For many small landlords, the numbers don’t add up. High tax, mortgage interest rate hikes, inflation and rent caps mean spiraling costs for dwindling returns.
Some landlords fear eviction bans like the one that has been in place this winter that prevents them from selling a property they can’t afford may sink them.
It’s no surprise then that of some 58,400 residential property sales last year, approximately 21,000 of these sales were landlords exiting the market, according to SherryFitz estimates.
The Government’s decision to end an eviction ban from the end of this March will be a relief for those landlords who are under pressure and were prevented from selling a property they could no longer afford.
Talk of possible tax credits for landlords aimed at encouraging them to stay in the market may be too little too late. If you are a landlord hoping to sell this year here are some of the costs you will need to budget for.
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Should I stay or should I go?
Being a landlord right now is not an efficient use of money, says Jonathan Sheahan of Compass Private Wealth. “It’s the perfect storm, really. You have everything against you. You might be able to handle the 52 per cent tax on rental income, or 55 per cent in some cases, if you didn’t have the 2 per cent limit on [increases in] rental income,” says Sheahan.
Landlords who kept rents down to retain good tenants were caught out by rent pressure zone rules. When those tenants moved out, landlords were then tied to annual rent increases of no more than 2 per cent.
“I’m meeting landlords who now have rent capped at 25 or 35 per cent below market rent,” says estate agent Owen Reilly. Some 55 per cent of his sales last year were landlords exiting. “Some of them were in it for the long haul. They are now selling much faster than any of them envisaged,” he says.
The effect is that the landlord next door who was charging higher rent before the caps were introduced earns more for an identical property. This has devalued many landlords’ investment. If both properties come up for sale, investor purchasers will not want the one with hamstrung returns.
Rents are high overall in this State, most particularly for new rentals. But rents in some properties in pressure zones are well below inflation. “If you have inflation now running at 8 per cent, landlords are kind of guaranteed to be losing 6 per cent from a cash flow point of view,” says Sheahan. “Even if inflation was 6 per cent, you are losing 4 per cent every year because you are paying so much tax and so much more on loan repayments, repairs and insurance; it just doesn’t stand up as an efficient use of your capital,” he says.
Some 46 per cent of landlords here are PAYE workers, according to the Central Statistics Office, while about 15 per cent were self-employed in 2019. Those with tracker mortgages on their investment properties have seen repayments rise by about €300 a month since the European Central Bank started raising interest rates last summer, with more to come. Some won’t be able to absorb mounting costs and may tip into trouble, especially where an eviction ban means they have not been able to sell.
If you are covering your costs, however, or you have great tenants, or if selling would make you liable for a big capital gains tax bill, there is an argument to hang on to it, says Sheahan.
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From the tenants’ point of view, the irony is that a vacant property that’s well presented has the best chance of selling quickly, says Reilly.
Giving notice to terminate a tenancy due to sale is a formal process that needs to be done correctly in line with Residential Tenancies Board guidelines. It requires a statutory declaration witnessed by a solicitor, so landlords will need to factor in this cost.
If a tenancy has been in place for longer than a year but fewer than seven years, a tenant is entitled to a notice period of 180 days – about six months. And while landlords have been able to issue a notice of termination during the current eviction ban, they have been unable to act on it until the ban ends.
A vacant property means a loss of income during the sale period, of course. “There can be a conflict of interest between keeping your rent coming in and getting the best price,” says Reilly.
Some landlords and tenants come to agreement whereby the tenant facilitates viewings in return for reduced rent, he says. It has to work for the tenant, of course. “Typically, the rent might be reduced a little bit in return for that co-operation,” says Reilly. “I’ve come across anything from a 10 per cent to a 20 per cent cut in rent.
“Quite often, it’s agreed that the inducement is given at the end of the process. I recently sold a property in Ballsbridge and the inducement ended up being pretty much that the final month’s rent was free.”
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Start to finish, selling a property can take up to five months. The more you can do to shorten the process, the better, says Graham Murray, regional director of residential sales at Sherry FitzGerald. Sellers can speed things up by getting things in order before going to market.
Start things off by signing a service agreement with an estate agent, if you are using one. “You also need to have a Ber [building energy rating] in place. They last for 10 years from the date they are given. It has to be there, you can’t go to market without it,” says Murray.
Getting title documents from your bank can take two to six weeks, he says, advising sellers to engage a solicitor early to get this moving. A solicitor will help you arrange a land registry map, too. The last thing you want is a six-week wait for documents after you have gone “sale agreed”. Make sure any property management fees and local property tax are paid up to date, too. “Time costs money and preparation is key,” he says.
A well-presented property will attract more interest online and generate more viewings. At a minimum, landlords need to budget for a deep clean, says Murray. They should factor in the cost of a paint job, too. Online quotes for a two-bed apartment are about €250 for cleaning, including carpets, windows and oven, and €1,300 for painting.
“Whoever the buyer is, if the property is in turnkey condition, they can either move in straight away or re-let it without having to do anything,” says Murray.
Buyers are far more likely to be owner-occupiers and first-time buyers than investors these days. This is particularly the case for rent-capped properties. Investors just aren’t looking at them, says Reilly. Indeed for every one investor entering the private rental sector here, three are leaving, according to Sherry FitzGerald estimates.
Staging is increasingly popular, says Reilly. Painting and snagging, including things such as fixing door handles and regrouting bathrooms, and then renting soft furnishings for a viewing period of six to eight weeks, will cost about €6,000 to €7,000 for the average property, he says. If it speeds a sale and maximises return, it can be worth it.
The buyer landscape may be in flux however. When ending the eviction ban, the Government set out measures that may impact landlord sales. Details are still sketchy. One is to require a landlord selling a property to first offer it to the tenant on an independent valuation basis for sale.
Under the ‘first refusal’ plans tenants would be able to access shared equity through the First Home Scheme to help them buy the property. This will need changes to legislation that the Government hopes will be passed by the Oireachtas before the summer recess.
A second proposal is the development of a “cost rental backstop” where the Government is to work with Approved Housing Bodies (AHBs) and local authorities to develop a cost-rental model for tenants who don’t qualify for social housing supports – but who are at risk of homelessness – to continue to rent their homes.
If a tenant buys the property, this has the potential to eliminate some of the costs of sale incurred by landlords, such as estate agent fees and a period of vacancy.
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Estate agent fees vary in terms of service offering and location, says Murray. “Very typically, it’s 1.5 per cent, but you will have anything from 1 to 2 per cent of the sale price, plus VAT at 23 per cent,” he says.
There are marketing costs to pay, too. This entails professional photography, online and print advertising and social media. A property at the upper end will necessitate a bigger marketing spend than a one-bed apartment – “it can vary depending on the property from €600 to multiples of thousands”, says Murray.
The average selling time at the moment is seven weeks, says Reilly. The average time to close is about 11 weeks, so landlords should factor in 18 weeks where their property is vacant, he says. He charges 1.25 per cent in agent fees, plus VAT. Marketing costs depend on the property.
The other cost when selling is capital gains tax (CGT). In short, if you are selling the property for more than you bought it, you will have to pay tax on the difference, says Marion Ryan, consumer tax manager at Taxback.com. The standard rate is 33 per cent.
You can deduct allowable expenses from the chargeable gain, including fees, and commissions for professional services, including a surveyor, valuer, agent, solicitor or accountant and advertising.
Take the example of the first-time buyer of yesteryear. He bought an apartment in 2004 for €340,000. He lived in it until 2012 before meeting his partner. The apartment was in negative equity then, so he became an accidental landlord and rented it out. He sold the apartment in 2022 for €420,000. In general, CGT is payable on the €80,000 gain, says Ryan.
The owner can claim relief for the period he lived in the property as his primary residence, plus the final 12 months of ownership. He lived in it for eight years from 2004 to 2011, plus the final 12 months, this adds up to nine years. His total ownership from 2004 to 2022 is 19 years. The principal private residence relief is calculated as the €80,000 gain from sale, divided by the 19 years he owned it and multiplied by the nine years he lived in it – that’s €38,000. The chargeable gain is then €42,000. Subtracting the annual exemption of €1,270, the 33 per cent tax owed is €13,440.
His friend who bought an apartment in 2006 for €400,000 expects to sell for €265,000, a €135,000 loss. This loss can be set against other chargeable gains in the same tax year, or carried forward and set against other gains in future years, says Ryan.
“In general, if you don’t have any other chargeable gains in the same tax year you made a loss, you will not have to include the loss in a return for that tax year,” says Ryan. “I would recommend you report the loss, however, either via a CG1 return if you are a PAYE worker or a Form 11 if you are self-assessed.”