We will never get money back by renting property
Some landlords make money, but others don't
Like many of those who bought in the boom, my husband and I own a property that is worth a fraction of what we paid for it.
In the early 2000s, we bought a terraced house in Dublin that needed a lot of work. We spent valuable money rewiring and replastering it. We laboured for hours tearing down woodchip wallpaper. We tore out ugly avocado bathrooms and replaced them with spanking new bathroom suites. We pulled up manky old carpets and replaced them with expensive wooden floors. We'll never see that money again. Our chances of getting back what we paid for the house are slim– never mind the money we threw into doing it up.
We moved to Wicklow at the start of this year. Rather than selling our first home at a loss, we opted to rent it out. We didn't expect to make money from renting out the property – our aim was simply to get enough rent to cover the mortgage. The cost of renting out our Dublin property however means we may have to sell it sooner than expected.
THE TAX HEADACHE
In my view, the biggest financial headache that comes with renting out a property is the tax. The rent we get on our Dublin property is covering the mortgage on that property. We are lucky in this regard – many landlords can't get the rent to cover the borrowings on a property. However, even though the rent we are receiving is only covering the mortgage, we must pay tax on most of that rental income.
If you're renting out a property, you could have to pay tax equivalent to almost half of the rental income received in a year – even if all of that rent is being used to repay a mortgage. As a result, the tax bill you face from renting out your home could run into a few thousand a year, depending on the amount of rent you earn. You pay tax at your higher rate of income tax and you must also pay the universal service charge on your rental income.
So if you're a higher-rate taxpayer and a PAYE worker, you could pay 48 per cent tax on rental income. If you're self-employed, you also have to pay 4 per cent PRSI, which brings up the amount of tax paid to 52 per cent – or 55 per cent if you're earning more than €100,000.
Furthermore, from next year, everyone must pay PRSI on rental income so all landlords on the higher rate of income tax will pay at least 52 per cent tax.
You can write some expenses off your rental income tax bill – but you cannot write off the full cost of your mortgage repayments. Only three-quarters of the mortgage interest you pay a year can be written off against the tax bill that arises from renting out a residential property.
Rental income tax isn't the only tax bill you're hit with when renting out your home. You usually must pay the property tax on any residential properties you own. If your rented property is in a prime location, your property tax bill could easily run into several hundred euro next year.
On top of the property tax, anyone who owns a second property must pay the Non Principal Private Residence (NPPR) charge of €200 this year. The NPPR, which kicked in in 2009, will be abolished next year. Although the abolishment of the NPPR will be some relief to struggling landlords, the introduction of water charges in late 2014 will be another headache for anyone renting out a property.
When you first rent out a residential property, you must register the tenancy with the Private Residential Tenancies Board (PRTB). It costs €90 to register a tenancy, or €180 if you don't register the tenancy within a month of renting out your home. You must also get a Building Energy Rating (BER) cert, which shows how energy efficient your property is – and how expensive it is to heat it. It usually costs around €150 to get a BER cert.
Your house insurance will usually go up if you're renting out your home – particularly if you rent to students. If you're getting mortgage interest relief on the property you plan to rent out, you'll lose that relief as soon as you become a landlord. If you got a tracker mortgage for your home, some banks will pull your tracker if you rent it out. Don't be afraid to ask your lender if you can hold on to your tracker for the mortgage on the rented property – some lenders will let you do so.
As a landlord, you're likely to secure better rent for your property if it's furnished. Kitting out a property for tenants will easily set you back a couple of grand. It is also your responsibility to repair or replace any electrical appliances. This could easily cost you several hundred euro a year – but you can write off the cost of repairs against tax.
Renting out your property can be a good investment of course. Some landlords make a lot of money – particularly if they don't have any borrowings outstanding on their rented properties. But renting out a property can also be a losing game, particularly if you don't have much of a financial cushion behind you. Bear this in mind before pursuing any dreams of building a rented property empire.