Experts explore the pros and cons of each option as an investment for retirement
Yes, in the long-run we are all dead, as John Maynard Keynes famously put it, but not before many of us will have to survive a few years – or decades – having to fend for ourselves in retirement.
How will we fund these twilight years? Should you maximise your pension savings, enduring the associated market uncertainty and costs, or put your hard-earned cash to work in an investment property?
Or maybe you’re a so-called “accidental landlord”, renting out your first home as you couldn’t sell it, with vague thoughts of keeping your property to use as a source of income in retirement. Would you be better off getting rid of it now and saving in a traditional pension instead?
We have enlisted the advice of the experts to help you do the sums. It should be noted that the example used is illustrative only, as there are far too many variables to be definitive.
So let’s consider the example of someone aged 40 who has an inheritance of €85,000 net. Keenly aware of the inadequacy of his income in retirement, he is wondering how he can best invest this money today to offer him the best return in 25 or so years,
Option 1: Buy an investment property
Our 40-year-old is nervous about putting all the money into an investment property, particularly given that the home he shares with his family, bought back in 2005, is still in negative equity. But would he be right?
Let’s consider an example compiled by Shay O’Brien, a tax manager with PKF O’Connor, Leddy & Holmes. Our putative landlord buys a two-bed apartment for €250,000 in Grace Park Manor, Drumcondra, Dublin 9, with his €80,000 lump-sum, setting aside the remaining €5,000 for stamp duty at 1 per cent (€2,500) plus legal fees and other costs.
As an investor, he can only get a buy-to-let mortgage at a loan to value of 70 per cent, so this caps his purchase at €266,000. In this case, he is going for a €250,000 property, leaving a mortgage of €170,000 over 25 years at a rate of 5 per cent a year, repaying both principle and interest.
The cost of servicing his mortgage in year one comes to €11,295, made up of principal (€3,505) and interest (€8,420). Initially our investor is happy, because he knows, given the location of the property, he should get rent of at least €1,400 a month in the current market, or €16,800 a year, which should leave a healthy excess to plug the gap.
But then he remembers the expenses he’ll also incur: repairs/maintenance of property at a standard industry cost of €1,000 per year; management costs of €1,500; home insurance €130; PRTB registration €90; plus accountants fees of €700 to help him file his tax returns each year, not to mention property tax of €300 a year.
He also remembers his tax bill, but is unsure how to calculate it. Based on the above, the difference between his rent (€16,800) and his total expenses (€15,015) is just €1,785, which, he thinks, means he will just have to pay income tax of about €900 or so for the year. However, his tax adviser has some rather different advice: tax is due on his “rental profits” – which means income less eligible expenses.
Indeed O’Brien says he has a large of book of clients with property investments – and a considerable amount are “accidental landlords” – who are struggling to make their “investment” work.
“Those people are under pressure at the moment,” he says. “What we encounter as the main burden is the income tax and management of properties. The accidental landlords we encounter find income tax hard to deal with. On a monthly basis their mortgage repayments are higher than the rent, so every November it’s a big challenge and their savings are being eroded due to income tax.”
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