Keep renting, or sell and invest elsewhere?

lirjandoo

Hi,

Looking for investment advice on this:

House bought in 2012 as investment for €205,000.

Tenants moved in soon after and current rent is €1,700 per month.

Between time before tenants moved in and now, about 60K has been invested into the property so between that and the property market value increase, the house is now worth about 400K.

Current tenants are paying rent on time and besides general maintenance of new appliances when they break down etc, there's not much involvement required.

I'm not too familiar with what's considered a good return on investment, I heard between 4 and 7% or so?

I hear a lot of landlords are selling up. Is it best to just keep this ticking as it is or are there more practical ideas with equal or less time required to make things work for the money?

How is return on investment calculated with the variables of initial investment, rent, ongoing costs like maintenance, tax etc?

Thanks!

mrslancaster

Dont forget CGT at 33% will be due on any chargeable gain when you sell.

maninasia

If you live in Ireland.

herbalplants

https://www.boards.ie/discussion/comment/120263730#Comment_120263730

OP bought in 2012! There was an incentive at the time for CGT if you held the property for 7 years.

lirjandoo

The property was actually bought in Nov 2011 (this is the date on property price register if that's the crucial date?)

Does this mean the CGT relief was missed out on by just a few weeks as it says it's for property acquired between 7 Dec 2011 and 31 Dec 2014 on the revenue website?

Either way, what are people's thoughts on just leaving it as it is and keep renting it out as a viable investment?

Claw Hammer

Unless you need the money for something else, why sell?

lirjandoo

Maybe there's better returns to be had from investing in other equally low risk ventures?

How would I go about calculating the ROI from this anyway and how could that be compared to other ventures?

Mad_maxx

https://www.boards.ie/discussion/2058285026/keep-renting-or-sell-and-invest-elsewhere

You have a very well performing investment and bought right at the bottom, if you’re tenants are reliable , I would absolutely keep it

twowheelsonly

No brainer.

Good tenants, a steady income and an asset that's appreciating.

If you were having hassle with a high turnover of tenants and constant maintenance taking up your time I'd say sell.

As things stand I'd hold onto it.

Obviously you can suss out the CGT issue but worst case scenario every time the value increases by €1 you're up 66 cents !

lirjandoo

Thanks for the feedback!

Can anyone in the know, explain how the ROI figures work with % etc for somebody not familiar at ll with investment terminology and what's a good figure etc to aim for and what the above is achieving please?

DubCount

https://www.boards.ie/discussion/comment/120267949#Comment_120267949

I think the important calculation is "yield".

"Gross Yield" = Annual Rent x 100 / Value of property = Gross Yield %

"Net Yield" = (Annual Rent - expenses) x 100 / Value of property = Net Yield %

A Gross yield should be a minimum of 7.5% IMHO. Anything over 10% is good going.

Based on OP, the Gross yield = (1700 x 12) x 100 / 400,000 = 5.1%. If you have a buy 2 let mortgage, you're probably paying the bank at least 5% interest. On the amount of money you have outstanding with the bank, you earn nothing - your rental income is going straight to the bank. For your equity (the bit you own outright and dont owe the bank), the question is can you earn 5% in a less risky way - probably. If house prices were increasing, you might factor in your potential capital gains into the decision, but there's not much inflation in property prices right now. Some expect prices to fall this year.

Owning a property is not the only investment choice in the world. For something like investing in your pension, the tax relief you get would make it a far more attractive use of your money. Speak to an independent financial advisor to see what investment options might be appropriate for you.

lirjandoo

Thanks for that! So if it's taken that throughout the years of rent, it's probably earned about 130K in rent, on a property bought for 205K and 60K on improvements, and now getting about 20K in rent a year for it, do those figures still remain the same considering most of the mortgage is paid off, the value of the investment has risen from 265K to 400K etc? Like that's already a 135K increase?

Would this not make it closer to a 7.5 or 10% gross yield, or it doesn't work that way? Would it make more sense to sell, take the CGT hit @ 33% and then invest what's left in something else, or just to keep good tenants paying 1700 indefinitely and raise it 2% each year?

DubCount

https://www.boards.ie/discussion/comment/120270608#Comment_120270608

Historical gains and income are meaningless today. Its about where you are now, not where you have come from. Good decisions you made years ago that you have done well out of just brings you to where you are today - it doesnt direct where you should go from here.

Think of it this way, if you were to sell tomorrow, and say the mortgage left is 100k, you'd have 300k in the bank. You have a number of investment options to do with that money. One option would be to take out a new mortgage of 100k and buy back your current investment property for its current market value (400k). Would that be the best investment available tomorrow? If other properties can be bought at 8% yield, it wouldnt even be the best property investment. What about investments other than property which might suit your financial goals and life priorities. This is why spending a small fee on getting independent investment advice is important to make sure your money is working as well as it can for you.

lirjandoo

Wouldn't there be less than 400k left though if CGT has to be paid on the sale and then in effect the yield would have to be calculated on whatever is left being invested into something? So maybe 8% yield of that amount isn't worth as much as the 5% yield on the current investment in the long run?

Isn't a 5% yield still a viable investment and covers all overheads etc associated with the property anyway so even though it may not be the absolute best investment, it's still a solid investment I guess and for somebody with so much else going on, it probably just makes sense to keep it ticking as it is rather than taking any other risks of another property/potentially bad tenants or whatever other risks may be associated with other investments?

DubCount

https://www.boards.ie/discussion/comment/120275594#Comment_120275594

My point was just to illustrate that the investment decision is based on the present expectation, and not the past returns.

In the case of CGT, this is an unrealised loss that exists today, but is going to be a real cost at some point (regardless of how your proceed in the future). If your capital gain today is 180k, and the CGT rate is 33%, you are sitting on a 60k CGT cost. If you hold onto the investment for another year and your gain goes up to 270k, you now have a 90k cgt cost. If you had realised your gain when it was 180k, you would have realised the 60k CGT cost. If you reinvested in something else and made another gain of 90k, you have a new 30k CGT cost. The total CGT cost doesnt change, only the timing of whe you pay the cost.

The above is a bit simplistic I know. Timing of CGT liabilities and transactions costs etc., do make a difference, but I dont think its as big a difference as you might think.

If you believe that keeping going is your best option, then by all means keep going.

DownByTheGarden

We have a property that was a performing asset. Decided to sell because the risk/reward profile for the future has been turned on its head. Recently went sale agreed on it and have to see its a huge weight off us now. We can decide what we want to do with the cash afterwards, but just had to get out of being landlords because the future isnt very bright in that game.

Donald Trump

https://www.boards.ie/discussion/comment/120276959#Comment_120276959

Capital gains are taxed at the rate at the time of realisation. Which may or may not be the same tomorrow as it is today. It was different in the past.

If, for example, CGT rate doubled tomorrow it would have two impacts

1) It would decrease the value of the property as it would reduce demand from those looking to make a capital gain

2) You'd then have to pay a bigger chunk of the smaller amount and be left with a smaller portion of this smaller amount for yourself

Conversely, if CGT went to 20%, you'd benefit from the double positive impact. A negative drag on that might be that a lot of people would try to cash out (especially if it was time-limited). So the time of the transaction can indeed make a difference, but it would be nearly impossible to forecast with any kind of certainty.

DubCount

https://www.boards.ie/discussion/comment/120278569#Comment_120278569

Yes Mr Trump, Rates of CGT may change over time. The sky may fall in and we may be hit by a bus tomorrow. We cant predict the future and thats half the fun/challenge of life. You can only invest on a best guess basis of the risk and returns of what investment options are available to you today. Gross yield is a pretty good back of a fag packet calculation to judge how a rental property is performing from an investment point of view. You can get more scientific and do discounted cash flow analysis allowing for timing of tax payments, transaction costs and changes in tax rates etc., and you might get a more exact answer, but not everyone is into that kind of thing. The fact still remains, investments are considered on the basis of their future expected returns, and not on past performance. If I bought a Lotto ticked last week and won the jackpot, that was a past result - it doesnt mean buying 4,000,000 lotto tickets next week will be a good investment strategy.

Donald Trump

https://www.boards.ie/discussion/comment/120278638#Comment_120278638

Not sure what that has to me simply pointing out that CGT cost can indeed change quite a bit over time. I seem to remember it was 20% during the last boom. 40% before that

https://assets.gov.ie/25817/a7312e5125bc40e9bb7d1fef4bdfdc6a.pdf