Renting a house to the Local Authority

Jude13

Has anyone rented a house out to the local council? We are considering it as we are living abroad.

The_Conductor

Jude13 wrote: »

Has anyone rented a house out to the local council? We are considering it as we are living abroad.

If you look at this forum- people have very mixed feelings about this- its worked very well for some people- for others, its been a complete and utter disaster.

One thing- its no longer your home- and any possessions, furniture, fixtures and fittings etc- are presumed to have depreciated to nothing over the course of the 10 year letting- you will essentially have a shell that needs complete refurbishment at the end of the duration.

You have no control whatsoever over the tenants who are placed in the property- and their interactions with neighbours etc. Do you intend to live in the property again at some point in the future?

You get a discount on the open market rent for the property- typically 10-15%. Your tenant (the council/local authority) will withhold a further 20% in withholding tax- which they forward to Revenue- and you have to do an annual tax return (it can be simplified if you appoint an Irish agent- however, if you're renting to the council- the whole point of not needing an agent becomes yet more red tape for you.

Whatever country you're moving to- may view your Irish rental income as taxable income- once your tax resident in the country you move- and you may end up paying foreign tax on it- in the country you're moving to (this is why so many French and Germans have sold property in Portugal and Spain over the last 10 years- the tax implications of holding the units just didn't stack up).

You do need to do some proper research- expat websites based in the country you're thinking about moving to- often have discussions detailing tax implications etc- that can make interesting reading.

Jude13

Cheers for all that info.

We would not intend of living in the property nor live in the area. We have been expats in the middle east for a decade now. I guess I would be best to talk to an accountant about tax on the rental income.

Mad_maxx

Jude13 wrote: »

Has anyone rented a house out to the local council? We are considering it as we are living abroad.

1. Unless it's a cheap house you have no plans to live in again, don't consider it

2. The council use those arrangements to house troublemakers

3. The council outsource management of the property and tenants to third parties

I've done it with a house I paid 70k for, would not do it with a house worth more

machalla

There is an argument to say if you do lease it to the council the likelihood is that you will reduce the value of the house in the long term as it will drag the area down.

The council will most likely house the otherwise "unhouseable" in the property.

This may encourage more council leasing/sales as local property owners will be forced out by these tenants. By the end of the lease they may have brought the value of the surrounding area down as its now a council area where no one would choose to live.

Also with legislative changes potentially putting tenants in a property indefinitely you may not be able to terminate the lease with the council when it comes to a close without maintaining the tenancy of the council tenants. That will be a big issue when it comes to the sale of house if you are intending to do so.

That's speculation as of yet, there is no legislation as of yet on indefinite tenancies. It is a stated goal of the government though.

Selling and being shot of it either privately or to the council may be the way to go. You may have a significant capital gains tax bill by selling when its not your PPR is another problem but you would have that regardless whenever you sell it.

Mad_maxx

machalla wrote: »

There is an argument to say if you do lease it to the council the likelihood is that you will reduce the value of the house in the long term as it will drag the area down.

The council will most likely house the otherwise "unhouseable" in the property.

This may encourage more council leasing/sales as local property owners will be forced out by these tenants. By the end of the lease they may have brought the value of the surrounding area down as its now a council area where no one would choose to live.

Also with legislative changes potentially putting tenants in a property indefinitely you may not be able to terminate the lease with the council when it comes to a close without maintaining the tenancy of the council tenants. That will be a big issue when it comes to the sale of house if you are intending to do so.

That's speculation as of yet, there is no legislation as of yet on indefinite tenancies. It is a stated goal of the government though.

Selling and being shot of it either privately or to the council may be the way to go. You may have a significant capital gains tax bill by selling when its not your PPR is another problem but you would have that regardless whenever you sell it.

I bought in an area which can't go lower, more than half the houses in the area are already council owned, your point is well made though, the council use long term leasing to house the "unhousable"

Such a policy will ruin nice areas, it's reasonably sensible to take risks with small amounts of capital but not with valuable property

Jude13

That's what we are looking at. Buying in a place which is under 90k, doing a small amount of work and leasing it to the local council.

We would like to make it disabled friendly however the grants don't seem to apply to us and the tenant would have to apply, which doesnt work as the works would have to be undertaken whilst they are living there.

antoinolachtnai

Jude13 wrote: »

That's what we are looking at. Buying in a place which is under 90k, doing a small amount of work and leasing it to the local council.

We would like to make it disabled friendly however the grants don't seem to apply to us and the tenant would have to apply, which doesnt work as the works would have to be undertaken whilst they are living there.

I don't know how you are going to make this add up financially. You will pay a lot of tax, likely have to subsidise it to pay the tax if there's a mortgage, and at the end, you will own a house that isn't worth much more than it was at the beginning. It sounds to me like it would be more sensible for the council to buy this house itself.

If the council needs disabled accommodation they will spend the money themselves and do the upgrade.

Jude13

Far call. I will not have a mortgage and as an expat will have 20% withheld from the rent.

antoinolachtnai

All depends what rent the Council will guarantee in advance to pay you really.

Jude13

With interest rates dropping I am looking for a way to beat inflation so the thought is, invest in some properties, lease them to the council at 80-85% of daft rent. Therefore their rent, although small and taxed, will (hopefully) beat having capital in savings account. I do not plan on selling the property for maybe 20-30 years.

This is along with diversifying in other investments.

The_Conductor

Jude13 wrote: »

With interest rates dropping I am looking for a way to beat inflation so the thought is, invest in some properties, lease them to the council at 80-85% of daft rent. Therefore their rent, although small and taxed, will (hopefully) beat having capital in savings account. I do not plan on selling the property for maybe 20-30 years.

This is along with diversifying in other investments.

Interest rates aren't dropping though- they're at an all-time low. They have already started raising rates in the US and some other markets- in view of the manner in which inflation is ticking upwards (its not high- but its heading up).

As for buying properties and letting them to the council- its not really that simple. The properties have to meet fairly stringent minimum standards (which a secondhand house may require a not inconsiderable investment in order to meet). Incidentally- these investments- are not tax deductible- they're an upfront cost for you.

If letting property were as simple as you seem to think it is- there wouldn't be a flood of landlords exiting the sector. The fact of the matter is- the regulatory regime for letting residential accommodation in Ireland- has swung so far in favour of tenants (and indeed neighbours)- that if anything whatsoever were to go wrong- you'll spend days in the RTB trying to untangle it.

Also- all rental income is treated as 'unearned income' and is taxed at a person's marginal rate of tax. Some deductions (such as USC etc) are on the gross rental income- rather than the net. In theory you could pay up to 54% tax on rental income (obviously your tax will be a lot lower- as mortgage interest will be wholly allowable as a cost when renting to the local authority).

It is not the simple endeavour you seem to imagine it is- do some due diligence on the sector.

Glass fused light

It a business of you are investing directly, you were thinking of spending aditional capital without much hope of getting extra rent from the council let. You would be better off donating the money to a registered charity as at least you cold get a tax write-off.

Are you are looking to ride the market along with annual income? As a property investment you should look at a managed property fund and the costs associated. With a council let you know you are loosing 20% of your expected anual income. So comparing the additional work and risks associated with the unhousable tenant on the capital value of the property over the long term would be key.

murphaph

I guess if it was a straight comparison between investing 100k (or whatever) of your own money in a REIT or in property directly you would be insane to directly invest, rather than sharing the risk with millions of other investors in a REIT. But you won't get a mortgage to invest in a REIT. It comes back to that old leverage. I will not make a comment on what I think about that stuff.

I would say that IF you go down this road you need to have the rent increases built into the lease in a legally watertight manner. If you rely on the council to play fairly you will be let down. They will not accept your DAFT examples etc (been there, done that, left the RAS scheme because of it, though I understand you are considering long term leasing, which is different, but the same people will be responsible for rent reviews and my experience in a little under 5 years of RAS was that the council tried to treat me like a child and dictate the rent they would pay me).

I'm not sure every council would expect the property to pass the usual inspection (eg for RAS) when it's a long term lease because they effectively treat it as a council house and have their own contractors to maintain it.

My major concern for your plan would be around selling up in 30 years. That is the greatest unknown quantity. The laws may have changed by then to guarantee tenancy rights to whoever is living in the property at the end of the lease and they may not be the ideal tenants. At the very least I would want the lease to state that the council obliges itself to hand the property back tenant free, but if the laws are changed they could override any such clause.

The_Conductor

Yes- the lack of clarity over vacant possession- speaks volumes........

Jude13

The_Conductor wrote: »

Interest rates aren't dropping though- they're at an all-time low. They have already started raising rates in the US and some other markets- in view of the manner in which inflation is ticking upwards (its not high- but its heading up).

As for buying properties and letting them to the council- its not really that simple. The properties have to meet fairly stringent minimum standards (which a secondhand house may require a not inconsiderable investment in order to meet). Incidentally- these investments- are not tax deductible- they're an upfront cost for you.

If letting property were as simple as you seem to think it is- there wouldn't be a flood of landlords exiting the sector. The fact of the matter is- the regulatory regime for letting residential accommodation in Ireland- has swung so far in favour of tenants (and indeed neighbours)- that if anything whatsoever were to go wrong- you'll spend days in the RTB trying to untangle it.

Also- all rental income is treated as 'unearned income' and is taxed at a person's marginal rate of tax. Some deductions (such as USC etc) are on the gross rental income- rather than the net. In theory you could pay up to 54% tax on rental income (obviously your tax will be a lot lower- as mortgage interest will be wholly allowable as a cost when renting to the local authority).

It is not the simple endeavour you seem to imagine it is- do some due diligence on the sector.

https://www.irishtimes.com/business/personal-finance/aib-and-kbc-bank-to-cut-deposit-rates-for-regular-savers-1.3892437 AIB and KBC Bank to cut deposit rates for regular savers

Cheers for all the feedback lads, though I think some of my earlier info may have been missed. I will take it all on board as it is invaluable (bar the high house 'speaks volumes' comments). However I am aware of the standard requirements of the houses to be let to this specific council and under the leasing scheme the rent is guaranteed even of the house is vacant, also I will not need to register with the RTB under this scheme and any issues with the tenant are dealt with by the council.

murphaph

Yeah your main issues are "can I be guaranteed vacant possession" at the end and "how are rent reviews determined". Do not just trust these 2 core issues to luck. You need to nail them down contractually at the very least. The council will not care one iota once the contract is signed.

antoinolachtnai

The big issue is whether the property will be worth as much as you paid in ten or 20 years.

The council will fix things that are broken, but they're not going to invest in the fabric of the building or in the locality.

Who is going to actually look after this property? Who actually cares about the property and its neighbourhood? Property does not automatically maintain or increase in value. It needs stewardship and investment.

CreativeSen

Bought a house a few years back in the commuter belt. Ended up emigrating during the recession. The house was in negative equity, nobody was willing to buy. So we rented it to the council on a 20 year lease.

We get paid below market rent each month. We pay tax on the rental income each year. We have no say on who lives in the house.

However, the rent is still greater than the mortgage payment (tracker) so the excess covers most of the tax on the rental income. We moved back to Ireland a few years back and are now living in a different location. The contract with the council states that they will return the house to us after 20 years in the same condition that they received it.

Every now and then I drive by the house, mostly out of curiosity, from the outside, its looking good, the current resident keeps the garden neat.

We are very happy with how this is working out for us. Could it change in the future, sure. But today its good!

murphaph

antoinolachtnai wrote: »

The big issue is whether the property will be worth as much as you paid in ten or 20 years.

The council will fix things that are broken, but they're not going to invest in the fabric of the building or in the locality.

Who is going to actually look after this property? Who actually cares about the property and its neighbourhood? Property does not automatically maintain or increase in value. It needs stewardship and investment.

That's not really true unless we are talking about the difference between living in and completely abandoning a property. I bought a 1000m² site in the Berlin commuter belt in January 2015 for 60k. Today I could not buy it for less than 200k. It just appreciated due to supply constraint and demand.

A house is not that dissimilar as a huge chunk of the price of a house is the land it's built upon and we know that even run down legacy sales usually cost no more than 10% less than well maintained properties because most people want to put their own stamp on anything they buy anyway.

If we are being honest, the vast majority of us have rarely had to put any money into structural elements of our properties (assuming new build or recent build) and if there is a structural issue the OP would be required to fix it and it would be in their interests to do so. I assume the OP would at least inspect their properties every year or two, even if routine maintenance was the responsibility of the council.

I am slightly playing devil's advocate here. I would be very skeptical of entering into a long term lease agreement with the council given my RAS experience with that one property. They did speak to me about long term leasing but it was the same "we're doing you a favour" attitude that I got from them so left the scheme.

antoinolachtnai

murphaph wrote: »

That's not really true unless we are talking about the difference between living in and completely abandoning a property. I bought a 1000m² site in the Berlin commuter belt in January 2015 for 60k. Today I could not buy it for less than 200k. It just appreciated due to supply constraint and demand.

A house is not that dissimilar as a huge chunk of the price of a house is the land it's built upon and we know that even run down legacy sales usually cost no more than 10% less than well maintained properties because most people want to put their own stamp on anything they buy anyway.

If we are being honest, the vast majority of us have rarely had to put any money into structural elements of our properties (assuming new build or recent build) and if there is a structural issue the OP would be required to fix it and it would be in their interests to do so. I assume the OP would at least inspect their properties every year or two, even if routine maintenance was the responsibility of the council.

I am slightly playing devil's advocate here. I would be very skeptical of entering into a long term lease agreement with the council given my RAS experience with that one property. They did speak to me about long term leasing but it was the same "we're doing you a favour" attitude that I got from them so left the scheme.

Well the reason housing goes up is because there is improvement in the area through some sort of improvement. You have to consider how likely that is in the circumstances.

Jesper

Just to re-open a thread that I have interest in.
Has anyone purchased a property through their pension and rented it to the council? What are their experience?
Does the council pay the property tax over the 20/25 year period?

The_Conductor

Jesper wrote: »

Just to re-open a thread that I have interest in.
Has anyone purchased a property through their pension and rented it to the council? What are their experience?
Does the council pay the property tax over the 20/25 year period?

The LA/Council pay the RTB registration fees etc- they *do not* pay LPT or other fees associated with the ownership (in some cases they have paid Management Charges in apartments- however, this isn't the norm either).

So no- you are still liable for the LPT, Management fees etc- the council cover the RTB registration requirements.

CreativeSen

The_Conductor wrote: »

The LA/Council pay the RTB registration fees etc- they *do not* pay LPT or other fees associated with the ownership (in some cases they have paid Management Charges in apartments- however, this isn't the norm either).

So no- you are still liable for the LPT, Management fees etc- the council cover the RTB registration requirements.

As stated above, we have rented our house to the council for 20 years. The truth is, we rented it to the council for 20 years and 1 day. As the lease is more than 20 years we are not liable for the local property tax.

Revenue.ie wrote:

If you are a rent-paying tenant with a lease of less than 20 years, you are not liable for Local Property Tax (LPT) on that property.

If you are a rent-paying tenant with a lease of greater than 20 years, you are liable for LPT on that property.

If you are renting from your local authority, the local authority is liable to pay the LPT on the property.

You will find more details here

The_Conductor

Well done CreativeSen.
I was aware of the 20 year clause- however, you are the very first person I've encountered who has said they have let their property to their local authority for a term in excess of 20 years. I have never heard of anyone else- in all my years here and out in the real world, of anyone else doing a 20 year lease. The norm with a council or a local authority is 10 years- and lots of people have done the 10 year leases. You're the very first 20 year person I've encountered.

Jude13

CreativeSen wrote: »

As stated above, we have rented our house to the council for 20 years. The truth is, we rented it to the council for 20 years and 1 day. As the lease is more than 20 years we are not liable for the local property tax.



You will find more details here

How did you manage to get the extra day? is it in the agreement with the LA or just an oversight?

The_Conductor

Jude13 wrote: »

How did you manage to get the extra day? is it in the agreement with the LA or just an oversight?

Its 20 Years + 1 day- so it exceeds 20 years and comes under the clause for an exemption. I can't see any council or local authority having an issue with doing 20 years and a day- they'd bite your hand off at the opportunity to take it off you for such a protracted period of time.........

handlemaster

murphaph wrote: »

I guess if it was a straight comparison between investing 100k (or whatever) of your own money in a REIT or in property directly you would be insane to directly invest, rather than sharing the risk with millions of other investors in a REIT. But you won't get a mortgage to invest in a REIT. It comes back to that old leverage. I will not make a comment on what I think about that stuff.

I would say that IF you go down this road you need to have the rent increases built into the lease in a legally watertight manner. If you rely on the council to play fairly you will be let down. They will not accept your DAFT examples etc (been there, done that, left the RAS scheme because of it, though I understand you are considering long term leasing, which is different, but the same people will be responsible for rent reviews and my experience in a little under 5 years of RAS was that the council tried to treat me like a child and dictate the rent they would pay me).

I'm not sure every council would expect the property to pass the usual inspection (eg for RAS) when it's a long term lease because they effectively treat it as a council house and have their own contractors to maintain it.

My major concern for your plan would be around selling up in 30 years. That is the greatest unknown quantity. The laws may have changed by then to guarantee tenancy rights to whoever is living in the property at the end of the lease and they may not be the ideal tenants. At the very least I would want the lease to state that the council obliges itself to hand the property back tenant free, but if the laws are changed they could override any such clause.

Im not convinced by the whole if you want to invest in property invest in a REIT , when the crash comes where does that investment go ? Where as with physical property you still have it , and if you buy in a good location , that will never change. (cross your fingers )

CreativeSen

The_Conductor wrote: »

Well done CreativeSen.
I was aware of the 20 year clause- however, you are the very first person I've encountered who has said they have let their property to their local authority for a term in excess of 20 years. I have never heard of anyone else- in all my years here and out in the real world, of anyone else doing a 20 year lease. The norm with a council or a local authority is 10 years- and lots of people have done the 10 year leases. You're the very first 20 year person I've encountered.

Honestly, it was pure luck and total ignorance on our side. The contract we received from the agency that we used stated that it was "a 20 year and one day lease".

We didn't look for it and I remember us scratching our head and wondering, why the extra day?

It wasn't until we got a bill for the property tax that we thought to ourselves that we shouldn't be paying it as surely on a 20 year lease the tenant (the local authority in this instance) should pay for it, after all, 20 years is a LONG lease.

Did some research and discovered that the extra day, to bring it over 20 years, was super beneficial to us.

At first the local authority in question refused to accept that they had the obligation on the property tax. We pursued it and after a few months they conceded and have been paying it since.

It may been a mistake by the housing agency, it may have been a mistake by somebody in the local authority and it may have been a mistake by us not to realize what was happening. But we are happy!

Mad_maxx

handlemaster wrote: »

Im not convinced by the whole if you want to invest in property invest in a REIT , when the crash comes where does that investment go ? Where as with physical property you still have it , and if you buy in a good location , that will never change. (cross your fingers )

I see no merit in REITs at all, at the end of the day it's just another type of security you are buying, like any stock, you have no control over how the company is run, yields are no better than on any of the main European index funds but without any sector diversity

I'd buy the city of London investment Trust quicker

Jesper

I enquired to Kilkenny local authority last week and was told that councils are currently out of funds and not purchasing properties. There was no idea when funds would be made available again.

TSQ

The_Conductor wrote: »

The LA/Council pay the RTB registration fees etc- they *do not* pay LPT or other fees associated with the ownership (in some cases they have paid Management Charges in apartments- however, this isn't the norm either).

So no- you are still liable for the LPT, Management fees etc- the council cover the RTB registration requirements.

I think the tenant is liable for LPT on long leases (20+ years) not owner. If you are letting to the council rather than to individual tenants then council should pay

The_Conductor

TSQ wrote: »

I think the tenant is liable for LPT on long leases (20+ years) not owner. If you are letting to the council rather than to individual tenants then council should pay

Yes- anything over 20 years- or a lifetime right of residence, and the occupier, rather than the owner, is liable for LPT. Leases of 20+ years are rarer than hens teeth however, though lifetime rights of residence have soared (tends to be an entirely tax compliant manner of giving children an inheritance in your lifetime- which shelters the property from other schemes such as the Nursing Homes Support Scheme (7.5% per annum of the value of a PPR to a max of 22.5% of the value of the property).

There is some extremely aggressive tax planning going on out there........

murphaph

Mad_maxx wrote: »

I see no merit in REITs at all, at the end of the day it's just another type of security you are buying, like any stock, you have no control over how the company is run, yields are no better than on any of the main European index funds but without any sector diversity

I'd buy the city of London investment Trust quicker

The benefit of a REIT as opposed to directly investing in real estate, for someone who explicitly wants to invest in Irish property is clear:

I do not put all my eggs in one risky basket. One bad tenant can wipe out my profit for years. With a REIT that can't happen as you spread the risk of the bad tenants among many investors.

The downside is that you can't generally leverage (ie take out a loan to buy REIT shares and use the dividends to pay back the loan) whereas you can take out a mortgage for real estate.

I agree that diversity is good. I have very broad based ETFs myself (and some let real estate that I accumulated along the way but never BTL). I do not have any REIT stock except what's in my ETFs. I was specifically talking about the case of someone wanting to invest in Irish property, where the legal situation makes direct ownership fairly risky. I disagree with the idea that REITs are bad because you have no control how the companies are run. I mean if you apply that logic you should not invest in any shares from any company unless you can acquire a controlling interest!

murphaph

The_Conductor wrote: »

Yes- anything over 20 years- or a lifetime right of residence, and the occupier, rather than the owner, is liable for LPT. Leases of 20+ years are rarer than hens teeth however, though lifetime rights of residence have soared (tends to be an entirely tax compliant manner of giving children an inheritance in your lifetime- which shelters the property from other schemes such as the Nursing Homes Support Scheme (7.5% per annum of the value of a PPR to a max of 22.5% of the value of the property).

There is some extremely aggressive tax planning going on out there........

In Germany if I do this there is an added advantage: The property is deemed to be worth less because it has a burden on it and the value for inheritance tax purposes is thus reduced. I wonder is that the case in Ireland also.

The_Conductor

murphaph wrote: »

In Germany if I do this there is an added advantage: The property is deemed to be worth less because it has a burden on it and the value for inheritance tax purposes is thus reduced. I wonder is that the case in Ireland also.

Yes- however it depends on when the inheritance vests- e.g. a living inheritance is worth significantly less to the recipient than a posthumous inheritance (as obviously the right of residence will also expire on the death of the holder of such a right). Nonetheless- the lifetime inheritance rights of a child remain constant- regardless of when they inherit- so its far more efficient to inherit when your parent is still alive- and your parent continues to live in their property with a lifetime right to do so- as the property is thus devalued from an actuary perspective (though if its not going to be sold until there is clear claim to it- obviously this is immaterial- what matters is you cannot sell it right here right now- so its worth less).

Yes- is the short and simple- its the same here- the bigger difference is a much lower inheritance threshold in Ireland than in Germany- so while property may be worth less in Germany, it may not matter if the recipient stays under their threshold- however, in Ireland- a far higher proportion of inheritance recipients hit their thresholds- because of both Irish property prices- but also the lower Irish thresholds.

murphaph

Thanks for the clarification. It may prove useful to our own circumstances actually given the fairly low thresholds at home!

Yes here in Germany the gift/inheritance tax thresholds are significantly higher (440k per parent to child) and gifts are only considered within a rolling 10 year window, so a property I inherited 11 years ago is no longer considered when calculating tax payable today.

Practically speaking only fairly wealthy people in Germany ever pay inheritance tax and anything they inherit from their parents and even then it starts at 7% and rises linearly with the value of the inheritance over the threshold.