Investment property

Bulky Boy

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: ?
Lump sum (combined): 120,000
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 52% tax (is this the rate we'd pay?), we're left with having to pay 48% 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.

coylemj

Have a read here.....

http://www.revenue.ie/en/tax/it/rental-income.html

White Cockatoo

Maybe I've missed something, but you say you have 10% of a deposit on a 300k property, but then say you have 120k combined, ie 40% ??

I like you, am considering an investment property. Here's my take on your position, although I'm happy to be corrected by established investors;
Working off the 120k deposit, that means you borrow 180k. Say you get an interest rate of 5.5%. Then your interest costs are 9.9k per annum. Of which you get tax relief on 75% = 7,425

Say depreciation on the property is 3k per annum (I've simply assumed this figure). Then your deductions would total 10,425.

Rent at 1,100 per month totals 13,200 per annum. So you'd therefore be liable to pay tax on 13,200 - 10,425 = 2,775

What I would like to understand from other investors, is how is the new property tax treated? Can it be included in the deductions? There's also a registration fee as a landlord I understand, I presume this too is tax deductable?

Liam D Ferguson

The proposition you're looking at doesn't look good to me.

€1,100 per month rent on a €300,000 property is a gross yield before any expenses of 4.4%. That's not a great gross yield for starters.

I'd also agree with White Cockatoo's figures. Let's ay you borrow €180,000 at 5.5%, your interest bill will be €9,900 for the first year. It will probably go down over time as you repay capital, but then interest rates may rise.

So in the first year, your profit is €13,200 rent less €9,900 interest less any expenses less tax. Perhaps €2,000 if you're lucky. If you put your €120,000 on deposit at 3% interest, you'd have €2,400 interest at the end of the year even after DIRT tax, without any of the work or risk involved with property investment.

Don't get me wrong - I'm actually in favour of property as an investment. I'm hoping to close the purchase of an investment property myself shortly, using my pension fund to buy it (thereby avoiding the interest and income tax on rental income). There was a piece on investing in property in last Sunday's Sunday Times and I was one of the few positive contributors.

I just think that this particular deal you outline doesn't sound good. In your shoes, I'd look to see if it was possible for you to invest in property through a pension structure. Whether or not that's practical or possible for you, I'd also look at properties with a better gross rental yield than 4.4% and arguably a lower price requiring lower borrowing.

MMAGirl

Good workings on property investment in this thread though he doesnt seem to post anymore.

http://www.boards.ie/vbulletin/showthread.php?p=79604340

handlemaster

The figures dont look good your looking only to break even and thats never good. You can buy 3 bed semi s in west dublin for under 140k and youd be looking at 950 / 1000 per month in rent and thats not looking to hard.

Someday

Don't get me wrong - I'm actually in favour of property as an investment. I'm hoping to close the purchase of an investment property myself shortly, using my pension fund to buy it (thereby avoiding the interest and income tax on rental income). There was a piece on investing in property in last Sunday's Sunday Times and I was one of the few positive contributors.

How does that work Liam, do you need to be self employed? Would you mind giving an example of what the invest would work?

Liam D Ferguson

Someday wrote: »

Don't get me wrong - I'm actually in favour of property as an investment. I'm hoping to close the purchase of an investment property myself shortly, using my pension fund to buy it (thereby avoiding the interest and income tax on rental income). There was a piece on investing in property in last Sunday's Sunday Times and I was one of the few positive contributors.

How does that work Liam, do you need to be self employed? Would you mind giving an example of what the invest would work?

You wouldn't have to be self-employed but you would need to be able to make decisions on how your pension fund is invested. So if you're working for a large company with a large group scheme, then it's unlikely that your employer's HR department will allow you to do your own thing with your pension fund when the other 400 employees are with, say, Irish Life. Public servants are also out because there is no "fund" underlying the public service pension schemes - pensioners are simply paid from the taxes of those still working.

So who would it suit? Everyone else...e.g.

• People with pension funds accumulated in previous employments
• People with Buy-Out Bonds
• People working for small employers where the employer is agreeable to letting them arrange their own pensions
• People who have built up AVC funds
• People with their own PRSAs
• Retired people with Approved Retirement Funds (ARFs)
• Self-employed sole traders
• Company directors
• People paying into private pension funds where there is no employer involvement

That's not a comprehensive list. Basically if you're in a position to choose what company your pension is invested with, then you could look at a self-directed plan.

In terms of buying property, you would need to have already accumulated a sizeable pension fund. While it's permissible for a pension fund to borrow to buy a property, in practice few if any banks want to lend to them right now. So you need to have enough of a fund accumulated already to buy the property outright. You cannot get a mortgage as an individual to help your pension fund to buy a property. Either the pension fund buys and finances the property or you do, but not both. If you have surplus cash personally then you could look at putting the cash into the pension fund to help it buy a property although there are limits to how much you can put into a pension fund.

As a rough & simplified worked example...

• You have €120,000 accumulated in a pension fund from a previous employment.
• You transfer it into a self-directed Buy-Out Bond.
• Your Buy-Out Bond purchases an apartment for €100,000 and leaves €20,000 in a bank account as a sinking fund.
• The apartment rents for €700 per month.
• The €700 per month goes back into the pension fund.
• Any expenses of running the place come from the pension fund.
• You have no tax liability in relation to the rental income as it's being paid into your pension fund and not to you.
• If you later sell the apartment for a profit, you don't pay Capital Gains Tax on the profit as the sale proceeds after legal and auctioneer fees go back into the pension fund.
• You can only access the funds that are in the pension fund by retiring in the normal way and subject to the same rules as any other pension policy.

D3PO

White Cockatoo wrote: »

Say depreciation on the property is 3k per annum (I've simply assumed this figure).

you cant write down depreciation on your property for tax purposes sweet mother of jesus. You can however write down 12.5% annually on things like furniture.

marathonic

D3PO wrote: »

you cant write down depreciation on your property for tax purposes sweet mother of jesus. You can however write down 12.5% annually on things like furniture.

I glossed over that sentence when I first read the thread and assumed they meant annual maintenance as 1% of the value of the property for annual maintenance is a figure I use when assessing the potential of a possible investment.

If you could write depreciation off against rental profits, there wouldn't be a landlord in the country paying taxes at the moment.

sy

Liam D Ferguson wrote: »

You wouldn't have to be self-employed but you would need to be able to make decisions on how your pension fund is invested. So if you're working for a large company with a large group scheme, then it's unlikely that your employer's HR department will allow you to do your own thing with your pension fund when the other 400 employees are with, say, Irish Life. Public servants are also out because there is no "fund" underlying the public service pension schemes - pensioners are simply paid from the taxes of those still working.

So who would it suit? Everyone else...e.g.

• People with pension funds accumulated in previous employments
• People with Buy-Out Bonds
• People working for small employers where the employer is agreeable to letting them arrange their own pensions
• People who have built up AVC funds
• People with their own PRSAs
• Retired people with Approved Retirement Funds (ARFs)
• Self-employed sole traders
• Company directors
• People paying into private pension funds where there is no employer involvement

That's not a comprehensive list. Basically if you're in a position to choose what company your pension is invested with, then you could look at a self-directed plan.

In terms of buying property, you would need to have already accumulated a sizeable pension fund. While it's permissible for a pension fund to borrow to buy a property, in practice few if any banks want to lend to them right now. So you need to have enough of a fund accumulated already to buy the property outright. You cannot get a mortgage as an individual to help your pension fund to buy a property. Either the pension fund buys and finances the property or you do, but not both. If you have surplus cash personally then you could look at putting the cash into the pension fund to help it buy a property although there are limits to how much you can put into a pension fund.

As a rough & simplified worked example...

• You have €120,000 accumulated in a pension fund from a previous employment.
• You transfer it into a self-directed Buy-Out Bond.
• Your Buy-Out Bond purchases an apartment for €100,000 and leaves €20,000 in a bank account as a sinking fund.
• The apartment rents for €700 per month.
• The €700 per month goes back into the pension fund.
• Any expenses of running the place come from the pension fund.
• You have no tax liability in relation to the rental income as it's being paid into your pension fund and not to you.
• If you later sell the apartment for a profit, you don't pay Capital Gains Tax on the profit as the sale proceeds after legal and auctioneer fees go back into the pension fund.
• You can only access the funds that are in the pension fund by retiring in the normal way and subject to the same rules as any other pension policy.

Apologies for digging up this old thread but curious as to what you think my position would be regarding my AVC lump sum. I have just retired as a public servant and have amassed an AVC fund of €143000. I can take €32000 tax free and the balance of €111000 I can invest as follows
1 Take the balance as a lump sum and pay tax on it (no)
2 Buy an annuity (no)
3 Invest in an ARF

My question is can I avail of a self directed Buy out Bond to purchase a Rental Property as outlined above, using the ARF sum or the full €143000. I would be foolish not to take my tax free lump sum.
Many thanks for your informative post Liam D Ferguson

Liam D Ferguson

sy wrote: »

Apologies for digging up this old thread but curious as to what you think my position would be regarding my AVC lump sum. I have just retired as a public servant and have amassed an AVC fund of €143000. I can take €32000 tax free and the balance of €111000 I can invest as follows
1 Take the balance as a lump sum and pay tax on it (no)
2 Buy an annuity (no)
3 Invest in an ARF

My question is can I avail of a self directed Buy out Bond to purchase a Rental Property as outlined above, using the ARF sum or the full €143000. I would be foolish not to take my tax free lump sum.
Many thanks for your informative post Liam D Ferguson

You can take the €111,000 and invest it in a self-directed ARF, which can then buy a property. Depending on where you're looking, the amount of money may limit your choice of property, as you have to keep an amount aside in cash for charges, a sinking fund and if you're over 60, a few years' withdrawals.

In theory you could put the full €143,000 into an ARF to increase your property-buying budget but that wouldn't be tax-efficient because any withdrawals from the ARF will be taxed and you'll have given up your tax-free €32,000.

If you don't feel that you could get a property you'd like within budget but still want to invest in Irish property, there are several Irish Commercial Property funds available for ARFs - pooled funds which own commercial properties. But you have no control over the properties.

stainluss

Liam D Ferguson wrote: »

I'm hoping to close the purchase of an investment property myself shortly, using my pension fund to buy it (thereby avoiding the interest and income tax on rental income).

If the OP was to put the property in a holding company he created as opposed to a pension fund he would pay corporate tax as opposed to income tax, right?

Liam D Ferguson

stainluss wrote: »

If the OP was to put the property in a holding company he created as opposed to a pension fund he would pay corporate tax as opposed to income tax, right?

I'm not a tax professional but my understanding is that using a company to buy an investment property can be inefficient in that the company will pay taxes but then the individual will pay more taxes when they want to liquidate the investment. That would be one for an accountant or tax consultant.