Is buying an investment property a good idea?

With the current housing crises in Ireland, the demand on housing is huge. Lots of people are looking for places to live but the supply isn’t like it was during the Celtic Tiger. Rents have shot up due to demand, so lots of people with savings are looking to leverage their money and buy an investment property. Besides the hassle of being a landlord, do the numbers actually make sense?

Being in a position to buy in the first place

The maximum loan you can get for an investment property is 70%. In our example, we are going to look at purchasing a property for €400,000, so a deposit of €120,000 is required. Add in Stamp Duty , legal and surveyor fees, you will need approximately another €7,000 in addition. If you are going to rent it furnished, you will need to be able to pay for that too.

Mortgage

The maximum mortgage term you can take out is a 25 year mortgage, which is a lot shorter than if you were buying a mortgage for your own home. As mentioned already, you need a 30% deposit. Some lenders will look for the rent to be at least 1.2 times the repayments.

Tax

As a landlord running the business of renting property, you are entitled to deduct some expenses from the rental income you receive

1. 100% of the interest that you pay each year is deductible against your rental income. This is highest in the initial years and reduces over the term of the mortgage
2. Private Residents Tenancy Board (PRTB) fees are tax deductible as long as you haven’t incurred any penalties for late registration.
3. Repairs, maintenance, wear & tear but not pre-letting/ post-letting expenses
4. Legal/ Accounting fees
5. Insurance premiums

What is left over after you have paid these deductions is liable to income tax at your marginal rate. So if you are working, it is likely you will pay income tax at 40%, USC at 8% and PRSI at 4%. A total of 52%.

Will it wash its face?

When it comes to renting property, people generally look at the rental income versus the mortgage repayments. What they forget about is the tax. Whether the property will pay for itself really depends on the rental yield, which is the rent divided by the purchase price of the property.

In running the figures, I assumed the following:

• Purchase price of €400,000
• 25 year mortgage of €280,000
• Interest rate of 4%
• Monthly repayments of €1,477.94
• Annual deductible expenses of €250
• Non deductible expenses of €1,000 every 5 years

Our analysis found the following:

• 5% yield – The property will cost you an average of €3,812 a year during the mortgage term.
• 6% yield – The property will cost you an average of €1,643 a year during the mortgage term.
• 7% yield – You will gain an average of €526 a year from the property during the mortgage term.
• 8% yield – You will gain an average of €2,696 a year from the property during the mortgage term.

Once the mortgage is paid off, the property will provide you with a regular income.

Rental yields are strong at present due to the pressure in the property market but your investment is for a long time, so it is unlikely that you will get an 8% yield for 25 years. I also haven’t included periods where there is no rental income received if the property is between tenants or there is refurbishment. You will have to be able to meet the repayments yourself during this period.

Buying an investment property is most suitable to those who can buy with cash or with a small mortgage. For those interested in buying an investment property. What I do advise people who are a bit tight on funds but want to buy an investment property is to wait. You are making a long term investment, something you plan to have for decades. Don’t be in a rush to make your investment. Wait until you are in a strong position to make the purchase and it makes sense to you financially.

If you have any questions, drop me an email at steven@bluewaterfp.ie