When we look at the financial assets and liabilities of clients, it is often an investment property. Very often, they ask our advice as to whether they should keep the investment properties they have owned for several years or sell them to reduce debt or take our equity.
Of course, we know that many Irish people love to own property and invest in ‘bricks and mortar’. However, I always urge people to look dispassionately at the property they own, or consider buying it and treating it like any other asset they would invest in. I have a checklist of topics that I tell people they should consider before purchasing this property investment.
Tax efficiency. Rental income from personal property is fully taxable at an individual’s marginal rate.
This means that any rental income received from your tenant will be added to your other taxable income such as salary and bonuses.
You can reduce your personal tax each year by making a personal pension contribution within age limits, but you cannot reduce the tax you pay on your rental income earned as this is not considered relevant net income.
This halves the return on your investment property and does not make it a tax-efficient investment.
Entry / exit cost. In my experience, many buyers of investment property do not adequately add up the true cost of buying a second property.
There is a fairly high entry cost as a percentage of the total transaction cost when buying, which includes legal fees, stamp duties, surveyor’s report, insurance, property tax, land registration fees, etc.
This can add a lot to the purchase price compared to investing in non-real estate assets. Keep in mind that when you sell the property, you will have to bear some of these costs as well.
Liquidity. Don’t underestimate the benefits of liquidity when you own an asset that you hope will increase in value over time. Liquidity simply means that you can sell it and turn it into cash whenever you want in the short term. Obviously, property does not fall into this category and from 2008 onwards for a good number of years it was simply not possible to sell a property even if you wanted to.
The problem with an illiquid asset like a property is not necessarily that the price drops when it is appropriate for you to sell, sometimes there is simply no price if there is no buyer for it. This surprised many people who wanted to retire during our real estate crash from 2008.
Another important point is to try not to overpay for a property if your decision has already been made and you are going to buy. Like any other asset that you want to sell someday for more than the price you paid for it plus costs, do some research to find out what this property was sold for before and after the 2008/09 real estate crisis.
On a separate note. In my article two weeks ago, I incorrectly stated that eligibility for state pension here in Ireland increases to 67 from 2021, i.e. anyone born after 1955 will have to wait until they are 67 years old to claim their pension.
The current age of eligibility for all state pensions is still 66. It was expected to increase to 67 from 2021 and to 68 from 2028, but the 2021 budget predicted that 66 would remain the age of eligibility. Hope my inaccuracy in the article has not caused unnecessary distress to readers