How can you purchase a buy to let?
If you have decided that you are going to invest in property and have chosen buy to let as your preferred option then what are your next steps?
Mark Solon discusses the next steps below on determining your eligibility for an investment mortgage, how they work, the numbers and assessing the viability of it.
Finally he also looks at the advantages and disadvantages of purchasing through your pension.
1. Am I eligible for an investment mortgage?
Personal Investor:
• Do you already own a property / properties?
• What is your overall debt to income ratio (i.e. multiple of debt to income)?
• Do you have a basic salary of €18,000 (Finance Ireland) / €40,000 (ICS/Dilosk) - combined if joint?
• Do you have the deposit or are you using an equity release?
• Where is the property located (i.e. rural or built-up area)?
Company Investor:
• Is it a new or existing company?
• What is the company structure (i.e. holding company; trading company; investing vehicle)?
• Who is / are the directors and shareholders?
• What is the source of the deposit / funds?
• Do you have a basic salary of €40,000 (ICS/Dilosk) – combined income if joint application?
• Where is the property located (i.e. rural or built-up area)?
2. How do Investment mortgages work?
Buy-to-Let Mortgages are a lot like ordinary mortgages, but with some differences.
• Fees tend to be higher
• Interest rates are usually higher
• Minimum deposit is higher (min 30%)
• You have an Interest only option or Interest & Capital
• Borrowing is based on the stressed rental income V the stressed mortgage repayment.
3. How do Investment mortgages work (personal purchase)?
Step 1:
• Take the market rent (i.e. as per a valuer not what you think!) and multiply by 80%
• Rental income is €2,000 / month. Use €1,600
Step 2:
• Work out the cost of the mortgage repayments based on a rate of 3.95% (or 3.75% depending on LTV)
• Repayment for €200k over 25 years = €1,050 per month
• Is step 1 greater than step 2?
Step 3:
• Take the market rent (i.e. as per a valuer not what you think!) and multiply by 70%
• Rental income is €2,000 / month. Use €1,400
Step 4:
• Work out the cost of the mortgage repayments based on a rate of 5.95% (or 5.75% depending on LTV)
• Repayment for €200k over 25 years = €1,282 per month
• Is step 3 greater than step 4?
4. Don’t forget about the deposit:
• 30% deposit for a BTL purchase as an individual or via a Company Or
• 50% deposit for a BTL purchase via your pension
5. The Application - What do I need to apply?
6. What does an example of a property purchase, purchased personally or through a business look like?
*Estimated figure including legal fee; valuation fee; survey; mortgage registration with Land Registry
7. What does an example of a property purchase, through a pension look like?
*Estimated figure including legal fee; valuation fee; survey; mortgage registration with Land Registry
**Replaces Annual Management Charge from Pension provider
8. What are the rental income allowable expenses?
• House & Contents Insurance
• Mortgage Protection • Accountancy Fees • Letting Agent Fees • Repairs & Maintenance • Painting & Decorating • Property Management fees • Private Residential Tenancies Board
• Wear & Tear on Fixtures & Fittings
9. Investing in a property through your pensions - Advantages and Disadvantages
Advantages:
• Deposit for Property purchase is accumulated before any tax is paid – i.e. from gross income or gross profit
• No Capital Gains tax of 33% paid on Property Growth.
• No Income Tax payable on rental income (saving up to 50%)
- Rental income goes back into your pension account (No Annual Tax return required)
• Potentially Superior net Yields (using the power of Compound interest)
• You can use leverage of 50%(max)to achieve your goals faster
Disadvantages:
• Personal use of the property is prohibited – it must be for investment only.
• Risk – Gearing significantly increases the risk profile of the investment.
• It is an illiquid asset.
• The vendor must not be related to you, your employer, it’s directors and associated companies.
• The property cannot be sold or let to relatives, your employer or its directors and associated companies.
• The development of a property with a view to its disposal is not allowed.
• You may be required to use a Professional Property Letting agent
10. Is an Investment Property right for you?
1. Do you prefer investments that feel more tangible than stocks and shares?
2. Are willing to tie up your money for a long period of time?
3. Are willing to take the risk that you might not earn a profit on your investment?
(If you sell and the sale price doesn’t cover the whole mortgage, you’ll have to make up the difference. )
4. Understand and accept the additional risks that go along with borrowing money to buy a property
5. Understand and accept the costs and time involved in owning and running a property (treat it like a business).
11. Investment Property Challenges:
1. The amount of rent you can charge can vary and sometimes depend on wider market trends outside of your control.
• Rents are not guaranteed.
2. If you can’t find tenants / can’t charge the rent you expected
• You might not be able to cover your mortgage repayments.
3. The value of your property may fall as well as rise.
• You might not be able to sell it for as much as you hoped.
4. Major repairs or difficult tenants might increase your costs – and trouble – unexpectedly
5. Dealing with the RTB – Residential Tenancies Board & future rule changes (e.g. Rent Pressure Zone (RPZ) etc)
An investment property is not without it's risks but equally offers a number of significant benefits and particularly when purchased in the right structure for tax efficiencies.
If you would like to book a virtual appointment to discuss your mortgage or mortgages for investment properties with Symmetry you can do so by emailing Mark at mark@symmetryfinancial.ie.