Author Topic: Another sell/rent  (Read 421 times)

Sherman

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Another sell/rent
« on: October 31, 2020, 04:59:38 AM »
Im wrestling with a classic keep and rent/sell dilemma which I hope the super-smart MMM hive mind can help with!

Existing home:

Market value:     $500k
O/S Mortgage:   $180k (so equity of approx. $320k)
O/S Term:          16 years
Rate:                   0.5% (yes, you read that right. Thanks, European Central Bank!)
Repayment:        $1,020/month
Rental income:   $2,500/m (conservative, easily over $2,700/m more realistic)
Tax rate:             52% on full rental income, before mortgage payments (ouch)

Even with the crazy high tax rate, this would be cash-flow positive to the tune of about $350/m although I am not accounting for any tax reliefs so would likely be somewhat higher once I avail of depreciation relief etc.

Other Information:

Post-tax income:    $150k p/a (household)
New mortgage:      $800k (repayments $3,200/m).
                               2.5% mortgage rate, 27 year term.
                               Approx. $160k of that is renovation borrowing, which we would not need if we liquidate first property. So if we sell first property, mortgage on this house would be $640k, or $2,750/m.
Property value:       $1.1m (after renovation)
Pension:                 Me = fund currently $500k, $40k additional annual payroll/employer contrib. (max. allowable)
                               Spouse = Gov. Job, accrues 1/80 of final salary per year of service. 20 years service. Looking at annual pension of approx. $40k (in today's money), index linked, govt. g'teed.
Savings:                 $150k cash which will all go on renovations on new house. Saving approx. $3k cash/month, even with paying two mortgages currently. Whatever happens this will obviously increase by at least $1k/m as 1st mortgage will no longer be paid by us in either scenario.

Spouse adores her job, will never leave. I like mine, but have lots of other interests so would like to go at 60 at latest which might dovetail nicely with a paid off investment property. My income is approx. 80% of household income.

Both me and my wife are 43, one kiddo whos 7.

Question: What to do, oh great hive mind? Keeping and renting current house feels like a no-brainer and nice inflation hedge...

waltworks

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Re: Another sell/rent
« Reply #1 on: October 31, 2020, 10:30:17 AM »
What are your non-mortgage (maintenance, capex, vacancy, management, etc) costs?

-W

Sherman

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Re: Another sell/rent
« Reply #2 on: October 31, 2020, 10:53:23 AM »
What are your non-mortgage (maintenance, capex, vacancy, management, etc) costs?

-W

Thanks Walt. Very minimal running costs - my conservative rent assumption includes 10% vacancy p/a. House was significantly upgraded (insulation, wiring, plumbing) 5 years ago, all new appliances etc. at that time, so I don't anticipate material maintenance costs for the next few years.

Management would run about 8% of annual rent (to be offset against tax) if I used an agency - although I could manage myself as I'd be living only about 5 minutes away.

waltworks

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Re: Another sell/rent
« Reply #3 on: October 31, 2020, 11:15:24 AM »
I guess it depends on how you feel about an investment that yields something like 1% annually and isn't really even passive.

You have a TON of NW tied up in RE already, too. I'd personally be uncomfortable in your situation but that's just me.

-W
« Last Edit: October 31, 2020, 11:52:21 AM by waltworks »

Papa bear

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Re: Another sell/rent
« Reply #4 on: October 31, 2020, 11:19:52 AM »
In the US, thats a no brainer for a sell.  In your local country, I cant help much with the different regulations and tax consequences.

My gut says this still pans out as a sell, but there is a lot more info wed need. 

What are the tax implications of selling on your gains? Your taxes are 52% on your gross revenue? Can you pass some of your expenses on to tenants to come out net ahead? For instance, can your tenants take a triple net lease and cover capital expenses for reduced rent?

Non financial, so you want to be a landlord? Is this something you can handle?

Sherman

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Re: Another sell/rent
« Reply #5 on: October 31, 2020, 11:58:57 AM »
In the US, thats a no brainer for a sell.  In your local country, I cant help much with the different regulations and tax consequences.

My gut says this still pans out as a sell, but there is a lot more info wed need. 

What are the tax implications of selling on your gains? Your taxes are 52% on your gross revenue? Can you pass some of your expenses on to tenants to come out net ahead? For instance, can your tenants take a triple net lease and cover capital expenses for reduced rent?

Non financial, so you want to be a landlord? Is this something you can handle?

Very interesting, thanks Papa bear. Sale proceeds are 100% tax free for up to one year after we move out - so a neat $320k tax free if we sell within a year of moving out. If we keep and rent it, the duration of ownership is proportionately set off against the capital gain e.g. if we hold it 30 years, 15 of which was primary residence, the taxable gain is halved. Capital gains in Ireland are a painful 33%.

We could pass some, very limited, expenses to the tenants - really all worthwhile tax structuring options have been eliminated in Ireland since the 2008 financial crisis.

Good question on whether I want to be a landlord. My gut tells me I could handle it with not much stress.

Papa bear

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Re: Another sell/rent
« Reply #6 on: October 31, 2020, 12:09:06 PM »
Tax free capital gains.  This is 100% no question sell this place and take that amazing tax break.  Given the tough tax implications and marginal return on your equity, put this on the market ASAP.


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Sherman

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Re: Another sell/rent
« Reply #7 on: October 31, 2020, 12:14:06 PM »
Sorry, just realized the capital gain would be sale price minus purchase price, so a cap gain of $140k rather than $320k. Your point remains a good one however!

waltworks

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Re: Another sell/rent
« Reply #8 on: October 31, 2020, 12:23:33 PM »
To recap:
-You have a ton of exposure to RE already via your home.
-The rental earns minimal return, if you manage it yourself (ie, the real return is zero here, even if the management is relatively easy - you have to pay yourself something for your time)
-You can extract your capital gains/equity with no taxes (!!!)

There is really no question on this. Sell it immediately.

-W