Caution vital when buying property

If a two-bedroom dockside apartment costing €285,000 typically pulls in a monthly rent of €1,400, investors will clearly have to put up a considerable deposit to ensure that rental income will cover the mortgage.

Even at that, the purchase price is just one figure prospective buyers have to consider. Stamp duty and solicitors' fees are charges that buyers of existing property will already be familiar with, but buying in an apartment or townhouse scheme means additional annual service charges. A typical annual service charge in Dublin is about €1,000 but it can be much more and these charges are rising partly due to increased insurance costs.

"Void periods", where the apartment or house is empty due to a changeover of tenants, are common and can be as long as two months. Investors need to be sure that they can carry the mortgage during these periods.

Rents are static in Dublin for typical apartment units and there has been considerable softening at the top end of the market. There is no sign that this will change. Investors should take into account that, if mortgage interest rates rise, it is unlikely in the current climate that they will be able to pass it on in rent increases and will have to cover the shortfall themselves. A 1 per cent rise on a 20-year €200,000 mortgage will add an extra €124 per month to mortgage repayment.

Buyers should also consider how the property will be managed. Amateur property investors rarely want the hassle of midnight call-outs when the tenant forgets a key or the time-consuming business of advertising for and interviewing prospective tenants. The convenience of employing letting agents and management companies comes at a cost, although this is deductible from rental income before taxation. Typically, a letting agent will charge the equivalent of one month's rent to find a tenant. If you then take on a management company, that will cost around 10 per cent of the monthly income.

"We act as surrogate landlords," says Ms Kate Sissons, managing director of Christies, who advises prospective residential property investors to get a letting agent on board at an early stage. "Buyers should be sure that the property they are looking at can command the rental income they need and we would also advise on the best way to furnish and generally present a property to maximise rents."

Rental property should be thought of as the business it is. Mortgage interest payments can be offset against rental income. Costs associated with the rental such as furnishing the property, insurance, cleaning repairs and management fees are taken as expenses for tax purposes and landlords only pay tax on the net rental profit.

Financing a buy-to-let investment depends greatly on personal circumstance. Lenders are now so used to seeing people keen to release the equity in their current homes by buying a second property that they routinely take the entire package of properties into account when assessing loan applications.

It is possible to get 100 per cent financing on an investment property if there is sufficient equity tied up in the principal property. For that, a cross-charge is put on both properties, with the principal home acting as security on the investment property.

An increasingly popular way to finance a buy-to-let investment is with an "interest-only" loan where the borrower only pays the interest on the loan, usually for three to five years.

"Around 20 per cent of the buyto-let loans we give are interest only," says Mr Brian Healy of EBS. "And these loans typically are up to 75 per cent of the purchase price."

Ms Sara Wellband of Rea Mortgage Choice gives the example of an apartment bought with a €200,000 mortgage. Rental income would be €1,200 while monthly repayments would be €833. Repayments on a same size capital and interest mortgage would be €1,134. In this scenario Ms Wellband would advise clients to save the difference with a view to paying off the capital.

Interest only loans are most attractive to a person buying with the hope that the property will rise significantly in price over the next five years. If it did, they could sell the property pay off the capital and make a profit. But if the market remains static or falls the apartment owner could find themselves in a negative equity situation where the outstanding loan is larger than the market price of the property.

"While interest-only mortgages are certainly of interest to a lot of people, \ people like to feel they are eating into the loan with their repayments," says Mr Healy.

Tellingly, while he has seen a growth of activity among first-time residential property investors, he has also noted several more experienced investors with large existing residential portfolios holding back from investing in more property.