IT'S now five years since Irish house prices started to collapse, wiping up to 60 per cent off the price of properties -- and pushing hundreds of thousands of homeowners into negative equity.
Most of those homeowners have been stuck in the negative equity trap for some time now. As well as being unable to sell their home because the sale proceeds would not be enough to repay their hefty boomtime mortgages, many have been forced to become reluctant landlords -- and at a prohibitive cost.
The dramatic collapse in house prices has prompted many homeowners to rent out rather than sell their own home. Doing so allows them to move house and put off selling their property until prices hopefully pick up enough to ensure a house sale pays off their mortgage.
Renting out your home, however, can burn a deep hole in your pocket.
You could pay as much as 55 per cent tax on the profit you make on rental income, says Cathal Maxwell of the tax website, paylesstax.ie.
The tax you pay consists of your higher rate of income tax (which could be 41 per cent) and the universal social charge (7 per cent). An ordinary PAYE worker therefore could pay up to 48 per cent tax on rental income, depending on how much they earn.
If you're self employed or living off investment income, you could also have to pay PRSI of 4 per cent on rental income -- bringing the total amount of tax paid up to 52 per cent. If you're self-employed and earning more than €100,000, you could pay as much as 55 per cent tax on rental income as your earnings over €100,000 attract a universal social charge of 10 per cent.
You can reduce your tax bill by writing off 75 per cent of your mortgage interest against rental income. However, your mortgage interest is only a portion of your mortgage repayment -- you can't write your full mortgage repayments off your rental income.
This could leave you substantially out of pocket if you're only getting enough rent to cover your mortgage repayments -- or indeed, if you can't even secure the rent to cover your mortgage repayments.
There are other expenses which you can deduct off your rental income when calculating the amount of tax you should pay.
Along with the tax on rental income, you must also usually pay the €200 non-principal private residence tax if you rent out your home.
Letting agents can save you the hassle of finding tenants and dealing with tenants' problems. But they don't come cheap.
You could pay a letting agent 6.25 per cent of the rent to find tenants for you -- plus 23 per cent VAT. So if you make €14,400 in rent on a property a year, you'll easily lose about €1,107 to your letting agent.
If your letting agent manages the tenancy as well as letting it out, you could pay fees of between 12.5 and 15.5 per cent a year (plus VAT). So you could pay €2,745 a year to your letting agent if you make annual rent of €14,400.
However, you can deduct letting agent fees from your rental income when calculating your taxes, thereby reducing your bill.
"If hiring a letting agent, ensure the agent is licensed and bonded," said Margaret McCormick,of the Irish Property Owners' Association, which represents landlords. To check if a letting agent is licensed, contact the Property Services Regulatory Authority (www.npsra.ie).
A landlord's house insurance is easily 50 per cent more expensive than insurance for a home you live in, according to David Hughes, director of online insurer, getcover.ie.
"Tenants are usually not as careful with your home as you would be, so there tend to be more claims for a rented property," says Hughes. "As a result, landlord insurance is significantly more expensive than insurance for a property you live in yourself." If you want to keep your house insurance bill down, it could work out cheaper to rent to a family, professionals or retired people. "Student tenants tend to result in higher house insurance premiums," said the IPOA's McCormick.
LOSING YOUR TRACKER
That cheap tracker mortgage you snapped up could be a thing of the past if you rent out your home.
Some banks will pull your tracker mortgage if you rent out your home -- but this will depend on your tracker mortgage contract and your financial circumstances.
If you're renting out your home because you're having difficulty paying your mortgage, you should be able to hold on to your tracker. But if you're renting out your home so you can buy another property or rent out a larger home, you could lose your tracker -- and end up with an interest rate three times the size.
A PTSB spokeswoman said a customer could lose their tracker rate and be moved on to a residential investment mortgage interest rate of 5.8 per cent "if the customer is simply moving from one property to another for lifestyle or other reasons".
A spokeswoman for AIB said its approach "is not to amend the tracker rate, particularly in cases where the house continues to be the customer's only property. But if a customer wishes to buy a new home, this will be subject to a separate contract. As a customer may only have one principal dwelling house, the existing mortgage would then be classified as a buy-to-let and would be subject to discussion."
A spokeswoman for Ulster Bank and Bank of Ireland said each customer's case would be considered individually.
If you rent out your home, you must register the tenancy with the Private Residential Tenancies Board, which costs €90.
You must also get a BER (Building Energy Rating) cert for your home. A BER cert usually costs between €100 and €150 but it could be higher. You must pay the €100 household charge -- which is to be replaced by the property tax next year.
All the above financial headaches will pale in comparison to that caused by a tenant who does not pay the rent. "You could be 18 months trying to get a tenant who doesn't pay the rent out of your property," said McCormick.
"It's good to get references for tenants from employers and previous landlords -- but it's very difficult to protect yourself from troublesome tenants."
Still want to play landlord?
Sunday Indo Business