Property
Investing
- Will property investing in Ireland produce the profits that you are expecting?
- The 1% rental rule to consider before purchasing
- 50% of rental incomes is used for ongoing costs
- The expenses that can be deducted from a rental property
- A review of the net profits from one rental income versus stock market investing
Most people in Ireland have a love affair with property, whether it is to purchase as a family unit or buy to let. That may be due to the strong upward market trend since 2012 until now 2019, where we have seen house prices increase by almost 100% from the pre-bubble market of 2006. According to The Irish Examiner on March 2019, the national Medium Home Price was €261,000
I would highly recommend reading “Irish Property Buyers’ Handbook 2015” if you are considering purchasing a property either for investing or as a home. There are lots of tips and tricks in the book the will help you with negotiating and how to handle to entire purchasing process.
But does a buy-to-let property give you the high returns that you think. Let’s take a look to see if we can get the expected returns on a buy-to-let in Ireland. We can compare the long-term returns with what you can expect to get from a low-fee ETF. An ETF like the iShares Core S&P 500 UCITS ETF that has an expense ratio of 0.07% would get a normal rate of return of 6% per year or 4% after taxes.
It sounds like a perfect business plan; buy a house, fix it up, rent it out, have rent pay the mortgage for the next 20 years, you are then left with a high value house that is paid off. And a bonus of an income from the rent if you decide to keep it.
- House pricing trend since 2006
Rental rule of 1%
There is a rule-of-thumb that you should try to get a monthly gross rent of at least 1% of the price of the property. As this will determine how long it will take to pay off the mortgage less interest; getting 1% rent will pay off the property in 100 months (8.3 years). For example, if you buy a property for €200,000 Eur property and you spend €50,000 immediately on repairs / fix up then you should be looking for a rent of €2,500 per month.
However, you will need to double that, see the 50% rule below, to calculate using the net proceeds.
p.s. I have yet to find a property in Ireland, which is reasonably priced which could fetch 1% rent. I think we would be lucky to get .5% in Ireland.
50% rule
There is another known rule-of-thumb that 50% of gross rental income will be used on operating costs. You probably won’t spend 50% every year but over the period of time it takes to pay off the mortgage, it will come close to averaging out at 50%. Operating costs would be such things as new light fittings, gutters replaced, electrical work, materials, labour, property taxes, etc…
Deducting Expenses
Expenses – some expenses that you should consider are
- Maintenance of the property; you will still need to paint it internally and externally on a regular basis, gutters need to be cleaned, boiler serviced, appliances changed, etc…
- Taxes; one thing for sure, you will need to pay taxes on any income at your highest rate of tax. Of course, that is only if you made a profit; rental income is greater than rental expenses.
- supplies; such things as light bulbs, lawn mower if you have a lawn
- Solicitor’s fees; another unavoidable cost.
- Down payment; if this is an investment property you may have to put 30% down. That money is locked-up for a few years until you can get it back from rent. Think about opportunity costs here, if you were to put that 30% into an index fund making 6% per year, how much would you have earned.
I would recommend that you open a bank account specifically for tracking income and expenses from the property. Get a debit or credit card with the account and run all expenses through it. It will make it a lot easier to work out your taxes later. If you use a credit card, pay it off in full at the end of each month to avoid additional charges. If you can find a card that gives cash-back for all charges, that is even better.
Deductions that can be used to offset the profits include:
- Rates
- Management Fees
- Maintenance
- Insurance
- Some Legal / Accountancy fees
- Wear and tear on furniture / fittings
- Home Repairs
- Interest on a loan for purchase or repair of a property
There are also tax relief in some cities which allows you to claim relief on refurbishment or converting residential or commercial properties. Read more about the Living City Initiative
Rental Income
Ok, now let’s see how much can be made from a property. I’ve pulled together a few calculations, I don’t own any rental property so this is all speculation and research.
Download the file here: https://drive.google.com/file/d/16_UvyndrpmFsDhd9DAdgciLVj3nWHfpU/view?usp=sharing
You can adopt this for your own needs: change any of the figures in PINK.
Rent
Even though you may read that you should look at getting 1% of the cost of the property as rental income per month, I have yet to find this in Ireland. It looks closer to .5% – .6%. I used .6% in the calculations, increasing by 4% per year.
Mortgage Payments
The mortgage payments are maintained at the same level throughout the ten-year period, I realise this is unrealistic but I’ve no way of known how the ECB rates will perform or if the banks will match those rates
Tax Deductions
You can find what items can be used for deductions on the revenue site, link provided below. I’m unsure of the following; if your profit is a lot less than total deductions, can the deductions be brought forward to the next year or can they only be used in the current year. I need to do more research on this, it was not clear on the revenue site.
I’ve used the model that they can only be used on the current year. Based on that, it would be year 6 before the profits catch up with the tax deductions. So essentially, you would not be paying any taxes until year 6.
https://www.revenue.ie/en/property/rental-income/irish-rental-income/what-expenses-are-allowed.aspx
Net Profit
As you can see, the good news is that the property would be profitable after year one; net profit is income minus expenses. I may be missing something here, I’m going to see if I can talk to a few property landlords to get their input.
After ten years, there would be a net profit of €16,384 on a €150,000 property, this would mean that the mortgage is paid for those ten years and taxes are deducted. Which is a 3.3% yield per year on your costs (see cell D5).
However, once we add in an assumed 3% property appreciation per year, that jumps the overall yield to 14% per year (see cell M4). This is not bad, as the opportunity costs would give you about the same. Of course, this is unrealized gains, they don’t become realized gains until the property is sold.
Opportunity costs are what you could have made from by investing the outlay costs that you had when you purchased the property. We assume that the money was invested in a fund making 5% per year. After ten years, that money would have made over €26,000.
Conclusion
In conclusion, we do need to make many assumptions; mortgage costs, rental prices, management fees. The yearly yields are low; one property would not be enough to provide an income. According to this calculation, a €150,000 property would not give you the same returns as you would get from investing in an index ETF.
I would love to compare this sheet to actual income and expenses from a property. If any property owners out there would care to share the income/expenses with me so that I could update this sheet, I would be very grateful. Of course, your information would be kept in the strictest of confidence.
Do your own due diligence, get financial advice before investing in anything. I am not a financial adviser nor do I give advice in any fashion. This information is provided based on my own research and experience.
