Landlord Maths

DubCount

There have been several posts recently expressing the view that small landlords are leaving the market. It can be hard to understand why this is happening when rents are at an all time high. I just want to set out a typical set of numbers for a landlord entering the business to show why becoming a landlord just does bot add up.

Typical 2 bed apartment in suburbs of Dublin. Cost €250,000. Stamp Duty €2,500 Legal costs and some initial renovations etc. €12,500. Total Cost of ownership €265,000. Mortgage of €180,000 (72% LTV over 20 years) and the balance from that spare €85,000 you have knocking around in your bank account. Rent €1750 per month - a yield of €8.4%.

Rent Income €21,000

Mortgage Interest €9,000
Mortgage Capital Payments €5,244
Apartment Complex charges €2,000
Repairs/Maintenance €2,000
RTB Registration € 90
Other cost/contingency €2,000

Total expenditure (excl tax) €20,334

Tax (40%) €3,080
PRSI (4%) € 308
USC (8%) € 616

Total Tax €4,004

Total net cast outflow €3,334

So a landlord with an 8.4% yield and 100% occupancy has more cash outflow than cash inflow every year. The venture will (all going well) pay back the €180,000 mortgage over 20 years. However all this does come with risks. a rogue tenant could easily cost €50,000 between lost rent, legal costs and property damage and you need that in your bank account along with the €85,000 to set into the game. There is no guarantee rents wont fall over the next 20 years. The apartment complex may require significant works not covered by a sinking fund. You may not have full occupancy.

Compare that with putting the €3,334 into a pension scheme over 20 years . With tax relief, that is translates to €111k with no risk.

You may argue about some of my calculations, but overall I just wanted to show that it is difficult to make the finances stack up - even when you have significant cash to invest.

cruizer101

The capital repayments aren't really an expenditure though, yes they have to be paid but they are not money lost they are money gone into an asset.

That said I do agree with the general sentiment of your post, there isn't necessarily great money to be made and there are a lot of risks (rental rates, property prices, bad tenants)

Browney7

cruizer101 wrote: »

The capital repayments aren't really an expenditure though, yes they have to be paid but they are not money lost they are money gone into an asset.

That said I do agree with the general sentiment of your post, there isn't necessarily great money to be made and there are a lot of risks (rental rates, property prices, bad tenants)

What does it look like without capital repayments and mortgage repayments? Is it ever a good idea for individuals to take out leveraged investments? People were making "investments" in 2006 buying properties with leverage when the rental yields were less than the interest rates on the loans - that was bananas altogether.

Any return on the Investment was only ever going to come from capital gains and your example is no different. If your example came to fruition exactly for five years you'd have made roughly 30k in capital repayments so you'd owe the bank 30k less. You'd have paid out 20k for taxes (4k approx for five years). If the asset had increased by 10% in value over the five years this would all accrue to you (less any CGT and selling costs).

Part of the reason for the low net yield is the high tax which applies to all individual investors in all asset classes - shares, bonds etc (aside from EIIS schemes).

No question saving via a pension is very efficient and its still possible to get property exposure via funds especially if you go self directed.

Wesser

I think that small business buy to let landlords should sell up and I am happy that they are being incentivised to sell up.

When I was house buying I had to complete with buy to let landlords. I found this infuriating. I had to complete to buy a home that they wanted to make money out of but I wanted to sleep in it and make it a home and a place to live.

Landlords selling up their stock will calm house prices as more properties available.
Renting of propertiesshould be done by large professional property management organisations that do a professional job and aimed at students and you g working people. Families should be buying.

Houses are for living in not making money out of.

Peregrinus

DubCount wrote: »

. . . Compare that with putting the €3,334 into a pension scheme over 20 years . With tax relief, that is translates to €111k with no risk.

Yes, but at the end of 20 years the landlord now owns an apartment, free of mortgage, which was initially worth €250k, but which presumably is now worth considerable more than that. So doesn't that make the apartment purchase the significantly better investment? Or am I missing something?

DubCount

Without the requirement to leverage (mortgage) the investment. The number certainly improve

Rent Income €21,000

Apartment Complex charges €2,000
Repairs/Maintenance €2,000
RTB Registration € 90
Other cost/contingency €2,000

Total expenditure (excl tax) €6,090

Tax (40%) €5,964
PRSI (4%) € 596
USC (8%) € 1193

Total Tax €7,753

Total net cast Inflow €7,157

Thats about a 2.7% after tax return on your €265,000 spend. Its better than interest you would get in the bank, but still comes with all the risk previously mentioned.

Hack12

Your figures are wrong as for tax purposes you can only deduct 80% of the interest paid (75% until last year). Capital allowances are not allowed to be deducted. Your figures are also based on current stamp duty rates and property prices at present which a lot of landlords paid in "the boom" which were higher. I'm hooefully about a year from getting out of being a landlord and never ever to return to it. Things to note:
- 80% of mortgage interest only is deductible.
- LPT is not deductable
- If you have 2 or more properties and 1 is making a loss you can't deduct that loss from the one making a profit which you can with any other business.

There is a few more things to know but in general its impossible to make a decent return on it for the work involved annualy.

Peregrinus

DubCount wrote: »

Without the requirement to leverage (mortgage) the investment. The number certainly improve

Rent Income €21,000

Apartment Complex charges €2,000
Repairs/Maintenance €2,000
RTB Registration € 90
Other cost/contingency €2,000

Total expenditure (excl tax) €6,090

Tax (40%) €5,964
PRSI (4%) € 596
USC (8%) € 1193

Total Tax €7,753

Total net cast Inflow €7,157

Thats about a 2.7% after tax return on your €265,000 spend. Its better than interest you would get in the bank, but still comes with all the risk previously mentioned.

But that calculation also disregards the capital appreciation of the asset, which is in fact the main return that you can expect from buying a house or flat.

Plus, both calculcations assume that rent doesn't go up at all over the 20-year term. That's not very likely.

DubCount

Peregrinus wrote: »

Yes, but at the end of 20 years the landlord now owns an apartment, free of mortgage, which was initially worth €250k, but which presumably is now worth considerable more than that. So doesn't that make the apartment purchase the significantly better investment? Or am I missing something?

leaving aside capital gains for the moment, the LL does own the property outright at the end of the 20 years. However, he/she initially invested €85,000 of the value. All he/she has gained in the paying off of the mortgage (€180,000). This is better than a risk free return, but its not risk free, and the risk is considerable.

The value of the property may increase/decrease over time, but that is true of any investment. There is no reason to suggest that a single property will outperform the capital gain of any other investments.

pc7

Also with rpz you may not be able to achieve maximum rent due to 4% cap, lots of landlords who had good tenants didn't push rents up during the difficult years and are now stung badly.

Tar.Aldarion

Others have pointed out a few problems with your thoughts (including mortgage repayments, appreciation of asset etc), another is that pensions are risk free.

PhoenixParker

Having €2000 for repairs maintenance and €2000 for other costs/contingency is excessive, especially in an apartment block where your €2000 maintenance fees should cover some of the big ticket costs of ownership like a new roof and outside painting.

Usually I think people underestimate those costs but €4kpa is too much.

spaceHopper

Mortgage Interest €9,000 Tax offset @75%; 6700
Mortgage Capital Payments €5,244
Apartment Complex charges €2,000
Repairs/Maintenance €2,000 Can be offset against tax and seems very high
RTB Registration € 90
Other cost/contingency €2,000 For what ? This is strange

Total expenditure (excl tax) €20,334

Tax (40%) €3,080
PRSI (4%) € 308
USC (8%) € 616

DubCount

Tar.Aldarion wrote: »

Others have pointed out a few problems with your thoughts (including mortgage repayments, appreciation of asset etc), another is that pensions are risk free.

There are some points raised about my calculations. I expected that. The idea was just to show that when you work through the maths, the returns are not wonderful, and there are safer ways of investing.

Pensions can in theory by risk free if the funds put in are retained in cash. I just used that as an illustration to show the best kind of risk free investment available (one which has an incentive in the tax code). Investing in riskier investments should generate more return over time, but a single property investment is inherently riskier due to a lack of diversification and our anti-landlord regulatory environment.

DubCount

spaceHopper wrote: »

Other cost/contingency €2,000 For what ? This is strange

LPT, cost of an accountant to do your tax returns, any other services/contingencies you did not think about

Tombo2001

First of all - well done; you could be following print/radio/ TV media on property for ten years and not see this type of very basic analysis.

Second - I think your figures are slightly off - for example - there is a 2 bed for rent in GracePark Manor Drumcondra for EUR1700 currently; there is a 2 bed for sale for 325k.

Slightly off, but not far. I think you have undercooked buying prices by 15%-20% roughly.

Your costings look right.

The only other point, when comparing with a pension fund, is that you also have to consider the value of the deposit, in this case EUR70k, and the cost of Stamp Duty & Legals; when making that comparison.

Final point - pension schemes are not nil risk. It depends what the underlying investment is.

Peregrinus

A pension fund isn't the appropriate comparison, I think. You get tax advantages from investing in a pension, but at the cost of accepting substantial restrictions on when and how you can access the investment. These don't apply to investing in a flat, which you can realise at any time by selling.

I think the appropriate comparison is between

(a) investing an initial sum representing the deposit, etc plus a monthly sum representing the net monthly cost for 20 years in a flat, and

(b) investing the same initial sum and monthly sum in a non-pension managed fund/unit trust/UCITS, with dividends.distributions reinvested.

I'd be reasonably optimistic that this comparison, on reasonable assumptions, will show the flat to be the better investment.

I take the point about diversity; the managed investment can be diversified but the flat cannot. And this does increase risk. But risk cuts both ways; buy the flat in an area that degrades or become less fashionable, which obviously can happen over 20 years, and your return is depressed. But buy it in an area which improves or becomes fashionable, which can also happen, and your return is enhanced.

Tombo2001

DubCount wrote: »

LPT, cost of an accountant to do your tax returns, any other services/contingencies you did not think about

Insurance goes in there also presumably.

Tombo2001

Peregrinus wrote: »

A pension fund isn't the appropriate comparison, I think. You get tax advantages from investing in a pension, but at the cost of accepting substantial restrictions on when and how you can access the investment. These don't apply to investing in a flat, which you can realise at any time by selling.

I think the appropriate comparison is between

(a) investing an initial sum representing the deposit, etc plus a monthly sum representing the net monthly cost for 20 years in a flat, and

(b) investing the same initial sum and monthly sum in a non-pension managed fund/unit trust/UCITS, with dividends.distributions reinvested.

I'd be reasonably optimistic that this comparison, on reasonable assumptions, will show the flat to be the better investment.

I take the point about diversity; the managed investment can be diversified but the flat cannot. And this does increase risk. But risk cuts both ways; buy the flat in an area that degrades or become less fashionable, which obviously can happen over 20 years, and your return is depressed. But buy it in an area which improves or becomes fashionable, which can also happen, and your return is enhanced.

I think its a reasonable comparison in that a lot of people are buying a house as a pension - but point is fair. You can sell the house at any time.

donspeekinglesh

DubCount wrote: »

the LL does own the property outright at the end of the 20 years. .

Not if it's a interest only buy-to-let mortgage. Which is what we have. We won't own it unless we have the cash to pay the mortgage off. (We wont, and we'll be selling as soon as it's worth more than the mortgage amount.)

DubCount

donspeekinglesh wrote: »

Not if it's a interest only buy-to-let mortgage. Which is what we have. We won't own it unless we have the cash to pay the mortgage off. (We wont, and we'll be selling as soon as it's worth more than the mortgage amount.)

Very true and there are not enough interest only Buy2Let mortgages available in the Irish Market. The best I have come across is ICS and I think they charge 5.5% for it and have a max of 15 years duration.

Peregrinus

donspeekinglesh wrote: »

Not if it's a interest only buy-to-let mortgage. Which is what we have. We won't own it unless we have the cash to pay the mortgage off. (We wont, and we'll be selling as soon as it's worth more than the mortgage amount.)

The figures quoted in the OP are for a repayment mortgage.

erudec

Peregrinus wrote: »

Yes, but at the end of 20 years the landlord now owns an apartment, free of mortgage, which was initially worth €250k, but which presumably is now worth considerable more than that. So doesn't that make the apartment purchase the significantly better investment? Or am I missing something?

I don't know about that. You're extrapolating the explosive growth in house prices over the last 40 years into the future. We also know that more and more houses are going to be sold just to pay for nursing home care.

100% of current house owners will eventually be in need of care which they cannot provide for themselves.

In the last crisis, we sold off the pension fund in a manoeuvre to prop up house prices and it worked. I wouldn't assume it will happen thus when the next crisis appears.

Askthe EA

Tar.Aldarion wrote: »

Others have pointed out a few problems with your thoughts (including mortgage repayments, appreciation of asset etc), another is that pensions are risk free.

Oh no theyre not!!!!

Peregrinus

erudec wrote: »

I don't know about that. You're extrapolating the explosive growth in house prices over the last 40 years into the future.

No, I'm not. I'm just assuming that there will be some growth in property prices over any period of 20 years. The calculations in the OP assume no growth at all.

erudec wrote: »

We also know that more and more houses are going to be sold just to pay for nursing home care.

100% of current house owners will eventually be in need of care which they cannot provide for themselves.

No, they won't. The great majority of us die while still living at home, and there is no reason to expect that this will change.

jimmycrackcorm

Tombo2001 wrote:

I think its a reasonable comparison in that a lot of people are buying a house as a pension - but point is fair. You can sell the house at any time.

Assuming the house is paid off by the time of retirement then subsequent rental income is a useful supplement.

For many people who start pensions very late in life (private sector), this is probably a better bet. Though it would be an interesting comparison to see how maximising AVCs in that timeframe would fare.

draiochtanois

This post has been deleted.

handlemaster

Wesser wrote: »

I think that small business buy to let landlords should sell up and I am happy that they are being incentivised to sell up.

When I was house buying I had to complete with buy to let landlords. I found this infuriating. I had to complete to buy a home that they wanted to make money out of but I wanted to sleep in it and make it a home and a place to live.

Landlords selling up their stock will calm house prices as more properties available.
Renting of propertiesshould be done by large professional property management organisations that do a professional job and aimed at students and you g working people. Families should be buying.

Houses are for living in not making money out of.

thats what we what all rental property controlled by a few big property management companies. nothing could go wrong with that plan !

handlemaster

handlemaster wrote: »

thats what we what all rental property controlled by a few big property management companies. nothing could go wrong with that plan !

Nothing what so ever :pac:

https://www.breakingnews.ie/ireland/students-will-become-homeless-if-accommodation-rent-hikes-go-ahead-dcu-students-warn-837714.html

These type of companies are going to be able to get a decent little monopoly going over the student accommodation if we're not careful

erudec

What percentage of the rent income does the taxman let you keep if you're making over 35K a year?

DubCount

erudec wrote: »

What percentage of the rent income does the taxman let you keep if you're making over 35K a year?

That depends on how much more than 35k you are earning, are you married/single, the level of interest expense you have as a proportion of rental income. Assuming you are a high rate tax payer, you will be paying 40% income tax, 4.75% USC (maybe 8%) and 4% PRSI. On a leveraged property investment, the effective rate of tax may be as high as 60% given that some expenses are disallowed for tax.

Consult an accountant to get exact details for your circumstances.

Subtle

Right, here's another example or two for what it's worth just to put some balance on things .

Situation 1: Landlord bought second property for 160k several years ago via mortgage. Property now valued at 300k and monthly rent currently at €1400 pm. No bad tenants ever - landlord is very careful. Not bad going methinks! Obviously good timing helped but this landlord along with others who bought at a similar time are laughing...

Situation 2: Business invested in property back in boom days via cash. Property now valued only marginally higher than what it was bought for but has been rented the last 10 years or so. Nothing really to complain about here either...

My points:
1) Not all landlords bought to let at the wrong time and some had a much shorter mortgage term than 30 years etc.
2) Not all landlords/businesses had to get mortgages. Some bought with cash and so there is no loan interest to pay off.

Victor

DubCount wrote: »

There have been several posts recently expressing the view that small landlords are leaving the market. It can be hard to understand why this is happening when rents are at an all time high.

Buy low, sell high. Buy 2012 for €100,000, sell 2018 for €200,000.

Saying rents are at an all time high is only one side of the discussion and doesn't consider the cost of buying the property. "Are yields at an all time high?" is a more important issue.

DubCount wrote: »

So a landlord ... has more cash outflow than cash inflow every year.

Until it is paid off.

DubCount

Subtle wrote: »

My points:
1) Not all landlords bought to let at the wrong time and some had a much shorter mortgage term than 30 years etc.
2) Not all landlords/businesses had to get mortgages. Some bought with cash and so there is no loan interest to pay off.

For those who bought at the top of the market, they may still be in negative equity. For those that bought at the bottom, they are sitting on significant gains. However, what has past has past. Starting from today, property prices may go up or down. It would be unwise in my view to look at an investment justified by capital gains. The purpose of the thread was not to say whether Landlording has been a good business in the past. The purpose was to outline that as an investment decision today, its not exactly creaming it. A landlord sitting on a big capital gain still has a decision to make - keep going and accept the current risk and return, or cash in and invest in something else.

Property investing without a mortgage does provide much better returns. I think that gets worked through in the thread. Not everyone has a spare couple of hundred thousand "resting in their account" to make a cash investment though, and the risk/return must still be viewed against other possible investments.

All the headlines are about record high rents. I just wanted to show that even with record rents and significant excess demand from prospective tenants, making the maths work to make an investment in residential property is not easy.

erudec

handlemaster wrote: »

thats what we what all rental property controlled by a few big property management companies. nothing could go wrong with that plan !

Do these companies buy up ghost estates or will they purchase private dwellings?

erudec

Askthe EA wrote: »

Oh no theyre not!!!!

Certainly public service pensions should be heavily discounted. When the next depression comes along in, say, 2045 (being insanely optimistic in assuming, against all indications of history, that there will be no serious recessions in the 2020s and 30s) and the government is faced with a Greek-style predicament, slashing public sector pensions across the board by 60% will be a popular measure amongst the private sector majority.

A wave of broke ex-public servants will commit suicide, thus seriously relieving pressure on the health services.

Peregrinus

erudec wrote: »

Certainly public service pensions should be heavily discounted. When the next depression comes along in, say, 2045 (being insanely optimistic in assuming, against all indications of history, that there will be no serious recessions in the 2020s and 30s) and the government is faced with a Greek-style predicament, slashing public sector pensions across the board by 60% will be a popular measure amongst the private sector majority . . .

. . . who have no family members in the public sector.

Would you rather pay an extra 0.5% social insurance, or have Great Aunt Bessie and her cats come live with you?

ted1

Subtle wrote: »

Right, here's another example or two for what it's worth just to put some balance on things .

Situation 1: Landlord bought second property for 160k several years ago via mortgage. Property now valued at 300k and monthly rent currently at €1400 pm. No bad tenants ever - landlord is very careful. Not bad going methinks! Obviously good timing helped but this landlord along with others who bought at a similar time are laughing...

Situation 2: Business invested in property back in boom days via cash. Property now valued only marginally higher than what it was bought for but has been rented the last 10 years or so. Nothing really to complain about here either...

My points:
1) Not all landlords bought to let at the wrong time and some had a much shorter mortgage term than 30 years etc.
2) Not all landlords/businesses had to get mortgages. Some bought with cash and so there is no loan interest to pay off.

Landlord pay capital gains tax of 46,200 if he sells for 300k

beauf

A lot of people are Landlords to provide a pension. If that's gone, private and public pensions are gone, and healthcare is un-affordable. This is going to be one awful place to grow old in.

Askthe EA

erudec wrote: »

Do these companies buy up ghost estates or will they purchase private dwellings?

They have no interest in houses. Too expensive to manage. Apt blocks only.

beauf

Askthe EA wrote: »

They have no interest in houses. Too expensive to manage. Apt blocks only.

There been plenty of stories and articles of them buying homes and even farms.

Also the 'Tyrrelstown Amendment'.

http://www.thejournal.ie/farmers-vulture-funds-3329461-Apr2017/

So how can you say apt only?

Askthe EA

beauf wrote: »

There been plenty of stories and articles of them buying homes and even farms.

Also the 'Tyrrelstown Amendment'.

http://www.thejournal.ie/farmers-vulture-funds-3329461-Apr2017/

So how can you say apt only?

Dont confuse vulture funds with professional landlord companies

Professional landlords only have an interest in high volume blocks. Id be interested to see where they have bought houses.

beauf

Multinational property asset companies, funds, vulture funds, professional landlord companies.

I'll agree to disagree with you.

I'm not convinced the term professional landlord means what people think it means.