While welcoming the decision not to restrict Section 23 relief in the Budget, landlords are feeling besieged by the challenges facing them, writes FIONA REDDAN
LANDLORDS ACROSS the country breathed a sigh of relief last week when the Government announced that it was not going to follow through with a proposal to restrict Section 23 relief.
However, while this move may be welcome, landlords are feeling besieged by the scale of the challenges facing them.
“There’s a very, very sizeable problem out there in the buy-to-let market,” notes Trevor Grant of Mortgage Negotiators, adding that for many of those looking for some relief in last week’s Budget, “they actually just got another bill”.
While owners of Section 23 properties will still be able to shelter rental income from their property portfolio, a surcharge of 5 per cent will apply to property investors with income of more than €100,000.
“We’ll live with that,” says Stephen Faughnan, chairman of the Irish Property Owners’ Association, but he adds that the new €100 household charge is a “serious one for us”.
As a result of this, investors will see an effective 50 per cent increase in the €200 second home charge – both of which are not tax deductible.
And for investors who have yet to pay the second property charge, which was first introduced in 2009, they could be facing a bill of some € 1,600 once all the late charges are factored in.
The scale of this charge means that some landlords will now look to levy it on their tenants, notes Faughnan, by introducing a € 25 monthly service charge,
Allied to this is the increase in capital gains tax to 30 per cent in the Budget; along with other costs such as BER certification; certification with the Private Residential Tenancies Board; the reduction in interest relief on mortgages from 100 per cent to 75 per cent; and the proposed review of rent supplements which will take place in 2012.
According to Faughnan, this is likely to lead to reductions in how much the government will pay to supplement rent, which will place further downward pressure on returns.
The maximum monthly rent allowable is currently € 1,100 in Dublin, € 800 in Cork and € 550 in Monaghan for example.
And this is all against a background of ongoing uncertainty in the euro zone and the future viability of the euro currency.
The difficulties are leading to a new class, “the reluctant landlord”, a remnant of the boom years. These are the people who were swept away in the boom, sometimes letting their first property, often a small house or apartment, while they traded up to a larger property, or those who bought a property to supplement their pension or provide a home for their children in college.
The category also includes inexperienced landlords who quickly built up an extensive property portfolio thanks to the easy supply of credit, believing that prices could only go one way – up.
While it is often thought that landlords are experienced property investors with swathes of houses and apartments in their ownership, this changed during the boom years, as borne out by statistics from the Revenue Commissioners.
In 2009, the most recent year available, almost 90,000 PAYE workers, which would include guards, civil servants, accountants etc, filed tax returns on rental income for example. Moreover, according to the Revenue stats, in 2009, 65 per cent of taxpayers who returned rental income did so for one property; a further 30 per cent declared between two and five properties; 4 per cent returned between six and nine properties, while just 1 per cent declared more than 10 properties.
For many of these reluctant landlords, the property dream has not just turned sour but is threatening to bring them into serious financial difficulties.
“I’ve probably spoken to over 100 customers in the last three months and 90 per cent of those, if they had their time again, wouldn’t touch property, notes Grant.
But for those in difficulties, what are the options?
Grant says banks are tending to be “fairly reasonable” when it comes to working out problems, but that there is an “enormous delay” in getting decisions made. While much has been made of banks retracting interest-only offers, he says that it is still an option.
“If the numbers suggest that interest-only works, then the banks are willing to apply six- to 24-month extensions,” he says.
Of course, there is also the option of selling up, taking a hit and simply getting out. “You can get out at a price – but it’s not very attractive,” notes Faughnan.
And for some, selling hasn’t really been an option until now, given the scale of negative equity many people find themselves in.
However, according to Grant, banks are now starting to consider short sales, whereby you can sell your negative equity property, and repay the oustanding sum over an agreed period of time.
If you are left with a small balance when the property is sold, this could be a viable option, but if negative equity is too great it’s not generally feasible.
And, of course, it is dependent on the property selling.
For some beleagured landlords, going bankrupt might be an option, depending on whether or not property loans are to be included in the forthcoming insolvency legislation. But, as Grant points out, it’s a very big decision to make.
“It’s great to say, ‘I’ll go insolvent and in five years time the problem will have gone away’, but it’s a big personal step to take and most people will want to avoid it.”
Faughnan. however, asserts that landlords are going to consider it. “The viability of the sector is up for question at the moment. Certainly for a lot of people at the moment, insolvency will be a consideration.”
But, while the challenges may be significant for landlords who got into the business during the boom years, given the decline in values – of more than 50 per cent in some cases – for those with some cash in the bank, might it be a case now of fortune favouring the brave?
After all, according to the most recent Daft report of the market, rents are on the rise again, while interest rates are at historically low levels.
Grant, for one, thinks it could be a viable proposition. Given the value of properties it makes a lot of sense. You have to look at what the yields are likely to be, and whether or not you can cover the mortgage if you have void periods,” he advises, but adds that investors who need financing will face challenges.
“The biggest problem is the availability of credit. It just isn’t there for investors.”
Faughnan, however, is less sanguine, and even the prospect of a capital gains tax holiday for investors who buy in the next two years, as announced in the Budget, is not enough of an incentive.
“You would need to very, very brave to do it,” he says, pointing out that there are too many uncertainties on the horizon, such as the introduction of a new property tax; how PRSI will be applied on rental income for PAYE workers, (either on all income or just profit from 2013); as well as talk that mortgage relief might be reduced further.
But for those ruing their boom-time decisions, Grant urges investors to take the long view.
“Property is a long-term play. Even if you bought in the good times and are now in trouble, you probably bought on the basis that you’d hold for 20-25 years. In 10 years, the world will be a completely different place.”
