Property dilemma - advice needed

Steptoe1970

Apologies in advance if this is a rather stupid question, I'm not terribly savvy when it comes to this kind of thing.

Bought a 3 bed, end of terrace at height of boom in Dublin for €400K+. Very quickly afterwards, prices plummeted. Only silver lining was I'm on a tracker mortgage.

Present day, just coming out of neg equity and contemplating a move closer to home.

If we sell, we will most likely make little or no "profit" shall we say. We also walk away from a tracker mortgage and over 100K paid off the original mortgage.

I'm thinking the most sensible option would be to rent the house out and let whatever rental income comes our way pay off the mortgage while we concentrate on paying off the new mortgage if/when we move. Even if we kept it for ten years, at least we'd have some equity on the house.

I know there are "drawbacks" to being a landlord, however, my driver is not to make money on the rental income (but if I do then so be it) and would happy to have the mortgage covered. If in 10-20-30 years time we decide to sell it, we'd have something to help the kids out with when the time comes for them to get on the ladder.

We will never, ever get as good a mortgage as the tracker were on now and I feel sick knowing we would be walking away with virtually nothing should we sell.

Thoughts?

HeidiHeidi

I'm no expert in the area, but these thoughts immediately occurred to me.....

How much are your repayments, and how much might you expect to get in rent on the house? You'll be taxed on the rental income at your marginal rate (less expenses which are tax deductible and a certain amount of mortgage interest relief) so you'd want to make sure that you can afford it (including if interest rates rise, which I think is fairly inevitable in the near/medium term).

Your bank may not allow you to keep your tracker rate if you're no longer an owner-occupier. You may or may not wish to ask them about that.

Your may not get approval for another mortgage if you already have one.

Steptoe1970

Thanks for the response.

Mortgage at present is €1200 pm. Houses in the area are renting at €1800 pm.
Good point on interest rates but I think the net rental income would cover interest rates to a certain point.

Need to check with bank on keeping tracker if we rent it out.

Mortgage approval looking positive at present.

mloc123

Steptoe1970 wrote: »

Thanks for the response.

Mortgage at present is €1200 pm. Houses in the area are renting at €1800 pm.
Good point on interest rates but I think the net rental income would cover interest rates to a certain point.

Need to check with bank on keeping tracker if we rent it out.

Mortgage approval looking positive at present.

Keep in mind also that you will clear ~900 pm after being taxed on the rent?

sweetie

Steptoe1970 wrote:

Need to check with bank on keeping tracker if we rent it out.

They won't let you, if you tell them

Steptoe1970

mloc123 wrote: »

Keep in mind also that you will clear ~900 pm after being taxed on the rent?

Thanks for that - pardon my ignorance but would you mind breaking that down for me?

Hollister11

Unfortunately the likelihood if keeping the tracker of you rent it out is 0.

I would rent it out myself, even if you averaged 10K a year over 10 years. That's 100K, I would definitely rent it.

Steptoe1970

sweetie wrote: »

They won't let you, if you tell them

Seems our bank will allow us to keep the tracker if we rent it out, thankfully.

db

You will need to pay tax on your rental income at your marginal rate so probably 51%. You can reduce this tax bill by taking your costs into account so any letting fees, maintenance bills etc. You will also get some relief on the interest you pay on the mortgage.

The rent will never cover the mortgage so you will always feel that you are paying a mortgage for someone else to live in the house. This is without even considering that the bank will more than likely change you to a buy to let rate. The flip side is that your equity in the house will be growing so hopefully the value will increase further and the debt will reduce.

I was in the lucky position to have cleared the mortgage before buying a new house a few years ago. I thought it would be possible to hold on to the old house and rent it out but after 6 months of renting I was glad to be rid of it even though it was at the bottom of the market.

You may be able to sell this house and keep the tracker mortgage you have on to your next house.

Fian

Steptoe1970 wrote: »

Seems our bank will allow us to keep the tracker if we rent it out, thankfully.

Do you have that in writing? I think it is extremely unlikely that the bank would adopt that approach, it may be an inexperienced person you were speaking with who misunderstands the situation.

Trackers are uneconomical - banks are losing money on every tracker mortgage in issue. They are not in the business of facilitating people to continue with their tracker unless they have to. The standard terms and conditions for a tracker mortgage (or indeed a non-tracker mortgage on your own place) prohibit you moving out.

Interest rates for Buy to let mortgages are higher than on PDH mortgages. They are seen as higher risk since people are more likely to default on a buy to let than on their home. Interest rates are set relative to the risk involved in the lending - which is why lower LTV loans attract better rates than higher LTV loans.

deathtocaptcha

Steptoe1970 wrote: »

Bought a 3 bed, end of terrace at height of boom in Dublin for €400K+.

If we sell, we will most likely make little or no "profit" shall we say.

We will never, ever get as good a mortgage as the tracker were on now and I feel sick knowing we would be walking away with virtually nothing should we sell.

What makes you think you're not buying in at or near the height of another boom? Fast forward a couple of years and who's to say you won't have another big mortgage on not one but two properties in negative equity...

You should be thinking worst case scenarios, as with any investment. The price of it can go up and down. It's not guaranteed to go up. If taking a loss makes you feel 'sick', then you need to question why you've made / are making the investment in the first place because it means your gut is telling you it was/is a bad idea.

If you can't stomach losses, you should be reducing risk as much as possible, therefore you should simply sell the current house. Whether its financially savvy or not will be determined in time and with hindsight as nobody can time the market.

dumb_parade

Hollister11 wrote: »

Unfortunately the likelihood if keeping the tracker of you rent it out is 0.

I would rent it out myself, even if you averaged 10K a year over 10 years. That's 100K, I would definitely rent it.

I don't agree with this on the tracker. We have a property rented without loosing our tracker and have a second mortgage from the same bank (BOI) with out any issue.

goldsalmon33

I was in a similar position to yourself. Bought in 2006 and i had a good tracker in the city but wanted to move home.
So i moved home. Rent covered the city mortgage and i got a new mortgage for home place. The bank allowed us to keep tracker mortgage on the city house even though i wasnt the occupier. Make sure to get that in writing from the bank though. I had to chase them a bit for it.

It was a bit scary owing the bank so much money but i know it's all repayable. Yes I'm an landlord which is a bit of a pain but getting the right tenants means a lot. You could also get a management company to manage it for around 10%.

The rent is considered a taxable income as well so consider that you might have a tax bill each year to pay.

I'm looking at that city house now as accommodation for the kids when/if college comes around.

Graham

Steptoe1970 wrote: »

Thanks for that - pardon my ignorance but would you mind breaking that down for me?

If you charge €1800 per month rent you will be taxed on

€1800 - (85% of your interest payments) - other allowable costs.

E.g.

€1800 rent
-€500 (replace this figure with 85% of your monthly interest payments)
-€200 other expenses e.g. repairs, managing agents fees etc (replace this figure with your estimated allowable expenses)
=€1100 profit

You pay tax on the €1100 profit.
E.g. @51% that would be €561 tax/month
Leaving €539

If the capital part of your mortgage is more than the €539 left (in this example), you dip your hand into your own pocket.

On the plus side, you eventually own a mortgage free house.

PokeHerKing

Graham wrote:

€1800 rent -€500 (replace this figure with 85% of your monthly interest payments) -€200 other expenses e.g. repairs, managing agents fees etc (replace this figure with your estimated allowable expenses) =€1100 profit

Graham wrote:

You pay tax on the €1100 profit. E.g. @51% that would be €561 tax/month Leaving €539

Graham wrote:

If the capital part of your mortgage is more than the €539 left (in this example), you dip your hand into your own pocket.

Graham wrote:

If you charge €1800 per month rent you will be taxed on

Graham wrote:

€1800 - (85% of your interest payments) - other allowable costs.

Graham wrote:

€1800 rent -€500 (replace this figure with 85% of your monthly interest payments) -€200 other expenses e.g. repairs, managing agents fees etc (replace this figure with your estimated allowable expenses) =€1100 profit

Graham wrote:

You pay tax on the €1100 profit. E.g. @51% that would be €561 tax/month Leaving €539

Graham wrote:

If the capital part of your mortgage is more than the €539 left (in this example), you dip your hand into your own pocket.

Graham wrote:

On the plus side, you eventually own a mortgage free house.

And people wonder why rents are sky high!!😂

from_atozinc

Graham wrote: »

If you charge €1800 per month rent you will be taxed on

€1800 - (85% of your interest payments) - other allowable costs.

E.g.

€1800 rent
-€500 (replace this figure with 85% of your monthly interest payments)
-€200 other expenses e.g. repairs, managing agents fees etc (replace this figure with your estimated allowable expenses)
=€1100 profit

You pay tax on the €1100 profit.
E.g. @51% that would be €561 tax/month
Leaving €539

If the capital part of your mortgage is more than the €539 left (in this example), you dip your hand into your own pocket.

On the plus side, you eventually own a mortgage free house.

Are you saying if you rent a place for 1800 a month that, at the end, you only get 539 in to your pocket ? If so, CHRIST ABOVE.

andekwarhola

If you really don't want to live there, can break even on a sale and have approval for a mortgage somewhere you actually see yourself living long term, maybe just sell?

You're in a far better situation than many that bought at the top of the market. I know people stuck with 'starter' properties that would love to walk away and break even.

You'll might lose your tracker and a lot of the rent you make to tax and rents/house prices won't keep rising.

You might end up having to supplement more and more of the mortgage in a few years time when you may need the money more.

Browney7

from_atozinc wrote: »

Are you saying if you rent a place for 1800 a month that, at the end, you only get 539 in to your pocket ? If so, CHRIST ABOVE.

And a house that is magically paid for after 20 years...

Wesser

Please clarify

You pay tax on the €1100 profit.
E.g. @51% that would be €561 tax/month
Leaving €539


If the tax is 561 a month then surely the net is 1800 - 561 which is 1239?

You said the tax is charged on the 11000 but then you minuses it off the 1100 instead of 1800?

I'm not trying to be cheeky just trying to understand

2xj3hplqgsbkym

I am in a similar situation , here are my thoughts on it;

If I was renting my house out in dublin at about €1500 per month and paying rent nearer to home at €900 per month ( a bigger house) , it would cost much the same when I pay tax on the rental income.

If my tenants decided not to pay rent for 1 or 2 months, I could definitely not pay out €3000 a month to cover rents & mortgage, that worries me.

You can move your tracker with most banks ( mine is AIB) at a rate of 1% or do added into your tracker.

If you have a house in neg equity and a good tracker, you are better holding on to it as long as possible as you are paying a lot off the mortgage each year, not just interest.

It would be good to have house in Dublin in the future when kids are going to college/ university!

You will still need a 20% deposit to buy new house .

I don't know about you, but In my case I would have to move jobs, therefore may not get mortgage for a few years after moving .

Also in my case , moving home would mean more travel time to work, so more money on car/ petrol etc.. ( but also cheaper childcare) .

Would love to know your decision and reasoning.

Cuddlesworth

Steptoe1970 wrote: »

Mortgage approval looking positive at present.

Are you not applicable for 3.5 times income, minus debt owed. So 3.5 times joint income, minus 300k(guessing here) plus 20% deposit on new property?

LirW

Wesser wrote: »

Please clarify

You pay tax on the €1100 profit.
E.g. @51% that would be €561 tax/month
Leaving €539


If the tax is 561 a month then surely the net is 1800 - 561 which is 1239?

You said the tax is charged on the 11000 but then you minuses it off the 1100 instead of 1800?

I'm not trying to be cheeky just trying to understand

There you go, Rent charged minus 85% interest minus expenses leaves you with the profit which is taxed 51%.

If you charge €1800 per month rent you will be taxed on

€1800 - (85% of your interest payments) - other allowable costs.

E.g.

€1800 rent
-€500 (replace this figure with 85% of your monthly interest payments)
-€200 other expenses e.g. repairs, managing agents fees etc (replace this figure with your estimated allowable expenses)
=€1100 profit

Wesser

What?!

db

Wesser wrote: »

What?!

He is assuming that 85% of the monthly interest is €500.

beauf

You would need a contingency fund in case of a tenant not paying rent for a long time, a boiler failing or even a leak damage etc. Ideally a years rent or so.

fflynn

Wesser wrote: »

Please clarify

You pay tax on the €1100 profit.
E.g. @51% that would be €561 tax/month
Leaving €539


If the tax is 561 a month then surely the net is 1800 - 561 which is 1239?

You said the tax is charged on the 11000 but then you minuses it off the 1100 instead of 1800?

I'm not trying to be cheeky just trying to understand

1800 - 561 (tax) = 1239 - 588 (interest paid) = 651 - 200 (expenses) = leaving 451

Wesser

No.
my question is
Do you not minus the 561 from 1800 instead of 1100.

Graham

Wesser wrote: »

Please clarify

You pay tax on the €1100 profit.
E.g. @51% that would be €561 tax/month
Leaving €539


If the tax is 561 a month then surely the net is 1800 - 561 which is 1239?

You said the tax is charged on the 11000 but then you minuses it off the 1100 instead of 1800?

I'm not trying to be cheeky just trying to understand

In Cash Terms
From the €1800 you receive
you pay €588 mortgage interest (with 85% of this classed as an expense)
you pay €612 mortgage capital (not an expense so not tax deductible)
you pay €200 expenses (with 100% of this as an expense assuming they are allowed expenses)
you pay €539 tax (tax @ 51% on €1800 - (85% of €588) - €200)

Total in your pocket each month -€139


In other words, using my makey uppey numbers. It's entirely possible to appear to be cashflow positive on a rental property but actually be out of pocket when you realise you can't claim all of your mortgage payment as an expense.

august12

Wesser wrote:

If the tax is 561 a month then surely the net is 1800 - 561 which is 1239?

Yes, your figure is correct but the other person's calculation was also taking off mortgage interest and other allowable expenses, so 1239 is correct.

Wesser

1800 - 561 (tax) = 1239 - 588 (interest paid) = 651 - 200 (expenses) = leaving 451[/quote]

Ok so that 451 pays off the principle right?
And the 588 pays the interest right?
You're not paying the whole mortgage out of 451?

fflynn

Wesser wrote: »

1800 - 561 (tax) = 1239 - 588 (interest paid) = 651 - 200 (expenses) = leaving 451

Ok so that 451 pays off the principle right?
And the 588 pays the interest right?
You're not paying the whole mortgage out of 451?

correct

Wesser

Ok that's fine. Graham was making me think.it was way worse than that!!

Graham

Wesser wrote: »

1800 - 561 (tax) = 1239 - 588 (interest paid) = 651 - 200 (expenses) = leaving 451

Ok so that 451 pays off the principle right?
And the 588 pays the interest right?
You're not paying the whole mortgage out of 451?

Correct, the 451 is off the principle but it's often not enough without a contribution from the landlord.


Sorry if I confused things wesser, most people mistakenly assume €1800 rent and €1200 mortgage leaves them €600 taxable profit. You obviously get that this isn't the case.

Graham

Graham wrote: »

Ok so that 451 pays off the principle right?
And the 588 pays the interest right?
You're not paying the whole mortgage out of 451?

Correct, the 451 is off the principle but it's often not enough without a contribution from the landlord.


Sorry if I confused things wesser, most people mistakenly assume €1800 rent and €1200 mortgage leaves them €600 taxable profit. You obviously get that this isn't the case.

Wesser

No.need to apologise!
Everyday is a school.day!!

lcwill

Or to look another way the 451 is his net return on the 100k in equity which works out about 5% clean per year, plus any further capital gain on the whole 400k value of the property.

The only catch is that he is forced to keep investing back into his equity on the property as it is not an interest only mortgage

Not such a terrible deal as long as he doesn't need any free cash flow

davindub

Graham wrote: »

Graham wrote: »

Ok so that 451 pays off the principle right?
And the 588 pays the interest right?
You're not paying the whole mortgage out of 451?

Correct, the 451 is off the principle but it's often not enough without a contribution from the landlord.


Sorry if I confused things wesser, most people mistakenly assume €1800 rent and €1200 mortgage leaves them €600 taxable profit. You obviously get that this isn't the case.

Obviously worth noting as more of the principal is paid the more profitable it becomes. Also inflation increases return.

Steptoe1970

I am in a similar situation , here are my thoughts on it;

If I was renting my house out in dublin at about €1500 per month and paying rent nearer to home at €900 per month ( a bigger house) , it would cost much the same when I pay tax on the rental income.

Even if the mortgage was covered by renting out the property, I'd be happy. I'm going to meet a tax consultant to discuss the in's and out's.

If my tenants decided not to pay rent for 1 or 2 months, I could definitely not pay out €3000 a month to cover rents & mortgage, that worries me.

Understandable worry and definitely something I'd have to account for - put aside a pot of money to cover things like this.

You can move your tracker with most banks ( mine is AIB) at a rate of 1% or do added into your tracker.

Bank will allow us to keep tracker +1% for five years, then we have to choose variable or fixed with higher % rate.

If you have a house in neg equity and a good tracker, you are better holding on to it as long as possible as you are paying a lot off the mortgage each year, not just interest.

We're literally just out of neg equity. If we didn't have a tracker I wouldn't even consider keeping the house to rent it out. I'd cut my losses, sell it and walk away.

It would be good to have house in Dublin in the future when kids are going to college/ university!

You will still need a 20% deposit to buy new house.

Deposit not an issue, literally saved every penny for the last few years and lived on bread and water. Crazy yes but a necessary sacrifice.

I don't know about you, but In my case I would have to move jobs, therefore may not get mortgage for a few years after moving.

We'd be moving to a different part of Dublin, where we grew up. Home is where the heart is. We've never felt at home where we are now. No need to leave jobs.

Also in my case , moving home would mean more travel time to work, so more money on car/ petrol etc.. ( but also cheaper childcare) .

See above. My commute would be better with the move though.

Fian

Wesser wrote: »

1800 - 561 (tax) = 1239 - 588 (interest paid) = 651 - 200 (expenses) = leaving 451

Ok so that 451 pays off the principle right?
And the 588 pays the interest right?
You're not paying the whole mortgage out of 451?[/QUOTE]

You delete the interest (actually 85% of the interest) and expenses from gross rent before tax - you don't take it off the net rent. So you are left with €539 "profit after tax" which you put towards paying the principal portion of the mortqage + the remaining 15% interest + management fees etc.

That is fair enough - you should not expect to be able to pay the entire principal from the rent, at least not for years when the principal becomes a lower proportion of the total value. Landlords routinely use other income to pay off the mortgage, otherwise they would essentially be getting tenants to buy the property for them.

As it is some would argue they are getting the tenants to subsidise the mortgage payments anyway. Which makes about as much sense as arguing that since the landlords are paying more out than the rent they are subsidising the tenants accommodation costs.

steamsey

You can only deduct 80% mortgage interest, not 85% and this goes up to 100% if you accept HAP tenants

http://www.revenue.ie/en/property/rental-income/irish-rental-income/what-expenses-are-allowed.aspx

Graham

steamsey wrote: »

You can only deduct 80% mortgage interest, not 85% and this goes up to 100% if you accept HAP tenants

http://www.revenue.ie/en/property/rental-income/irish-rental-income/what-expenses-are-allowed.aspx

You're absolutely right. I think it's Jan 1st when it goes up to 85% and 5% more each year for the following 3 years.