Buying to Let, tax implications etc

m_stan

I have a lump sum that I am interested in investing long term by buying a property to let it. I will potentially do this with a trusted family member. Between us, we have around 10% of the cost of the type of house we would buy.

We've done some research in the area and are happy with the area, house type and all of that.

The Numbers:
House Price: 300,000
Stamp Duty: 20,000
Lump sum (combined): 40,000
Monthly Rent: 1,100

Problem is the mortgage repayments will roughly equal or slightly exceed the monthly rent we take in. So, presuming we pay 42% tax (is this the rate we'd pay?), we're left with having to pay 58% of the mortgage plus repairs etc and that's assuming it's rented 12 months of the year every year which it wouldn't be.

I am willing to invest my lump sum, and occasionally whatever wear and tear costs are involved. Even the odd mortgage payment when we dont have it rented, but not 58% of the mortgage every month forever.

So am I stuck ? Or is there another way ?

If so, how does anyone ever break into the Buy to Let market ? Invest huge sums (50%+ of the 1st house price) ?

I've looked at the VAT refund route on new houses, but I don't like the idea of all the hassle, plus there's no new houses in the area we have agreed to invest in.

Any advice would be most welcome.

PS: I'm not trying to evade tax in any way - just trying to find a way to make this work with the numbers I'm dealing with.

soma

Carefully go over your own post again yourself.. does this really seem like a sound investment to you..?

The mortgage payment is greater than the rental income before you take into account interest rate rises, repairs, vacancy periods and taxes. You are completely and utterly dependent on capital appreciation - and this in a market where even some of the most fervent property bulls think the Irish property market may have peaked.

Then when it comes time to sell, not only do you have the standard selling costs plus 20% capital gains tax, you then have to split any profit in two with your co-buyer.

This is not investing, this is speculation, it is quite literally a very expensive bet.

nesf

Personally I'd talk to an accountant about this. This really is one of those things I'd pay for professional advice about.

dunkamania

I am no accountant but my understanding is that you pay tax on
any profits after costs are paid so you wouldnt have any tax liability
if your mortgage is greater than your rent.I think there is a scheme
where a property that is rented out can be setup as a part of
your pension so there wouldnt be any tax liability on rent at all.

You should defnitely seek professional advice though.

m_stan

dunkamania wrote:

my understanding is that you pay tax on
any profits after costs are paid so you wouldnt have any tax liability
if your mortgage is greater than your rent.

can someone please confirm or deny this ?

and yes, I am speculating by investing. I understand the risks and have read all the commentary about the property market having reached it's peak.

just want clarification on the tax system - not to debate whether what I'm doing is a good idea - I can figure that out for myself.

thanks for the replies to date...

Hook Head

This is my first log in to this site and I was wondering if anyone could recommend from experience purchasing an apartment or a house as a buy to let investment.
Also what is your opinion on interest only mortgages?

madramor

1:
Tax = (Rent - Mortgage Interest - Running Costs) * .42

2:
Do you already own a property?

3:
if your investing long term an interest only mortgage is a good
option as it will limit your monthly costs and tax.

4:
Most people get into the buy to let using equitity release from
their own property, no secret trick that you can learn at some
training course.

5:
Don't under estimate running costs and number of vacant months.

6:
what type of property is it?

Hook Head

I already own my own house with no mortgage and have 200k to investand I am looking at property. I have recieved some advice to break this up into 4 units of 50k and take interest only mortgages on the the mortgages.
Any comments?

I am also undecided on appartments or houses. WHih is a better renatl option?

madramor

i was replying to m_stan
hookhead start your own thread if you want info don't
rob someone elses

dunkamania

Quote by SOMA.

"Carefully go over your own post again yourself.. does this really seem like a sound investment to you..?

The mortgage payment is greater than the rental income before you take into account interest rate rises, repairs, vacancy periods and taxes. You are completely and utterly dependent on capital appreciation - and this in a market where even some of the most fervent property bulls think the Irish property market may have peaked.

Then when it comes time to sell, not only do you have the standard selling costs plus 20% capital gains tax, you then have to split any profit in two with your co-buyer.

This is not investing, this is speculation, it is quite literally a very expensive bet."




I disagree with Soma,assuming that mortgage payments are close enough to rental income,then I would say hes getting a very cheap bet.

Assume a inflation rate of 5% and property only grows by 1%.
His house value increases to 303,000,which is a 7.5% return on 40,000
initially invested,beating inflation by 2.5%.If those rates stayed the same,
returns would decrease due to the increased equity held by the owner,but it
would take approximately 11 years before inflation makes the investment
unfeasible.

This example assumes an interest only mortgage,with a
standard mortgage the principal would decrease over time resulting in increased equity for the owner.This example assumes that there are no vacant months and no additional expenses for repairs,which I no first hand is unrealistic,but it also assumes very unfavourable inflation and property growth rates.

The fact that the profits are split two ways also means initial investment is halved.

My two cents.

soma

dunkamania wrote:

I disagree with Soma
.
.
Assume a inflation rate of 5%
.
.
This example assumes an interest only mortgage
.
.
This example assumes that there are no vacant months and no additional expenses for repairs

An interesting approach, you disagree with me, and yet "demonstrate" this by changing the facts on the ground that the original poster mentioned, and include day-to-day running costs that only exist in paralell universes i.e. zero repairs cost & no vacancy periods :rolleyes:

Going interest only is a different kettle of fish and, amazingly enough, would have resulted in a different initial answer from me.

dunkamania

The point I was trying to make was that its not such a bad gamble,relying
on capital gains alone,even if property growth rates become similar to inflation rates,because the initial investment is low and rental income
offsets a lot of the interest.

I wasnt suggesting it as a real life example,just as a theorethical model.
Ignoring vacant months and repairs is ridiculous,but so is an inflation rate 5
times the property growth rate.
I am trying to get across that even with lower gains in property values in recent years there is still room for a decent return.

garred

Agree with Soma's original post. If your rental income is just about covering your mortgage repayments (with some amount off the principle) its crazy. As stated you are relying on the price of the property going up. Also added to the mortgage you have house insurance, mortgage protection, repairs, vacant periods, etc so in essence you would be relying on the property to go up just to cover your costs (which would include startup, stamp duty, etc).

If however you are going with a property with guaranteed rental income (done on plenty of properties abroad) and each year you make some sort of net profit, well thats a different matter.

Genghis

madramor wrote:

1:

Tax = (Rent - Mortgage Interest - Running Costs) * .42

Madramor, I am about to rent out my home (the only house I own). I will be renting a bedroom in another house, in another town, where I will live.

In this context would the rent I pay for my room be considered a "tax deductible" cost? I have to pay this cost after all in order to rent my home?

soma

dunkamania wrote:

The point I was trying to make was that its not such a bad gamble,relying
on capital gains alone

Actually something that would help here is if m_stan posted the name of the county he was buying in, seeing as he is relying solely on capital appreciation its a pretty crucial factor e.g. I think overall house price inflation outside dublin is running at about 1.8% so far this year. Hardly the double digit growth that previously made money (albeit often only paper money) for people on these type of purchases in the recent past.

For a 300k house, I seriously doubt it's in Dublin.

dunkamania

If your rental income is 1100 a month (allow 1 month vacancy)
say 12,100 a year and you payout 15,000 on mortgage,repairs etc,
an increase of 1% for the year in house value would be the breakeven point,a more realistic increase of 4% would mean an increase of 9,000euro
in your holding and a gain of 21% (9,000/42,900) as well as 1 year paid of the mortgage.So even though you have to pump more money in its still not a loss in my opinion.


Sorry Soma I posted before I saw your latest post,I assumed Stan
was looking around Swords where you will get a 3 bed for 300k and prices
have gone up 9-10% in last 6 months.

garred

dunkamania wrote:

If your rental income is 1100 a month (allow 1 month vacancy)
say 12,100 a year and you payout 15,000 on mortgage,repairs etc,
an increase of 1% for the year in house value would be the breakeven point,a more realistic increase of 4% would mean an increase of 9,000euro
in your holding and a gain of 21% (9,000/42,900) as well as 1 year paid of the mortgage.So even though you have to pump more money in its still not a loss in my opinion.


Sorry Soma I posted before I saw your latest post,I assumed Stan
was looking around Swords where you will get a 3 bed for 300k and prices
have gone up 9-10% in last 6 months.

Its the big IF though. To get a rental of that amount you would want a decent property in a decent location. The price of that property, well would 15,000 a year cover it and repairs, insurance, mort protection, etc as well as your stamp duty and other setup costs (solicitor, surveyer, etc).
To be honest to get that rental you would, within reason, maybe looking at a house with a rough price of +300k and I would'nt say 15,000 would be reasonable outgoings especially when the stamp duty alone would be about 15k.

Example Mortgage 290,000
Monthly Repayments 1,467.00 (using AIB calculator) over 25 years.

17,604 a year + Mort Protection + Insurance + Repairs + Startup Costs, etc.

ianmc38

Interest only is an interesting option as the repayments are fully tax deductible on the rental income received. However an average figure for rental surplus in year 1 of a 3 year interest only would be €500-€600. Year 2 would be €300-€400. Therefore, assuming you're on a reasonable wage, you'll pay 42% tax on that sum(minus the 12.5% allowance for f+f in the house nad any other maintenance/tax deductible costs.) Personally I pay very little if any on my rental income(even without using my section 23 allowance).

In the current rental climate and with the projected building of 75,000 new house over each of the next ten years in Dublin, I would say property prices will continue to increase and have certainly not peaked. I heard the same thing said when i bought my 1st investment property 5 years ago, that ahs now appreciated in value by 86% of the original price. Dont listen to the uneducated who speak of a property crash. Its not going to happen. 2000 years in Ireland its never happened. 100% sound investment!

madramor

Genghis wrote:

Madramor, I am about to rent out my home (the only house I own). I will be renting a bedroom in another house, in another town, where I will live.

In this context would the rent I pay for my room be considered a "tax deductible" cost? I have to pay this cost after all in order to rent my home?

No, and you would probably have to pay extra stamp duty on your home
as it is now an investment property and repay the first time buyers grant
if you got it and i think interest relief is lower also.

dunkamania

Quote by Garred


"Its the big IF though. To get a rental of that amount you would want a decent property in a decent location. The price of that property, well would 15,000 a year cover it and repairs, insurance, mort protection, etc as well as your stamp duty and other setup costs (solicitor, surveyer, etc).
To be honest to get that rental you would, within reason, maybe looking at a house with a rough price of +300k and I would'nt say 15,000 would be reasonable outgoings especially when the stamp duty alone would be about 15k.

Example Mortgage 290,000
Monthly Repayments 1,467.00 (using AIB calculator) over 25 years.

17,604 a year + Mort Protection + Insurance + Repairs + Startup Costs, etc."
__________________




You will get a three bed around Swords Blanchardstown areas for just under
300k(although not for long)and standard rent is between 1100 and 1200
Also a mortgage of 290k with initial capital of 40k will cover house plus stamp
duty and maybe legal costs.

I agree with you completely on paying 1467 a month as unfeasible.
I would lean towards a 30/35 year if you can get it or interest only.
I wouldnt be worried about lack of capital gains either,Starter homes which are now around 300k will always be in demand especially now because of 100% mortgages and over the next few years because of ssia maturities.

garred

dunkamania wrote:

You will get a three bed around Swords Blanchardstown areas for just under
300k(although not for long)and standard rent is between 1100 and 1200
Also a mortgage of 290k with initial capital of 40k will cover house plus stamp
duty and maybe legal costs.

I agree with you completely on paying 1467 a month as unfeasible.
I would lean towards a 30/35 year if you can get it or interest only.
I wouldnt be worried about lack of capital gains either,Starter homes which are now around 300k will always be in demand especially now because of 100% mortgages and over the next few years because of ssia maturities.

Would you get that much rental in that area (no offence to anyone from Blanch). Yeah there are other options with regard to the mortgage repayments but after doing sums if you are solely relying on property going up to make a profit...well lets say personally I would'nt. However, as stated in many of these type threads, it has done so for the last decade or so.

PS good luck to the OP if he does do it. I have said it before and I'll say it again investment is probably 70/30 = 70% stats and 30% instinct. If you feel its a good investment then go ahead. I did'nt on a few and have rued those decisions.

m_stan

soma wrote:

Actually something that would help here is if m_stan posted the name of the county he was buying in, seeing as he is relying solely on capital appreciation its a pretty crucial factor e.g. I think overall house price inflation outside dublin is running at about 1.8% so far this year. Hardly the double digit growth that previously made money (albeit often only paper money) for people on these type of purchases in the recent past.

For a 300k house, I seriously doubt it's in Dublin.

The house I am looking at is a 3-bed end of terrace in Swords, Co Dublin. I am convinced that this area will stay strong due to the new terminal being added to Dublin Airport (lots of new jobs during contruction and operation) , and possibly even a second in time, plus the almost inevitability of the Metro coming to Swords in the first or second phases.

I could be wrong on all this, but it seems like a great area to me. It also happens to be where I live, but the two are not connected.

soma

In the current rental climate

Which is a renter's market, with often negotiable (downwards) rents..

and with the projected building of 75,000 new house over each of the next ten years in Dublin,

*cough* Did you just predict 750,000 new houses for Dublin!?!! :rolleyes: Did you read these 'projections' in tea leaves or something..?

I would say property prices will continue to increase and have certainly not peaked.

Ssoo.... according to you.... supply is about to go absolutely through the roof.. but still increase in price..?

Dont listen to the uneducated who speak of a property crash.

couple of thing there..

(a) Actually no one in this thread posted about a crash. Anyone who was negative about the proposed investment was sceptical of never-ending capital appreciation returns & the absence of a rental yield.

(b) "uneducated", sorry to burst your bubble (no pun intended..), but plenty of "educated" people have raised a potential price crash here. The Economist mag are hardly uneducated and yet are screaming about it from the rooftops, mind you, they did the same in 2003 & got it wrong.

Its not going to happen. 2000 years in Ireland its never happened. 100% sound investment!

A ten year economic boom of this magnitue has also never happened in our history, hence this is new territory for us, all bets are off on what can and cant happen.

soma

m_stan wrote:

I could be wrong on all this, but it seems like a great area to me. It also happens to be where I live, but the two are not connected.

I think they are, and should be, connected. It's good that you're looking at an area that you know, have a feel for & are comfortable with. Plus it makes it rather easy to keep an eye on anything if you do buy there.

soma

dunkamania wrote:

You will get a three bed around Swords Blanchardstown areas for just under
300k(although not for long)and standard rent is between 1100 and 1200

Relying solely on capital appreciation is bad enough, but relying solely on capital appreciation at close to the rock bottom of the market is probably even riskier.

Especially as there's a potential glass ceiling here of 317k for "starter homes", without government intervention (i.e. raising the 317k to something higher) will FTB/starter homes appreciate to higher than 317k..? (i.e. what FTB wants to pay 20-30k stamp duty..?)

dunkamania

Good luck to you Stan,

I think Swords is a great buy.Dont leave it to long a friend was bidding
on a similar house that started at 260k,he dropped out around the 280k
mark,bidding is still going at just under 300k.

Hope we answered your tax question somewhere in this thread.

garred

Actually reading it, I don't think the tax question was answered. You pay tax at 42% (if including wage you are over the lower bracket) on net profit. Going by your figures there will be a net loss even taking into account that not all the monthly mortgage repayment is interest. So you won't be paying tax on your income but will still have to declare it. You would pay CGT on net profit from sale. If you are paying this it means you have made a profit. However this seems to be the magical figure and depending on the amount will dictate whether it was worth while or not.

With regard to property crash, again this has been done to the death. Personally I don't think that there will be a crash (for various reasons) but there will also not be a growth rate as witnessed over the previous 6 years or so. This is only my opinion based on various factors and anyone who says there will be are also only giving their opinion.

m_stan

Sorry but I'm still confused - esp after reading Garred's comment saying "So you won't be paying tax on your income but will still have to declare it". How did you come up with the fact that I won't pay tax ?

Roughly how much tax would I pay on 1100 rental income if my mortgage payment was the same (for arguments sake) ? Do I just pay tax (yes 42% applies in this case) on whats left after mortgage interest relief, or on what's left after I pay the mortgage ? My feeling is it's the former. If so, what roughly would the mortgage interest relief anount to ?

Thanks for all the comments and feedback, and apologies if I'm just plain thick. I will seek professional advice on this, but wanted to get a view from all of you first.

It's always amusing to see how hot and bothered some people get with their opinions, but interesting to read anyway ! )

garred

Okay:

Mortgage repayments on say 290000 (over 25 years) = 1467. Of this amount 880 would be interest (I used an excel prog I have but its worth checking it out). Added to this you have house insurance, mortgage protection, depreciation of furnishings, misc.

Total incomings: 13200

Total outgoings: 880 x 12 + house insurance 850 + mort protection 600 = 12010.

Gross profit 13200-12010 = 1190 - misc costs.

For the first year you would definitely make a loss as you would have startup costs (solicitor, surveyor, etc). Yearly you could also make a loss but at best cover cost=no tax. However as this is a form of income you still have to declare this to the Revenue.

As you say definitely get professional advice. Get a receipt for this aswell

Yeah some people do get hot and bothered when giving opinions. When it comes to property investment thats all they are...opinions. Personally I find threads like this interesting. Its good to get different points of view.

ck1

Only read this earlier as I have been away. Just a quick reply.

Your taxable rent is based on your gross income less cost of Repairs and the interst element of the mortgage (not the capital element if there is one) and most other costs apart from Fixtures and Fitting purchased. F & F get written off over eight years. Repairs while the property is rented is written off in the year however repairs when the property is not rented is offset against your capital gains at the point of sale.

In relation to the VAT, if you reclaim VAT you will have to repay VAT on the sale at the end of the day. Additionally you will have to charge vat on rent on the lease depending on the term of the lease, long term/short term. Once you have reclaimed suffient VAT on the rent you can then fill in a waiver (I think it is a VAT 4A) but this particular area is very complicated. I would suggest if you are considering this, speak to an expert on VAT, it is an absolute minefield.

Also, just as a point to bear in mind, say you bought the house and rented it in 2006. Your income tax chargable on the taxable profit, which would be 42% (if you were in the higher rate bracket) plus 5% PRSI for that year would be payable by 31st October 2007 - plus 100% of the tax again. E.g. if your taxable rent in 2006 was €5000 your payment to the revenue on 31st October 2007 would be €4700.

RainyDay

ianmc38 wrote:

Dont listen to the uneducated who speak of a property crash. Its not going to happen. 2000 years in Ireland its never happened. 100% sound investment!

Deja vu - I remember all those guys in 1999/2000 who were absolutely convinced that the .com bubble wasn't a bubble. They were wrong.

And while Ireland has never had a property crash, it is has had many periods of 5+ where property prices stagnated in the doldrums going nowhere.

Property is not a no-brainer investment. Don't forget to put a value on the cost of your own time in managing the investment (finding tenants, doing maintenance, cutting the grass etc).

garred

RainyDay wrote:

Property is not a no-brainer investment. Don't forget to put a value on the cost of your own time in managing the investment (finding tenants, doing maintenance, cutting the grass etc).

Exactly and your net gain (whether it be a pre-tax profit, payment of the principal, and/or increase in property price) will determine whether or not it will be worth it.
Managing the property is time consuming as tenants, and quite rightly so, will want everything in working order and will air their concerns if it is not. From the lawn to the tv to maintenance of the boiler, there are so many aspects and factors that need "taking care of". You can obviously hire someone to do this, get/vet possible tenants, etc but obviously it would be coming out of your back pocket.
These misc costs, as I showed in the example earlier, would be specific to you and can vary from a small amount to a quite substantial amount in terms of the investment.

MorningStar

RainyDay wrote:

Deja vu - I remember all those guys in 1999/2000 who were absolutely convinced that the .com bubble wasn't a bubble. They were wrong.

Hugely different.

Property is limited but websites aren't/weren't
People were not saying there is going to be a crash for 10 years
You don't need a website to live
Fuel prices will not effect how much it costs to get to a website
SSIAs weren't about to enter the market for the next year

You have every right to say there will be a crash but just because people didn't believe it possible with dotcom doesn't mean it is right to say it is going to happen. Two seperate issues. Buy a good property with the right services close by it is hard to loose money in the long term.

On the main issue.
The tax relief on interest is great and makes the plan viable. The only problem is it is possible that the government remove it or phase it out. If enough people get mad landlords could be in for a lot of fire. THey could put up standards, new registration charge etc...
Does anybody know about the time the tax relief was removed and then came back? Did they stop new people getting it or did everybody loose out? I just can't remember but it was removed

RainyDay

MorningStar wrote:

You have every right to say there will be a crash but just because people didn't believe it possible with dotcom doesn't mean it is right to say it is going to happen.

Just to be clear - I'm not saying there is going to be a crash. Personally, I don't think there will be a crash - I do think prices will level out and stop climbing.

My main point is that anyone who goes into property (or almost any investment) assuming that prices are always going to rise is a fool. Any prospective property purchasers need to do some good hard thinking about how they will respond when;

- interest rates rise by 2%
- property is vacant for 3-6 months
- future left-leaning Govt cuts mortgage interest relief

MorningStar

RainyDay wrote:

Just to be clear - I'm not saying there is going to be a crash. Personally, I don't think there will be a crash - I do think prices will level out and stop climbing.

Fair enough but you were suggesting people were not listening as opposed to the actual concerns.
This guy has made up his mind and really only wants to know about the TAX issue. If he buys well he can limit his risk.
I would like to add a question. What happened when they removed the TAX releif? Did everybody suddenly not have relief or was it only new entries into the market?
Did they ever rehash the proposed rent control laws too?

unkel

garred wrote:

I don't think the tax question was answered

Yes it was in the very to-the-point post by madramor

madramor wrote:

1:
Tax = (Rent - Mortgage Interest - Running Costs) * .42

2:
Do you already own a property?

3:
if your investing long term an interest only mortgage is a good
option as it will limit your monthly costs and tax.

4:
Most people get into the buy to let using equitity release from
their own property, no secret trick that you can learn at some
training course.

5:
Don't under estimate running costs and number of vacant months.

6:
what type of property is it?

I suspect madramor rents out his second property?

MorningStar

unkel wrote:

Yes it was in the very to-the-point post by madramor

Relatively well answered but I would say if long term plan interest only is not a good idea I would always take that for short term investement.

Important question
When they removed rent relief did it effect those renting out property? If not could they remove it?

stjindigo

Bought my 1st investment property in 1986. Saved for a year with a building society who told me I'd have to wait for the funds to come through! The guy even tried to put me off.Prices have been climbing very fast recently he said but I don't think it will last! Nearly 20 years later and two more properties later prices are still rising. Even in the hungry eighties and hungrier early 90's with emigration at its height profits were still made. Things can potentially go wrong but there again...

garred

Has anyone gone along the lines of claiming back the VAT on the house price (new builds). Just read an article and had a quick chat with a tax accountant but apparently if you buy a second property (new) and are using it as an investment you can claim back the VAT on the purchase price. Don't know the full details but if you then sell that property you have to pay VAT and also VAT on the rental income.
I'm probably sketchy with the details but just wondering has anyone gone down this route with an investment property?

Edit: just read CK1 and he covers it better. But still wondering if anyone has done it?

m_stan

garred wrote:

just read CK1 and he covers it better. But still wondering if anyone has done it?

I haven't actually done it, but I did speak to a VAT accountant about doing it. It's extremely complicated and really you would need an accountant to handle it from beginning to end for you. If you'd like the details of someone who specialises in this area, PM me and I'll send them on. He'll charge you a consultation fee of around 200 Eur (which you can write off if you go down this route).

garred

m_stan wrote:

I haven't actually done it, but I did speak to a VAT accountant about doing it. It's extremely complicated and really you would need an accountant to handle it from beginning to end for you. If you'd like the details of someone who specialises in this area, PM me and I'll send them on. He'll charge you a consultation fee of around 200 Eur (which you can write off if you go down this route).

After talking to a tax accountant for a few minutes with regard this it did seem like opening a can of worms alright. Did you go through with your purchase?