Apparently 66% of the 70,000 'landlords' in Ireland own 1 investment property. Surely you don't want to look a gift horse in the mouth, you want to be one of these?
"Sure property prices are climbing, you'd be mad not to own at least one investment property". You buy the place and rent it out so that someone else can pay the mortgage for you, job done! Right?! Seems not long ago when this was the regular 'pub talk', however it is over 10 years ago now, and that talk is coming back (to a degree!). For a long time a bank would ring the Gardai if you went in and asked for a 'buy to let' mortgage (a loan to buy an investment property which you would rent out). They have softened, and are actually advertising these again, just google it!
Now before we jump in it's worth noting that there is a large % of our generation who are making ends meet, putting kids into creches, working hard, and paying the bills, maybe stashing a few quid each month for future and for rainy days. For this % of us a buy to let is not on the radar at all.
If you haven't then please do check out this episode on our Podcast:
Having said that there are also a fair % of our generation who have quite a bit of disposable (spare) income each month, their income may be comparatively high or their outgoings comparatively low, or indeed a mixture of both (if you are really fortunate!). It is this % that may be sniffing at the idea of buying another property or moving out of their home, renting it out and buying another.
In this episode we will share with you the maths behind mortgaged investment property ownership, so you can make your own mind up on whether it is for you or not! And that is the point isn't it, in owning investment property, it must be in order to try achieve some form of financial gain, otherwise why would you even consider such an investment (unless you fell into it by accident of course!).
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Considering a mortgage to buy an investment property in Ireland? In this episode we will look at 2 of the possible scenarios by which you could invest in an investment property. For clarity let's first establish what we mean by Mortgaged Investment Property. Such property can come about really in two ways;
a) You currently live in a property and have a mortgage on it. You decide to move out of this property for whatever reason, and instead of selling it you keep it, rent it out to tenants and you then live in the other new property. You are a Mortgaged Property Investor!
b) You currently live in a property, you may own it or rent it. You decide to become a Mortgaged Property Investor by purchasing a separate property by taking out a new mortgage.
Now that we have that clear lets now have an overview of the maths and financials in actually purchasing and owning one of these 'chaps'! For the purpose of this example we will assume that you are borrowing the money with a mortgage from a bank.
Can I Borrow Enough To Buy a 'Buy To Let'?
If you can then fair play to you, you would want to have a fair chunk of accessible cash, and a very healthy disposable income! Typically the banks under their current circumstances will give you 70% of the cash needed to purchase an investment property, meaning you need to stump up the rest. May not seem a lot but if you are looking at buying a property for €220,000 then that is a €66,000 deposit you need to pony-up! In addition to that lump you also need to have sufficient disposable monthly income ( approx 3 times what the monthly repayment on the loan would be!) for the bank to take on the risk of your tenants not paying the rent and you having to pay the mortgage yourself!
Will The Rent Cover The Mortgage On My Buy-To-Let?
Assuming you get rent each and every month, and that there is 100% occupancy (they say we should be prudent and assume 90%) then it may well do, but lets have a closer look at the figures. For this example we assume you are buying a place for 220k, a 3-bed semi in Balbriggan, a large population town in North County Dublin (my good wife is from there but we won't hold that against her!). In today's market you will get in the region of €1,300 per calendar month rental income on a property like that. So surely it makes sense in cash-flow terms?
Lets set aside the fact that you have had to shell out at least €66k deposit, plus legal fees, plus the inevitable 'bits & pieces' involved such as painting and decorating and perhaps an element of furnishing, in order to even get to this point, so you could be in the €70-€8o,000 zone already, and you haven't even had a pint yet!! You have borrowed €154k over 25 years (the max term typically for Buy To Let mortgages these days), at a rate of 4.95% (typical rate).
Annual Cash-Flow Of a Buy-To-Let:
Annual Gross Income:
|Rental Income (1,300 per month||€15,600|
|Mortgage (895 per month)||€10,740|
So that's it, job done, there's more income than outgoings, let's run out and buy one?? Not so fast! Unfortunately you would be paying income tax (& PRSI) on the rental income. If you are able to afford a Buy To Let mortgage then the likelihood is that you are paying tax at the higher rate, so effectively your income of €15,600 will Net approximately €8,000!!!
However, your other expenses (including interest on your mortgage) can be deducted from the income prior to the tax being calculated, so lets have a look at these expenses.
Other Expenditure (which can reduce tax on the above income):
|PRTB (Private Residential Tenancies Board)||€90|
|Mortgage Protection (not obligatory but silly not to!) Assuming €30 odd euro per month for a reducing life cover only life policy||€400|
|Building Insurance (purely for rebuilding it if it burned to the ground!)||€500|
|Mortgage Interest ( can claim 75% of mortgage interest, €7623)||€5,720|
|Capital Allowances (Depreciation allowed at 12.5% on floors, furniture, fittings. 16,000 * 12.5%)||€2,000|
|Property Repairs & Maintenance (in this example we assume painting, plumbing repairs & replacement curtains)||€800|
|Accountant Fees (You may decide to do it yourself but if you engage an Accountant this is roughly what it will cost you)||€500|
Deductible expenses therefore amount to €10,010. This amount can be used to reduce the taxable income.
So Will I Make Money Each Year By Owning A Rental Property?
Gross Taxable (Rental) Income €15,600
Less Allowable Expenses €10,010
(Net 'Profit' €5,500)
You then pay essentially 50% tax on this Net 'profit' (assuming you are paying tax at 40% on your main income, plus PRSI).
Less Tax Bill: €2,700
So in real money terms the total income was the rental income: €15,600
The Total Expenditure was the mortgage payment (which you make!!) and the other actual cash outflows you incurred in that same year (accountant fees, repairs, insurance, mortgage protection, PRTB & Tax Bill): €15,730!
In Net Cash-Flow terms we are down €130!
This is assuming relatively small maintenance costs, no estate management fees, and critically a 100% occupancy rate at that rate of rental income (non of which are guaranteed to remain the same!). It is also assuming you have a mortgage and can therefore reduce your taxable income with three-quarters of the interest you are paying. If you don't have a mortgage on the property then you will pay tax on a much higher portion of the rental income in the example above. Just saying!
So if all of that worked out just like that you could say that in these fairly ideal circumstances you break even in net cash-flow terms. While it did cost you a large chunk of cash (€66,000) to get started in this example, there is a tenant who is now paying your mortgage, which if it continues for the next 25 years on this path will be a mortgage free asset for you to sell or retain as a source of (taxable!) income................in an ideal circumstance!
Bottom-line is that in order to consider this seriously it's worth doing the maths for yourself and also to consider the possible pit-falls (of which there are many and will be addressed in a future episode). For now, hoping this is a useful resource the next time you pop onto daft.ie for a gander at the next addition to your property portfolio?! I'd love to hear your feedback, questions or suggestions, mail me here
Over to you!!
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