Rental Yield Calulator here, your thoughts please

Hi All, I’ve been looking at the idea of buying BTL property as part of a future savings towards pension.

I took some things from AAM and had created the spreadsheet attached so that I can see if there is any projected benefit compared with other investments.

I’ve used soem figures that AAM had to test my calculator.

Any suggestions/thoughts?

Rental Yield Calculator Ireland 2014
Investment 140000
Monthly Rent 750
Number of Months 11
Rental Income 8250

Expenses
PBRT 90
Property Insurance 500
Local Property Tax 157 revenue.ie/lpt_reckoner/index_en.html
Advertising 100
Other Expenses 1000

Total Projected Expenses 1847

Gross return after expenses 6403

Taxes
USC on Rental Income 7% 448.21
Income Tax 41% 2625.23
PRSI 4% 256.12

TOTAL TAX 3329.56

NET RETURN 3073.44

Net Return (in %) / Rental Yield 2.20% (Annual Rental Income divided by Market Value)

EDIT: I couldn’t find a way of attaching the .xls file, so I’ve pasted it here.

I did something similar- but added assumption of 75%mortgage, 75%interest relief on mortgage, solicitor, stamp, fit out costs- to work out how the sums look and what sort of money you need to sumo up to control the asset.

Hi ArikV,
the expenses quoted appear reasonable and of course assumes that you are buying in cash. I assume that all legal/stamp duty etc is covered by your initial investment. The purchase cost would assume that you are in a town (well!) outside of Dublin. Are you sure of the rental income… it seems high for the property purchase price and your entire calculation hinges on that?? Taxation-wise you may be better off borrowing the money (and then you could probably include the costs of a reducing mortgage protection premiums).

Your post reminds me of some scenarios that I ran back in bubble times where rental income wouldn’t even cover the cost of the interest payments on several properties that I was looking at. A number of the properties have since gone into receivership and been sold, one at less that one fifth of the price when I had looked at it according to the PPR. If you have to borrow the money you would have to be very careful of interest rates to ensure that you could repay the interest plus capital.

The overall return seems quite low to me and would not justify the investment in such an illiquid asset, unless you were using it to try and protect the capital from some kind of “Cyprus” event in the future. Over a long period of time you may have some capital appreciation but you will also have costs that will chew up a good deal of your budgeted expenses (eg new windows, roof, boiler, etc), even if they can be depreciated to reduce your tax bill.

Good luck with your decision,
sammy :wink:

My own experience would put other expenses (essentially depreciation) at closer to 2% of the rebuild cost of the dwelling. That is to OO standard so for a BTL you might get away with less. This expenditure tends to be lumpy (windows, boiler, etc) though and it’s quite difficult to budget for on a monthly or even annual basis.

Otherwise, what is destroying your net yield is the tax you’re paying at your marginal rate. Wouldn’t it make more sense to purchase the BTL at your point of retirement at which point the tax liabilty on other income will presumably be much lower?

To me the main reason a btl can be attractive only if its geared. Say you put 50% down and net payments cover mortgage (not too many places in ireland where this is possible) then after end of mortgage you own an asset that generates an income.

So I really see it as a type of saving, albeit extremely tax inefficient.

It all comes down to inflation and tax.

-1% for physical depreciation gives 3.7% gross return or 1.8% net of taxes.

Assuming property price keeps pace with inflation (could go either way) that’s 3.7% RROR before taxes which is better that the zero-effort low-risk alternatives (bonds, savings) if inflation is in any way significant.

OTOH without inflation that 1.8% looks pretty crappy compared to even a 10yr solidarity (!) bond @ 2.66% tax-free.

To put it another way: an investment that carries risk, requires effort and returns <2% is not worth bothering with.

Not sure BTL is a great idea for retirement income unless you can afford lots of properties - a lumpy, illiquid, undiversified asset is awkward to draw down, and without drawdown you’re looking at tiny income. I think I’d prefer coke, hookers and a swift glorious death.

At a guess this property is down the country somewhere-Purchase €140k rent €650pm,the figures you have given suggest this.

If it were me I would be looking for a hell of a lot more bang for my buck.

There are area in Dublin that this is possible,Finglas close to city,M50 etc with very strong rental demand would see you buying a good quality 2 bedder for between 90-100k generating a rent of €1000-€1050pm,lucky enough and you will land a RAS tenant and jobs a good un for 4 years.

Dont know where your getting a €100 in advertising costs €35 does the job on DAFT and that’s all you need,if you cant rent if from there its just not rentable.

You have put a void down at a month,I often see this in calculations and makes no sense to me,anytime I have notice form a tenant to quit,I immediately prepare the ad and assess what needs to be done,literally 5 minutes after the tenant has left I have brought in the paints and rolled up my sleeves and started to turn it round,I work from 8am til 10pm,generally a 2 bed apt takes 2 days to paint,ad is live lunchtime the first day and tenants are viewing the evening of the second,place smelling of paint,all bulbs replaced,deep clean in kitchen and bathroom.Place is usually rented 3rd or 4th day and tenant moved in by that weekend on a year lease at a minimum.

This was the case in both bad times and good…the key is location,if you are in an area that is popular for renting close to city etc then you wont go far wrong.If its taking a month to rent it then you are either in Roscommon or Longford.

Property insurance €500 seems high.Didn’t crunch your numbers so taking them as correct but if it were me looking down the barrel of a net yield of 2% I wouldn’t bother my arse. You need to be getting north of 9% to be worthwhile.

You need tho think long and hard about where you are planning on buying.

Good response from Rimbaud.

You can see that if you are a responsive, hands-on landlord who will get in there and turn the property around, you won’t have to figure in a long vacant period provided you are in an area of high demand by renters. This doesn’t work for absentee landlords.

I also agree about the yield expectations. I am even more conservative than Rimbaud’s 9%. I wouldn’t be comfortable with any yield below 12% on a risky, illiquid asset. But that’s just me and you can see that there are very few residential “opportunities” that would satisfy me.

During the Celtic Tiger days, people were prepared to accept lower yields because they convinced themselves that property values would continue to rise over the long period of the life of the mortgage to compensate for the uneconomical calculations. Clearly, people have learned from that disastrous logic and (hopefully) very few people still follow that same line.

Sammy,
I would have to borrow 50% to cover the purchase, I’ve looked at places such as Swords/Shankill, but that was a few months ago. I only got around to consider seriously as cash freed up recently.

Conflicted,
The tax system is really anti landlords at the moment, I don’t see it changing in the near future, but I see Property as about 30% of Pension plan, I’m not too keen on it in isolation, but trying to look forward makes me believe that 30% is needed in this aset class.

Skippy 3 / Eschatologist, I understand what you’re saying, but am not sure if the way things are that at the official age of retirment I’ll be working non stop. I think that you need to build some passive income in your 50s’, also now that I’m at the top of my earnings I have more free cash each month than I’ll probably ever have.

Based on my calculatiions I will not be buying this, prices are also giong up, and the Government is yet to announce water charges, for some reason all these charges seem to fall on owners as opposed to users of those services (Managmanet fees, water charges could be same).

Rimbaud/ Moaner,
I agree, at this rate (which is likely to reduce, due to future tax increase, watrer charge and internset increases) it’s not worth it, I can get close to it in a simple term diposit (2.85% pre dirt & future PRSI)

I’m not in a rush to buy, I’ve started looking at the possibility of building a rental unit in my back garden (Dun Laoghaire).

I’d say that if one was worried about water charges and property tax skewing the return calculations you are wise to keep away from this type of venture. Professional property investment is a serious business and requires your constant attention - a fact that many a BTL boyo forgot!
I would think long and hard about that garden flat venture as well!
I know this sounds strange to Irish ears - but property is not the only investment vehicle!

ArikV,

When there are so many conflicting opinions, it is always hard to decide. Whatever you do, I wish you luck.

Is that sarcasm? People have actually learned very little, and I still see droves of people chasing BTL’s in SCD on a regular basis with sub-5% gross yields (pre-management charges, etc., etc.) with the sole intention of cashing in on capital appreciation on the current ‘low’ prices. I wouldn’t touch a thing in SCD at the moment for the purposes of BTL - I have seen properties that have literally increased by 100% since the beginning of 2012 that we were interested in and they no longer are of any interest as far as investments go. Still reasonably good value to be had in the less desirable parts of the world if asking prices are anything worth judging by i.e. Tallaght, Finglas, Inchicore, etc. As per some of the other previous posters, I’m only interested in 9%/10%+ gross yield and it is getting more and more difficult to find as prices are still rising at astronomical rates all around Dublin.

Thanks everyone, I wasn’t about to buy yet anyway, I just wanted peoples thoughts in relation to my calculations, the bottom line is, as stated above, that it’s not a thing to be taken lightly but with due dilligence it’s not rocket science as well.

I’ll of course be making my own decition, as we live in an uncertain world, there are going to be unknowns, I do not believe that I can sit on the fence and wait until retirment as judging by what I see, unless you’ve inheritance in the future (which I don’t) you need to take some chances.

I also do believe that it’s essential to try and have some passive income long before retirment age, be it through bonds, property or whatever.

If you require lending than there’s also certain stages at life where banks are less likely to lend money to you.

30% seems reasonable.

My attitude to pensions is I’d discount the state pension as I have no faith in irish political class to provide anything, despite the ridiculous amount of tax I pay (relative to my income)

I would not place that much faith either in ability of occupational db pension to meet their promise.

Now the government isndipping its hand I’m my private pension provision by way of pension levy I have more concerns there

So to me some property ( despite high tax) seems like it could be sensible.

Be interested to hear what people think of 50% down with a view to net rent paying mortgage. Property with a gross yield of c. 7.5%. Central enough part of Dublin and a 2 bed house. Ideally I’d be looking for ras to cut down hassle.

I registered with prtb recently (and paid a late fee to boot) it seems to be the right up there in term of quango scams

Arguably, getting 2% return on being a landlord qualifies as neither “passive” nor “income”. :smiley:

That why people in their 50s tend to max out their pension contributions and savings.

Similar query on AAM

askaboutmoney.com/showthread.php?t=185150 :open_mouth:

Looks like another Garda getting all entryprunirile loike.