Pooled rent system

pasquale83

Hello folks,

I would like to invest some money in a rental property.
I've seen some apartments in Limerick rented under a pooled rent system.

I would like to have your opinion on this.

On the specific property I had a look at there is a 4-year guaranteed income equivalent to 3% return after tax and management fee.

What do you think? Looks like the property is fully managed.

Thanks!

antoinolachtnai

At the financial level, who is guaranteeing it, is the first question. What resources do they have to draw on if rents are not as high as expected, or if there is some sort of disaster? I'd be surprised if they are guaranteeing an after-tax figure. After all, they have no knowledge of where tax rates are going to go, and they don't know whether you are borrowing the money or have it on-hand (which makes a big difference to the tax that applies).

There is a revenue note which may or may not be relevant - http://www.revenue.ie/en/practitioner/tax-briefing/archive/71/rent-pooling.html

At operational level, if the property is fully managed, then you need to understand are the managers taking responsibility for any damage caused by tenants, i.e., will the property be returned to you in year 5 in perfect order?

The way this often works is that the return has just been added to the price of the property. So I build a property that with a typical margin for the developer would cost 200,000 euros (say) and then 'guarantee' a return of 5 percent. This is going to cost me 40,000 euros over the course of the four years at most. If I can rent it at all, it should cost less, so let's say it's going to cost the developer 20,000 euros. So now I sell you the property for 220,000 euros. You get a mortgage for 165,000 euros (75 percent of the higher value). You get your return for the first four years because the developer subsidises your return even if the rents are only half of what you expected. Everyone is happy. The problem is year 5. Now, hopefully, rents and values have increased in the area. But if they haven't, then you are going to see a sudden drop in yield as the subsidy from the developer goes away.

There is nothing wrong with these guarantee structures per se, but you have to understand that they cost money to finance and that you ultimately pay this cost.

pasquale83

antoinolachtnai wrote: »

At the financial level, who is guaranteeing it, is the first question. What resources do they have to draw on if rents are not as high as expected, or if there is some sort of disaster? I'd be surprised if they are guaranteeing an after-tax figure. After all, they have no knowledge of where tax rates are going to go, and they don't know whether you are borrowing the money or have it on-hand (which makes a big difference to the tax that applies).

There is a revenue note which may or may not be relevant - http://www.revenue.ie/en/practitioner/tax-briefing/archive/71/rent-pooling.html

At operational level, if the property is fully managed, then you need to understand are the managers taking responsibility for any damage caused by tenants, i.e., will the property be returned to you in year 5 in perfect order?

The way this often works is that the return has just been added to the price of the property. So I build a property that with a typical margin for the developer would cost 200,000 euros (say) and then 'guarantee' a return of 5 percent. This is going to cost me 40,000 euros over the course of the four years at most. If I can rent it at all, it should cost less, so let's say it's going to cost the developer 20,000 euros. So now I sell you the property for 220,000 euros. You get a mortgage for 165,000 euros (75 percent of the higher value). You get your return for the first four years because the developer subsidises your return even if the rents are only half of what you expected. Everyone is happy. The problem is year 5. Now, hopefully, rents and values have increased in the area. But if they haven't, then you are going to see a sudden drop in yield as the subsidy from the developer goes away.

There is nothing wrong with these guarantee structures per se, but you have to understand that they cost money to finance and that you ultimately pay this cost.

Thank you for your answer.

The 3% return after taxes was my estimate according to the gross return they guarantee for the first 4 years (and as you say I need to understand how the guarantee it) based on current tax regime and my marginal tax band.

I will have a look to the Revenue note, thanks!

I was thinking to pay cash as the price of the property is low and I already have a mortgage on my house. I am just wondering: how a mortgage changes the tax regime? Could you please tell me more on this?

I will ring the estate agent this week to ask more details.

Thanks again!

antoinolachtnai

If you have a mortgage you can set 75 percent of the interest bill against tax.

If you have a residential mortgage as is, and it is not a tracker you are likely to be better off tax-wise paying a lump sum off the residential mortgage, and getting a mortgage on the property you are buying. You need to talk to a financial advisor about this.

It is important that you know something about the area and the rental market that you are invested in. I don't know if you know much about renting property. It's a pretty tight business these days.

pasquale83

antoinolachtnai wrote: »

If you have a mortgage you can set 75 percent of the interest bill against tax.

If you have a residential mortgage as is, and it is not a tracker you are likely to be better off tax-wise paying a lump sum off the residential mortgage, and getting a mortgage on the property you are buying. You need to talk to a financial advisor about this.

It is important that you know something about the area and the rental market that you are invested in. I don't know if you know much about renting property. It's a pretty tight business these days.

Hi thanks for the services again.

I use to rent out properties since the past 10 years, even if in a different market. I will try to collect as much information as possible.

Thanks!

pasquale83

antoinolachtnai wrote: »

If you have a mortgage you can set 75 percent of the interest bill against tax.

If you have a residential mortgage as is, and it is not a tracker you are likely to be better off tax-wise paying a lump sum off the residential mortgage, and getting a mortgage on the property you are buying. You need to talk to a financial advisor about this.

It is important that you know something about the area and the rental market that you are invested in. I don't know if you know much about renting property. It's a pretty tight business these days.

If this is the tax relief you are talking about, looks like it doesn't apply for mortgages drawn after January, 1st 2013

http://www.revenue.ie/en/tax/it/leaflets/tax-relief-source-mortgage-interest-relief.html

antoinolachtnai

pasquale83 wrote: »

If this is the tax relief you are talking about, looks like it doesn't apply for mortgages drawn after January, 1st 2013

http://www.revenue.ie/en/tax/it/leaflets/tax-relief-source-mortgage-interest-relief.html

That is tax relief at source for a home loan. It isn't anything to do with buy-to-let.

pasquale83

antoinolachtnai wrote: »

That is tax relief at source for a home loan. It isn't anything to do with buy-to-let.

OK, so the thing you are mentioning is only for rental properties.

Is there anything for home properties as well?

Any links is really appreciated.

Thanks!

Michael D Not Higgins

I'd suggest starting here for rental income and tax: http://www.revenue.ie/en/tax/it/leaflets/it70.html.

The_Conductor

pasquale83 wrote: »

Is there anything for home properties as well?

Not at present- there was talk of having a first-time-buyer assisted purchase scheme- however, the absolute lack of property on the market- alongside the Central Banks reduced deposit requirement for first time buyers- put the kibosh on that.........

antoinolachtnai

pasquale83 wrote: »

OK, so the thing you are mentioning is only for rental properties.

Is there anything for home properties as well?

Any links is really appreciated.

Thanks!

There is basically no tax relief on your mortgage on your home. That is why I am suggesting that from a tax point of view, it might make better sense to have a mortgage on the rental property you are considering buying and to pay down your residential mortgage.