Real Estate Alliance

Investors Guide to Buying Property

INVESTING IN PROPERTY

You could buy a new home to live in yourself, or as an investment.

Property can be a very rewarding investment, provided you are aware of the responsibilities and challenges involved.

The 2002 budget reintroduced tax relief for mortgage interest on investment property and brought investors back into the Irish residential market. This move by Charlie McCreevy reversed the anti-investor legislation that was passed as a result of the Bacon Reports.

Income and capital growth

The return on a property investment comes in two forms - rental income and capital growth. Properties that offer a high rental yield tend to have a more limited growth potential. Conversely, those with an initially low rental yield usually hold the expectation of greater capital appreciation. For example, the initial rent on a three bedroom townhouse in Passage West would probably cover most, if not all, of the mortgage. In contrast, the initial rental income on a new apartment in Cork city centre is unlikely to cover the mortgage payments, however, the expected rental growth and capital appreciation would be far greater.

Before starting the search process investors need to decide whether rental income or capital appreciation is more important to them.

Active investment

A property investment is an active investment, unlike buying shares or units in an investment fund. First the property will need to be fitted with adequate furniture and equipment. Then you will have to find good tenants. It is important to rent your property to trustworthy people who will pay you on time and treat your property with respect. You will also have an obligation to respect your tenants’ rights.

Residential lettings tend to be short term, so you may find yourself looking for new tenants every year. You may also have vacant periods when you will not receive any rental income. Some investors use letting agencies to find tenants for them, and they usually charge a letting fee of about 7% of the annual rent. You will be responsible for any repairs and maintenance work needed. Expect to receive calls at the most inopportune times. If you are unable to do the repairs yourself, you will need to call in the professionals.

Borrowing

Property is an unusual kind of investment in that it makes sense to borrow to invest. The current low interest environment has made it possible for more people to become landlords. Mortgage lenders have targeted the investment sector and will usually advance anything between 70% and 100% of the cost of the property, depending on individual circumstances. Interest only mortgages have also become popular, where the borrower only repays interest for a set period of time. After the agreed time period, they revert back to the standard repayment terms of capital and interest.

Costs

There are costs involved in investing, and you will need to have sufficient funds available. Depending on your individual circumstances and the level of security available, you may have to fund up to 30% of the price of the property from your own resources. The level of stamp duty payable by investors ranges from 3% on properties over €127,000 to 9% on properties over €635,000. Other costs include legal fees, surveying fees and insurance costs.

Taxation

If you are paying income tax at the top rate of 42%, you will also have to pay tax of 42% on your rental profit. The rental profit is calculated by taking the rental income and deducting allowable costs, including mortgage interest, insurance, rates, repairs and maintenance. The cost of fixtures and fittings can also be deducted at 20% per annum over five years.

When you sell the property you will be subject to Capital Gains Tax at 20% of the profit made from the investment.

Caution

Buying to let can be a wise investment, but it is not without an element of risk. It is important to thoroughly research the matter beforehand. Choose your location carefully. With the right property it can be a very rewarding investment opportunity.