then by all means go ahead and do your best to use the tax system to your best advantage. If- on the other hand- you're going to be treated in a penal manner by Revenue- forget it........

It really does boil down to this simple question. Can the OP make it work from a tax perspective- yay or nay. He/she needs to get proper advice from competent professionals before they sit down and make a decision.

Proper planning now- to legitimately and legally avoid tax later- is key.

Thanks a lot for your detailed replies (some are real eye openers). Yes i will have a chat with an advisor..

pc7

suave.4u wrote: »

Thanks a lot for your detailed replies (some are real eye openers). Yes i will have a chat with an advisor..

Would be great if you came back and update us with their thoughts afterwards, be interesting to see.

ted1

suave.4u wrote: »

Thanks a lot for your detailed replies (some are real eye openers). Yes i will have a chat with an advisor..

You need to take a look at future legislative restrictions as there's talk about changing the law with regards selling property and tenants in situ as it may reduce the selling price

Lux23

Kaylin Raspy Snake wrote: »

If it was such a bad investment why do so many people invest in it? I'm not saying it's guaranteed profit by any means and you have to be smart and on top of everything but in this scenario where the op would have no mortgage on the property then after the tax is paid it's basically all profit and profit going into your account every month not waiting years for a return or having it tied up and unreachable if you need it.

Because Irish people have an obsession with property. That is the only reason why so many opt for it over other methods of investing.