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The Ups and Downs of Being a Landlord

Posted by mario on December 14, 2016
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It is estimated that over 50,000 landlords have left the rental sector in recent years due to the harsh tax treatment levied against them. Many of these property owners were ‘accidental landlords’ in their 30’s or 40’s who bought for capital appreciation but now find themselves in negative equity. Studies show that 71% of landlords’ rental income does not cover the mortgage and several incur a tax liability on rental income even though they made a loss on their property. The mortgage interest in the recent budget increased from 75% to 85% and while it was welcomed it will not be sufficient to stem the flow of landlords leaving the market.

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On the downside –

New legislation introduced by Minister Alan Kelly in May 2016 favouring the tenant may also raise doubts whether a landlord should enter or leave the market.

  •  Rent is now fixed for a 2 year period
  • Tenants must be provided with a 90 day written rent review with examples of properties at similar market rents.
  • Extra termination periods have been introduced for tenancies over 4 years.
  •  From Quarter 3 in 2017, deposits will be retained with the PRTB.
  • Reasons for terminating a tenancy now must include a statutory declaration to justify the grounds for terminating same. The new ruling intends to end the practice of landlords telling their tenants they must vacate the property as it is being sold, only to let the apartment or house to new residents but at a higher rent.

   On the upside –

  • With rents so high, it may make financial better sense to buy a property. Figures from economist Ronan Lyons show that the monthly rent on a 3-bed house in north county Dublin will cost €1,245, but to buy it will cost €1,078 a month (on a mortgage rate of 4.3% for a 30-year term).
  • In addition, the first time buyers grant introduced in the recent budget aimed at easing the burden of saving for the deposit may help somewhat. The maximum allowable relief is 20,000 euro on houses costing between 400,000 euro and 600,000 euro. However, the grant will not apply houses that cost over 600,000 euro.
  • Mortgage Approval – Despite the Central Bank 20% ruling, Mortgage lending equalled 2 billion euro in the first half of 2016, up 4.8% on last year. Mortgage approvals also surged in recent months – up by 33% on last year…..which is good news for potential buyers/investors.

If you do decide it is worthwhile to buy an investment property you need to be aware that you will be liable for the following taxes:

  • Stamp Duty – The stamp duty rate for residential property is 1% on the first €1,000,000 and 2% on the excess.
  • Income Tax – Rental income on all investment property is subject tax at 20%, but there are certain expenses that can be offset against it. Non-resident landlords are obliged to make tax returns in respect of the income earned to the Revenue.
  • Capital Gains Tax – The sale of an investment property is subject to capital gains tax. The current rate is 33%. Again, certain costs are allowable when calculating the capital gain liability.
  • LPT – All property owners are liable for LPT. However it is not allowable as an expense.

What does the future hold for the Housing Market in Ireland? Will the new supply measures mean we will have a radically different market by 2021? 

The government now recognises that developers and builders are the most important solution providers to the supply problem – they are risk takers, people who can raise money, who will invest and deliver large projects. The ‘Rebuilding Ireland’ programme devised by the government looks to tackle the supply of housing which over the next 5 years over a number of key areas:

  • Address homelessness: Government funding is being increased from 17m euro to 70m euro
  • Accelerate social housing: Government funding is being increased from 69m euro to 414m euro.
  • Build more homes: 4.5 billion euro has been allocated and NAMA is to work with developers to deliver a target of 20,000 residential units by end of 2020.
  • Improve the rental sector: 10m euro has been allocated to the Affordable rental pilot scheme
  • Utilise existing housing: 19m euro for Pyrite Remediation Scheme, and 5m euro towards Lead Remediation scheme

Conclusion

Property prices are still rising driven by lack of supply, and as rents are exorbitant it would seem to make financial sense to buy. A landlord needs to be aware of the new legislation introduced in May 2016 giving tenants much greater rights, in addition to knowing their tax liabilities. The pilot project ‘Rebuilding Ireland’ is extremely ambitious, yet if all measures are introduced over the 5 year plan we will see much more affordable housing and longer tenancies at reduced rents which may not in the long run be financially lucrative for a property investor.

 

 

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