I recently bought my first home in Ireland last summer but sadly didn’t qualify for first-time buyers as I’d moved home from the UK only six months before that. (Despite paying tax in Ireland)
Anyway, I’ve saved up enough of a deposit to buy a second home as a buy-to-let. This home we are in now is not our forever home and I see us there for three years max. Should I invest in another house for buy-to-let now or should I keep saving for the dream house?
Ms N.McG., email
Sometimes, it’s the throwaway lines that intrigue. You say you were working in the UK but paying tax in Ireland. Odd, but if so, you should have been eligible for Help-to-Buy?
Unless of course, you mean you had come home and were paying tax here for six months but didn't qualify. That would be correct as Help-to-Buy grants you a refund of income tax (and bank deposit interest retention tax – DIRT) paid in the four years prior to the year in which you are buying. If you came home and started paying tax a few months before buying, you wouldn't have the tax history over the previous four years on which to claim.
Either way, the good news for you is that, not only were you in a position to buy your home, but you actually have the wherewithal for a deposit on a second property.
The question is, should you?
There are several factors to take into consideration when looking at purchasing an investment property. Broadly these fall under the categories of financial and the hassle factor.
You have a deposit that would allow you to purchase a buy-to-let but that clearly means you’ll need a mortgage to pay the balance of the price – generally limited to a maximum of 70 per cent of the purchase price.
Repaying that will have to come from rental income, so you need to be confident of that income stream. You are going into a very uncertain market. Covid has created all sorts of turmoil. Will people choose to stay at home longer? Will students bother travelling to college or operate remotely? Will the trend to remote working mean that demand for properties will fall in certain traditionally popular urban areas? Would it make more sense to look at purchasing a buy-to-let in a less urban centre?
Will any or all those factors push down the rent you can expect to set?
These are all questions to which no-one really has definitive answers right now. It’s a nervous market. No-one wants to run the risk of overleveraging themselves and banks right now are even more risk averse than usual.
If landlord groups are to be believed there has been an exodus of smaller scale landlords from the sector. Partly, they say, this is down to the growing power of institutional landlords, but they also complain about increased regulatory control over areas like rent and tenants' rights.
Of course, there are costs you can set against rent – including mortgage interest once you have started renting it out – provided it is registered with the Residential Tenancies Board (RTB), though not the capital repayments on the mortgage.
You can also offset things like the cost of registering with the RTB, local rates, insurance premium fees for legal and accounting services, maintenance costs (such as cleaning, painting and decorating), repair costs, utility charges not paid by a tenant and capital allowances on the cost of fitting out the property.
If you employ a management agent to take care of the property and any tenant, you can set that cost off against rent as well. The alternative is that you source the tenant and be prepared to be on call for the inevitable minor emergencies that happen with properties.
Ultimately as you want to sell the property, you have to look at its long-term capital growth potential. Is it in an area where it will sell relatively easily? Is its value likely to increase, given the market and location? And finally, can your finances withstand the pressure if it fails to sell, or if it sells for less than you bought it for?
If there is a gain, you will also have to factor in capital gains tax at 33 per cent.
But this issue of selling brings us back to your original question. Even if you have the financial muscle to acquire a buy-to-let property right now, is it a good idea?
Property investment, unless you are operating on an institutional scale, is generally a long-term investment. Many people invest with a view to boosting retirement income or providing for family down the line. Even those who do so purely as a medium term diversification play on investment accept they will need to tie up the funds for some time.
In your own words, you are looking to move on from your current home in three years at the max. And, from what you say, it seems clear that you envisage this next move to be into a longer-term “dream home”, which will require the funds that would be locked up in this investment property.
The first thing to note is that three years is a remarkably short period of time. Buying (or selling) a home can easily take a year in itself. And any money you spend on your current family home would have to be done purely with its potential to add to its resale value rather than delivering a “family return” to you during your ownership.
In terms of an investment property, by the time you identify and buy a buy-to-let, and prepare it for rent before once again putting it on the market, you’d likely only have one year’s rental income from this property.
And in what is a relatively becalmed property market, three years is relatively little time to deliver a meaningful capital gain, once the costs involved are taken into account.
So is it worth it at all?
The only reason for you to invest in a property at this stage is to make a greater return on your funds than you can do elsewhere, such as bank savings accounts which are currently offering close to zero. There’s no guarantee you can do that with a rental property in the three-year window.
And then there is risk. Banks may not be offering a return on savings but your money is at zero risk given the deposit guarantee scheme covers up to €100,000 in any financial institution in the State. If you invest in a property, you are relying on the vagaries of the market to ensure not just a gain but even the return of your original investment. The risk is higher.
In general, investors can sit and wait but you have that three-year window. That leaves you exposed to market risk.
Personally, if I had funds that I want to use to help me buy my forever home in three years, I wouldn’t be putting them into an investment property. The window is to short and the outlook too uncertain – even before you consider the hassle factor.
Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street, Dublin 2, or email firstname.lastname@example.org. This column is a reader service and is not intended to replace professional advice. No personal correspondence will be entered into.