Sell or keep existing apartment?

LongfordMB

Here's our situation. We currently own an apartment in dublin docklands worth 350k with a 150k mortgage attached. Want to buy home worth 800k.

Question is, should we sell existing home and use that equity as deposit on new home, or should we instead save up 150k in cash and use that to buy new home while keeping existing apartmemt to rent?

We can save around 6k a month between us, both in early 30s and no kids at moment. Would take 18 to 24 months to get the cash together, but would require a lot of discipline on the spending side.

Thoughts? Seems to us that long term we're better off with two assets than one? Any downside to this strategy other than 2 years of financial purgatory?

IAMAMORON

Keep the CC apartment and use the rents.

Average Dublin CC rent is 2 k a month. That is say 24k a year. Say 20 k given unforeseen crap. Over the next 50 years that is a million euro.

Why do you need to spend 800k now? It sounds crazy given the way things are going to get. Even a 5 % p.a. drop over the next 2 years could cost you the guts of 100k.

As soon as you cash in the equity on the apt you will also be liable to pay CGT.

cubatahavana

Was in a similar situation (700k instead of 800) and more mortgage left in the apartment. We are selling it. Too many horror stories of bad tenants. We ended up deciding that we didn’t want the hassle

IAMAMORON

Op, to clarify, is the CC Apt where you are currently living or is it an investment property?

Brego888

IAMAMORON wrote: »

Keep the CC apartment and use the rents.

Average Dublin CC rent is 2 k a month. That is say 24k a year. Say 20 k given unforeseen crap. Over the next 50 years that is a million euro.

It's not really 24k a year is it when you lose nearly half of it on tax.

IAMAMORON

Brego888 wrote: »

It's not really 24k a year is it when you lose nearly half of it on tax.

Agreed, but it is still a lot of cash. The tax gets paid once a year.

Anyway there is a lot of unknowns so far as regards what to be doing, I reckon the op should hold tight. There is less chance of a CC Apt devaluing over the next 10 years than a random 800k investment. For all we know he is thinking about buying a 6 bed in Roosky with a Tennis Court?

Samuel T. Cogley

You would appear to have the money to afford the fallout if things go wrong renting out the apartment. As long as you keep a contingency fund I'd probably hold on to it as an investment and save the new deposit.

Just be aware that it's a constant niggle in regard to whether the rent will be paid or whether theres some sort of issue like something breaking or the tenant complaining about noise.

beauf

Supply of housing is tight at the moment. So many places are selling above asking. But rents are falling rapidly. After Covid a recession is likely. I would not be over extending. I'd be trying to reduce all debts to a minimum. Id be selling up. Then buying back into the rental or a bigger house when the market eventually falls. You'll have a healthy war chest to buy what ever you want then.

Or tough it out. Live frugally and after Covid you will still have the rental and a new house (bought at peak) assuming nothing changes with either of your financial position.

In the long run supply will improve and demand for rental has to fall. Especially in high tech where you rental is.

LongfordMB

IAMAMORON wrote: »

Op, to clarify, is the CC Apt where you are currently living or is it an investment property?

Yes currently living there. So we wouldnt have CGT if we sold up

LongfordMB

cubatahavana wrote: »

Was in a similar situation (700k instead of 800) and more mortgage left in the apartment. We are selling it. Too many horror stories of bad tenants. We ended up deciding that we didn’t want the hassle

True but as the apartmemt is dublin docklands we'd be hopeful of getting some young tech worker who'd look after it. Perhaps we're being naive. Expect wiuld get about 2,400 per month. But of course half gone in tax. Then with management fees as well as the existing 150k mortgage on the apartment wed basically be breaking even. But surely its better to own an asset than not own it?

beauf

LongfordMB wrote: »

....wed basically be breaking even. But surely its better to own an asset than not own it?

You have to consider the interest you'll be paying on your own mortgage in the house you hope to buy.

SteM

LongfordMB wrote: »

True but as the apartmemt is dublin docklands we'd be hopeful of getting some young tech worker who'd look after it. Perhaps we're being naive. Expect wiuld get about 2,400 per month. But of course half gone in tax. Then with management fees as well as the existing 150k mortgage on the apartment wed basically be breaking even. But surely its better to own an asset than not own it?

Absolutely, as long as that asset is making you money and not costing you money. If you think you'd only be breaking even getting rent of 2400 pm then I'd be selling up tbh.

A lot of tech workers are working form home at the moment but if that continues long term then they could be WFH outside Dublin where rents are cheaper.

rookieMan

Your thinking maybe right depending on your total wealth and how distributed your current wealth is. If you are in a position to buy another property without selliny your other property, you should do so but then you should go for professional advice from a financial advisor and real estate advisor.

Most good financial advisors would look at your current investments and suggest if you should restructure your investments in case you are over exposed to one asset class.

DubCount

Sell Sell Sell

1) The existing mortgage on the property would need to change from Residential to Buy2Let. This is going to add significantly to the cost.
2) The remaining balance on the apartment mortgage may impact your ability to obtain a mortgage on your new property
3) Research what happens if you get a bad tenant. With eviction bans etc., the landscape is only getting worse for Landlords.
4) Research what the trend on rent is in that area. what is 2400 today may not be 2400 next year.

Save yourself the pain, and just sell.

Browney7

LongfordMB wrote: »

Yes currently living there. So we wouldnt have CGT if we sold up

Yes so if you have a 100k gain now, you can realise it CGT free. If for example you've owned it for five years and you rent it for another five but the value doesn't change, half the gain you have now becomes taxable (maybe 40% with revenue rules on rounding up etc) if you do sell in five years.

Worth considering in any calculations you do.

Bass Reeves

There are both personal and financial considerations. First you have to decide if it will impact you personally. As you say you have no children at present will this delay this choice and are you happy with delaying. Another issue is if something came up that delayed your ability to buy, one of you losing a job how will this impact you personally.

I imagine from size of mortgage that you bought this in the 2010-2015 timescale and there is serious capital gain. In this situation it would be prudent to consider realising that gain. You do not need to use all this money on a deposit.

A 600k mortgage will cost in the region of 2.4k/ month over 30 years. I have no hangups about renting and dislike adding extra cost in the line of buying and selling fees when investing. However if there is substantial capital gain that can be encashed tax free it should be a serious consideration. If not the other option is a choice. But personal life consideration should be in play as well. The years fly by and money is not everything.

LongfordMB

DubCount wrote: »

Sell Sell Sell

1) The existing mortgage on the property would need to change from Residential to Buy2Let. This is going to add significantly to the cost.
2) The remaining balance on the apartment mortgage may impact your ability to obtain a mortgage on your new property

Point 1 is interesting hadnt considered that. Anyone able to quantify roughly the impact of that?

For Point 2, would the bank not offset the existing mortgage against the potential rent? Ie we are assuming we will be able to borrow the same amount for the second home, whether we sell our existimg apartment or not.

cubatahavana

LongfordMB wrote: »

Point 1 is interesting hadnt considered that. Anyone able to quantify roughly the impact of that?

For Point 2, would the bank not offset the existing mortgage against the potential rent? Ie we are assuming we will be able to borrow the same amount for the second home, whether we sell our existimg apartment or not.

Unless you have it rented already with a "guaranteed" income on it, I don't think the bank would take that into consideration. I'm no bank expert myself, though

Edgware

If you go down the rental line you will also have preliminary tax so a double whammy the first year.

skooterblue2

Call your accountant and get professional advice when dealing with those sizes of money. A little money spent now on professional advice is more sound and reliable than anonymous boardsies (no disrespect to any of the above posters).

bmm

If you rent an apartment for 24k a year. Your mgt. fees. are maybe 3k . other maintenance maybe 1k. Now your rent is 20k ! Next pay your taxes and PRSI and if you are working you can take it at 40% tax , PRSI is 4% . So your net rent is 20k minus 44% . And you still have to service your loan !

Bass Reeves

LongfordMB wrote: »

Point 1 is interesting hadnt considered that. Anyone able to quantify roughly the impact of that?

For Point 2, would the bank not offset the existing mortgage against the potential rent? Ie we are assuming we will be able to borrow the same amount for the second home, whether we sell our existing apartment or not.

TBH with a mortgage to value of less than 40% I do not think any bank would mess you around. I doubt even if they take any action. At present interest rates are droping and banks will look more and more to decent lensing opportunities. An interesting observation I had lately is credit unions are willing to lend at about 4% on sums over 50 with pay back periods of longer than 10years

It's hard to see secured lending in OP's senario costing any more than that. Even if bank insisted on a bit extra I be expecting interest rate to be no more than 0.5-1%extra. That 750-1500/year on 150k but decreasing as amount reduces. I

CGT and personal choices are a bigger factor than extra interest on loan

K.Flyer

LongfordMB wrote: »

True but as the apartmemt is dublin docklands we'd be hopeful of getting some young tech worker who'd look after it. Perhaps we're being naive [...]

They may be great with technology etc, but from my experience, being in and out of hundreds of apartments a year doing maintenance, being a tech worker definitely does not equate to someone who can look after a place. And I could say that about many professions!
If you are not local and hands on, then you may be better to consider a reputable property agent who can deal with vetting and management of the property during the letting period.

Samuel T. Cogley

Our bank took into account ten months of the rental income in calculating LTI but also included the outstanding mortgage in their LTV calculations. So as an example our LTI meant we could borrow 500K but the 150K existing mortgage meant we could only borrow 350K.

cubatahavana

skooterblue2 wrote: »

Call your accountant and get professional advice when dealing with those sizes of money. A little money spent now on professional advice is more sound and reliable than anonymous boardsies (no disrespect to any of the above posters).

best advice on this thread

Raisins

K.Flyer wrote: »

They may be great with technology etc, but from my experience, being in and out of hundreds of apartments a year doing maintenance, being a tech worker definitely does not equate to someone who can look after a place. And I could say that about many professions!
If you are not local and hands on, then you may be better to consider a reputable property agent who can deal with vetting and management of the property during the letting period.

If you only have one 2 bed apt to rent for example then it’s wise to get a professional couple that seem decent when you meet them, have good references and then agree a rent under market. As a general rule of them if you want commercial rent then you’ll have to put commercial levels of work into it. If you want zero hassle then you want tenants you feel like they don’t want to annoy you.

SwimClub

You have 200k tied up, work out all the costs, management fee, service charge etc. and a sinking fund for repairs.
What kind of return are you going to get on your 200k? It depends on the mortgage etc., but on my rental to cover the mortgage and tax over and above the income less expenses I add a small bit annually. So factoring in the amount paid off the mortgage by the rent every year it is maybe net 5% return on the equity tied up in a very illiquid (slow to sell) asset. Of course the amount of equity being paid off increases as the mortgage amount drops but you lose the mortgage interest relief also and the amount of money tied up is increasing from your 200k too, so it isn't a straightforward ROI calculation. Real estate isn't high risk in a lot of countries (e.g. France) but I think we can say in Dublin it is, although the new central bank rules hopefully have tamed the risk a bit. I bought my apartment at elevated (but not peak) price, so had no capital gains when I bought my house, you need advice on that if it isn't your principal home are you going to get hit with CGT on the increase since you bought it if you ever sell it. Re mortgage I had no issue with being asked to switch to a buy to let, but my existing provider was reluctant to give a high mortgage amount (I think due to their existing exposure) so I went elsewhere.

Why do you want to hold this asset? Are you convinced Dublin property prices are going to continue up? There are a lot of risks to that, my view is the upside potential probably isn't huge from here but the downside risk is significant. If you want to downsize on retirement you have a lot of exposure to Dublin house prices on your new home and the old one, you should probably at least consider diversifying more. You could also get property exposure through shares in a REIT those are a lot more liquid than a rental. Of course if you have a lot of spare cash going forward you can diversify with that while holding on to the property too.

A lot of private landlords have been getting out, the REITs have huge tax advantages over private landlords. I am keeping mine because it is ticking along fine, there are costs to selling, and it's a good way to tie up money. Also the kids may use it at some point and that would be a good return as you get out of the tax on income expense (but avoid them paying rent elsewhere so save on outgoings). But as a long term investment you might get a better return and less hassle plus more liquidity (if you have a sudden need for money) by investing in equity and bond indices.

LongfordMB

SwimClub wrote: »

You have 200k tied up, work out all the costs, management fee, service charge etc. and a sinking fund for repairs.
What kind of return are you going to get on your 200k? It depends on the mortgage etc., but on my rental to cover the mortgage and tax over and above the income less expenses I add a small bit annually. So factoring in the amount paid off the mortgage by the rent every year it is maybe net 5% return on the equity tied up in a very illiquid (slow to sell) asset. Of course the amount of equity being paid off increases as the mortgage amount drops but you lose the mortgage interest relief also and the amount of money tied up is increasing from your 200k too, so it isn't a straightforward ROI calculation. Real estate isn't high risk in a lot of countries (e.g. France) but I think we can say in Dublin it is, although the new central bank rules hopefully have tamed the risk a bit. I bought my apartment at elevated (but not peak) price, so had no capital gains when I bought my house, you need advice on that if it isn't your principal home are you going to get hit with CGT on the increase since you bought it if you ever sell it. Re mortgage I had no issue with being asked to switch to a buy to let, but my existing provider was reluctant to give a high mortgage amount (I think due to their existing exposure) so I went elsewhere.

Why do you want to hold this asset? Are you convinced Dublin property prices are going to continue up? There are a lot of risks to that, my view is the upside potential probably isn't huge from here but the downside risk is significant. If you want to downsize on retirement you have a lot of exposure to Dublin house prices on your new home and the old one, you should probably at least consider diversifying more. You could also get property exposure through shares in a REIT those are a lot more liquid than a rental. Of course if you have a lot of spare cash going forward you can diversify with that while holding on to the property too.

A lot of private landlords have been getting out, the REITs have huge tax advantages over private landlords. I am keeping mine because it is ticking along fine, there are costs to selling, and it's a good way to tie up money. Also the kids may use it at some point and that would be a good return as you get out of the tax on income expense (but avoid them paying rent elsewhere so save on outgoings). But as a long term investment you might get a better return and less hassle plus more liquidity (if you have a sudden need for money) by investing in equity and bond indices.

I hear what you're saying about ROI. There's only 150k left on the mortgage,we figure that given we can save 150k over the next 18 months, we would then be able to save 30k a year for 5 years to pay it off. At that point we will be making an after tax rental income of over 1k a month from the apartment. Present value of that over 20 years is 250k. Assuming a conservative 2 percent annual capital gain over 20 years thats around 50% ie 150k. So that's 250k plus 150k which is 400k gain on the current equity of 200k. Basically will treble our money over 20 years,whatever that ROi is.

I don't buy the talk of house price collapse. Dublin docklands is a different beast to rest of city and country and there will always be limited supply there due to insane height limits. Will always be first choice for foreign workers.

Incidentally rang the bank, a previous poster was correct that the mortgage on the existing apartment would rise up to around the 4.5% level from 3% now as it would be buy to rent instead of residential, but that is less of a problem if we're paying down 30k a year.

SwimClub

"At that point we will be making an after tax rental income of over 1k a month from the apartment"

Thats a 12k return on a 350k investment - 3.4%. Plus a taxable return on price changes, and possibly on the existing price change since you bought (I'm not sure on that definitely worth getting advice). Why do value 1k a month, given your income level. Would it not be better to take more risk with your investment as you don't need that 1k a month and on it's own it won't help you retire early.

You will have to maintain the place and have some risk of empty tenancy bad tenants etc. too.

I'm not sure what Dockland apartment market demand is going to look like, Facebook etc. are letting people work from home.
Most people would rather buy a house with a garden and home office if they are at home a lot. London house prices have been dropping along this trend, things are different here for now as supply is an issue but I'd be concerned about that long term trend as a risk.

SwimClub

You need to factor in the fact that you are getting a mortgage too and basically paying a similar percentage out because you didn't use the money to pay that down. I wouldn't wait to buy a house based on that investment scheme, especially if you believe prices are going up as they will be going up while you wait.

Bass Reeves

LongfordMB wrote: »

I hear what you're saying about ROI. There's only 150k left on the mortgage,we figure that given we can save 150k over the next 18 months, we would then be able to save 30k a year for 5 years to pay it off. At that point we will be making an after tax rental income of over 1k a month from the apartment. Present value of that over 20 years is 250k. Assuming a conservative 2 percent annual capital gain over 20 years thats around 50% ie 150k. So that's 250k plus 150k which is 400k gain on the current equity of 200k. Basically will treble our money over 20 years,whatever that ROi is.

I don't buy the talk of house price collapse. Dublin docklands is a different beast to rest of city and country and there will always be limited supply there due to insane height limits. Will always be first choice for foreign workers.

Incidentally rang the bank, a previous poster was correct that the mortgage on the existing apartment would rise up to around the 4.5% level from 3% now as it would be buy to rent instead of residential, but that is less of a problem if we're paying down 30k a year.

While I do not think house prices will collapse neither do I consider Dublin prices will accelerate either. You have a substantial capital gain tied up.in that apartment which as its you PPR can be realized tax free.

A 2% gain over the next 20years you will have an apartment work h over 500k. However if you seek it then what happens.

I am going to assumes that the apartment cost 200k in 2012. You will have 28years capital gain of 300k less selling and buying costs.

The tax calculation is 300/28X20 to give 215 in taxed gain or about 140 of that clear and add 85 which is the tax free PPR years leaves you with 225 of a capital gain. At present you can walk away with 150k in untaxed PPR gain if you paid 200k for it.

In your case the advantage selling has to be considered. If the gain was not as substantial as that then holding is more realistic.

carrickbawn

bmm wrote: »

If you rent an apartment for 24k a year. Your mgt. fees. are maybe 3k . other maintenance maybe 1k. Now your rent is 20k ! Next pay your taxes and PRSI and if you are working you can take it at 40% tax , PRSI is 4% . So your net rent is 20k minus 44% . And you still have to service your loan !

Also USC.