It’s nearly a decade since we fell out of love with residential investment properties. Over the last few months I’ve noticed a sharp increase in the number of people looking to invest in residential properties again. It’s hard to argue against it given the spike in rents and the capital growth expected over the next 10 years. However, it‘s important to remember the mistakes of the past.
A lot of Investors over borrowed during the years 2003-2008. It was like an addiction, once they had some equity in a property they would leverage it up and purchase another property. When the crash happened, property prices and rents collapsed which lead to repossessions by the banks and a waiting game for the rest, as they held on to emerge from the negative equity trap.
With all investment portfolios it’s important to stay diversified, invest over the long term and rebalance your investments in line with your investment strategy. Where possible take advantage of tax efficient investments.
If you want to purchase an investment property I would always look at the possibility of making the purchase within your pension fund. By doing this you won’t be liable to pay income tax on the rental income or Capital Gains Tax if you dispose of the property in the future.
Before you decide to purchase a property you need to work out the potential rental yield along with the potential for capital growth. The rental yield will be reduced by ongoing expenses on the property e.g. management fees, property tax, insurance and general maintainence of the property. The good news is that the rental income isn’t subject to income tax within the pension fund.
There are a few rules you need to be aware of before you proceed and it’s important to note that it’s your pension fund that purchases the property and not you personally. This may involve you setting up a small self-invested pension fund. The Revenue Commissioners require that the transaction be “at arm’s length”. This means that you can have no prior interest in the property or you can’t rent the property to yourself, your business or and other party connected to you.
Some lenders have now come back into the market and will allow borrowing on properties purchased within a pension fund. By doing this you will be taking on more risk. Mortgages are only allowed pre-retirement and must be fully paid off before your retirement age. Typically the maximum loan you could get would be for 50% of the value of the property over a 15 year term. It is possible to defer your retirement age to 70 if you need that time to pay off the loan on the property.
If you want to keep the debt free property in retirement you can do so. The property will be held in an Approved Retirement Fund. It’s even possible to purchase a property at retirement with your accumulated pension fund. Any income taken from your Approved Retirement Fund will be subject to income tax.
It’s important to seek professional advice before making any investment. Des Wilson Financial Services offers a comprehensive goal based Financial Planning service to help with your retirement plans.