Many landlords may be worried following recent reports that banks (EBS, AIB & Bank of Ireland), may attempt to collect rental income directly from tenants for those properties where the landlord is in arrears on mortgage repayments. A report in today’s Irish Times points out that there may be some legal difficulty in this regard. Also, the banks appear to be to be keen to stress that this will not apply to small investors. It seems that the bank is targeting those landlords, some who have moved abroad, who use their rental income for other purposes and have allowed arrears to build on their buy-to-let mortgages.
At SCK Group we have been helping landlords maximise their rental income through Rent-Monitoring and where properties are difficult to let because they are in bad repair, through our Property Refurbishment Scheme. We also negotiate with lenders on behalf of landlords.
Landlords – You, and not your tenant, are liable for the Household Charge which you must pay this week to avoid penalties. SCK Group will pay this charge for all new properties let and managed by us this year. Or if you have already paid your Household Charge, we will pay your NPPR instead. The NPPR is due for payment before 30th June 2012. That’s a saving of €200! Visit our webpage to see what else we can do for you.
Further to Mr Patrick Honohan’s comments that the “banks will have to be more aggressive in repossessing properties in the buy-to-let sector” a couple of points should be noted. Firstly, as a company working closely with buy-to-let investors, we are unaware that the banks were ‘holding off’ on being aggressive with landlords. In our experience working with our clients, we have found that the banks have already been taking an aggressive approach with borrowers, and it has taken considerable effort on our part to get the banks to agree to any arrangement with the borrower. In addition, many landlords have cross-secured their buy-to-let investment with their home, so if the bank seek repossession, this will place the landlords home at risk.
Since the downturn landlords have seen their rental income drop, increases in variable mortgage interest, the introduction of NPPR, USC on rental income, the reduction of mortgage interest that is tax allowable to 75% and the recent introduction of the household charge. Take a landlord who has rental income of €12,000 pa . If is mortgage is on a variable rate, his interest repayments will typically also be €12,000 pa, of which he can only allow €9000 against his rental income, so he will be liable for tax, USC etc on €3000. He will also pay €300 in property taxes and will have other bills for service charges, maintenance costs etc. Unless the landlord has losses forward from previous years or unused capital allowances, he will be paying income tax on a negative income.
If the banks insist on repossessing buy-to-let properties, they will either sell them at a vastly reduced price, leaving the landlord with the remaining debt leveraged against his home, or the bank will attempt to manage the properties themselves. Managing buy-to-let properties is not the banks area of expertise. The bank would be better coming to an arrangement with the landlord with regards to his loan repayments and allow the landlord to manage his property himself, or with the help of a property management company, who have experience in the area and can maximise rental income and therefore enable the loan to be paid off over time.
At SCK Group, we have been working with our clients to help them navigate what has been a difficult time for landlords. We have been negotiating with the banks on their behalf and have had some success in this. Many landlords have not been utilising all the capital allowances available to them and we have been able to reduce their tax bill by advising them in this area. Some properties have fallen into disrepair because landlords have not had the money to pay for ongoing maintenance. When we realised that this was preventing landlords getting tenants for their properties, we set up our Property Refurbishment Scheme, whereby we will carry out the repairs, pay the up-front costs and then the landlord can repay us overtime from the rental income. This year, because we recognise the extra burden placed on landlords, we are going to pay the NPPR (second home tax), for all new properties let and managed by us.
Simon Ball, writing in today’s Irish Independent gives a timely warning to those PAYE people who have moved out of their homes and have their property rented out to a third party. The resulting rental income may be chargeable for income tax, even though the individual considers him or herself a standard PAYE worker. A lot of individuals are not fully aware of this and their obligation to file a tax return before 31st October. It is essential that people in this situation keep enough money aside from their rental income to cover the tax that may be due. Preliminary tax may also be due for the following year. Failure to file a tax return on time can lead to additional surcharges and interest.
At SCK Group we can advise you on allowable expenses in relation to an investment property. We can complete your rental accounts and can file a tax return for you. If we let and manage your property, we will complete your rental accounts or file your tax return for FREE.
Apartment Owners and Service Charges (Irish Times)
Cash-strapped apartment owners are not paying service charges resulting in a fall in maintenance standards at many developments
WHILE REPORTS of home repossessions and negative equity are a constant reminder of the mess we are in, relatively little attention has been paid to new findings which show that there has been a fairly serious fall-off in maintenance standards at many of Dublin’s apartment enclaves.
“The service charges are too high”; “the bins haven’t been collected for weeks”; “the lift is not working”; “security staff have been withdrawn from the site” – these are some of the problems causing frustration and annoyance to apartment owners and their tenants. The reason for the reduced level of services is not – for once – the ineptitude of the management companies but the ever increasing number of owners failing to pay their service charges.
A recent survey by the Society of Chartered Surveyors and the Irish Property Managers Association has shown that half the property managers who responded estimated that up to 20 per cent of owners had not paid up in the past year. The remainder put the number of defaulters at between 20 and 40 per cent.
Not surprisingly, apartment blocks built in the past five years are worst affected because a high proportion of the units was bought by investors who are now in negative equity. As well as having to cope with an increased number of void periods, these owners have had to settle for rents up to 25 per cent lower than in the boom times.
With mortgage rates certain to rise later this year, the situation can only deteriorate further. A combination of all these factors, plus the fact that the rental market is over- supplied in many areas and that there is every likelihood that increased property taxes are on the way, could mean that the residential investment market will remain dormant for a considerable time to come.
The second group falling behind with their service charges are – wait for it – developers who built the apartment blocks and opted to cauterise their losses by fitting out unsold apartments and putting them on the letting market. Never mind the fact that by offering entire blocks for rent almost at any cost to ingratiate themselves with their Nama bosses they have frequently undermined their very own clients who often paid them over the odds for the apartments. A reduced cash flow since Nama started calling the shots has meant that for many developers the service charges are well down the list of priorities. The reduced funding has meant that cleaning, maintenance and security have either been reduced or dropped in many developments.
However, the largest property managers, Wyse, who handle apartments in up to 200 different locations, say by and large they have managed to avoid maintenance cutbacks by persuading service providers to reduce their charges. “However, with up to 30 per cent of service charges remaining unpaid, mainly in newish apartment blocks, we are finding it increasingly difficult to meet our obligations,” says managing director Ben Gough.
Many of the other property managers have already cut back on services because of the shortfall in funding and the possibility that the number of defaulters could increase further if the economy continues to deteriorate.
Poor maintenance means that owners of apartments who pay up can take as big a hit as those who do not. Once maintenance and repairs are reduced or suspended, the overall apartment block suffers, leading to a depreciation in values. When an apartment scheme is allowed to deteriorate – and there are any number of examples – it is a difficult thing to reverse.
Owner-occupiers, Landlords and Tenants of Aras Na Cluaine, Yellow Meadows, Clondalkin are concerned following recent newspaper articles re High Court Proceedings against the Developer in relation to issues raised by the fire officer.
At SCK Group we have been liaising with Aras Na Cluaine Management Company Ltd to ensure that the issues are satisfactorily resolved.
Below are relevant links
Many landlords will be relieved to read in today’s Irish Times of the Daft report which shows that Rent Costs have levelled out in Ireland.
THE COST of renting residential property in Ireland appears to be levelling out, according to a report by property website Daft.ie.
Rents fell by just over half a per cent last year compared to a 15 per cent drop in 2009 and 10 per cent in 2008. The largest drop, of over 7 per cent, was recorded in Leitrim, which also had the cheapest rentals in the country at an average of €467 a month.
Rents for Kerry dropped 7 per cent to an average of €617 and, while rents in Wicklow dropped by 3 per cent last year, it remained the most expensive place to rent outside the capital, with an average monthly charge of €922.
Dublin city centre saw the largest increase last year going up by almost 3 per cent. The average rent there was €1,134, but it did not top south Co Dublin where the average rent was the most expensive in the country at €1,303. It increased 2.2 per cent last year on 2009.
Rents in north Dublin city fell by more than 2 per cent to an average of €985.
Rents in Offaly were unchanged at an average of €604 a month and in Galway and Cork cities there was very little change, with average rents at €804 and €824, respectively.
The availability of properties also dropped; the total number available to rent nationwide fell from a high of over 23,000 in mid-2009 to less than 16,000 at the beginning of this month.
Read the full Daft report on:
This article was in the Irish Times Property Supplement on 27th Jan and explains why things have become so difficult for landlords recently. Just 1 small point; PRTB is now €90 not €70 as stated in the article.
Far from being members of a fat-cat elite, many small-time property investors say they face bankruptcy if Section 23 tax reliefs are phased out, writes CAROLINE MADDEN
MENTION the phrase “Ireland’s landlord classes” and it conjures up images of a rackrenting, bed-sit- peddling elite who simply sit back and watch the money roll in from their vast property empires. In reality, today’s landlord is much more likely to be a small-time, buy-to-let investor, with one or two white elephant properties, who is now facing death by a thousand cuts.
Last Thursday night, about 250 such property investors gathered on Dublin’s northside for a meeting of the Irish Property Owners Association (IPOA), where they expressed fears of financial devastation. Many warned they would face bankruptcy if the curtailment of Section 23 tax relief announced in Budget 2011 went ahead.
The following afternoon, IPOA members and thousands of other investors breathed a sigh of relief as the Finance Bill put the Section 23 proposals on ice until at least 2012. However although they have been granted a reprieve, it is only temporary.
In last December’s Budget, Minister for Finance Brian Lenihan announced that property-based legacy reliefs were to be phased out. The most controversial element of this related to Section 23 tax relief on rented residential property in tax-designated areas.
The main attraction of this type of property for investors was the ability to offset between 75 and 90 per cent (typically) of the purchase price against all of their Irish rental income, thereby cutting their tax bill.
However Minister Lenihan announced that from January 1st 2011, the relief could only be offset against rental income from the Section 23 property, as opposed to rental income from all of the investor’s Irish properties.
As the rents on Section 23 properties tend to be low, and borrowings are almost always high, little or no taxable income arises on such properties. Therefore if the tax relief were to be ring-fenced in this way, it would become worthless for many investors.
Doubtless the Government banked on the public appetite for meting out punishment to anyone associated with property development to carry this proposal through. However the big property players would have escaped unscathed from any such restriction, as they were generally able to use up their all of their reliefs or allowances in the first year or so.
Instead, small individual investors – from middle-class full-time landlords to tradespeople to pensioners – would have found their unused Section 23 relief effectively guillotined this year.
Representative groups argued that to retrospectively change the terms of the incentive was unfair, as investors had a legitimate expectation of being able to claim the full relief as offered to them by the State at the time of investing.
The Government was inundated with several hundred submissions to this effect and announced it was delaying the change, ostensibly to allow for the completion of an economic impact assessment.
In reality, as Labour finance spokeswoman Joan Burton summed it up last week, what the Government has done is to simply kick the can down the road.
It will take at least six months for the assessment to be completed, by which point it will be someone else’s problem as a new government will be in place.
If the Labour Party gets into power it is unlikely to take a softer line with property investors than the current Government, but it is impossible to predict whether the Section 23 proposals will eventually be implemented, changed or scrapped.
A recently-formed group, Justice for Investors, is encouraging investors to continue lobbying TDs and the Minister for Finance on this issue because of the uncertainty surrounding it. It has provided sample letters and TD lists on its website, justiceforinvestors.com.
Paul Reynolds, president of the Institute of Professional Auctioneers and Valuers (IPAV), has highlighted the fact that the deferral of any decision on property incentives has created serious uncertainty in the market. Investors now find themselves caught in a limbo – whatever hope they had of selling a Section 23-type property before, they have even less chance now.
This tax-shelter saga is not the only thorn in the side of property investors. In the 2009 emergency Budget, the amount of mortgage interest that could be offset as an expense against rental income was reduced to 75 per cent (from 100 per cent).
According to a Munster-based landlord (who did not wish to be identified) with more than 20 properties and no other source of income, this is a more serious issue for investors than the proposed restriction of Section 23 reliefs as it affects everyone who owns a second property and rents it out. “It’s not purely rack-renting fat landlords,” he says. Many investors are just waking up to the impact of this change now, as they only became aware of it when they filed their tax return three months ago.
“It’s a bigger but less immediate problem. People are going to slowly go bust,” says the landlord.
“With the 75 per cent mortgage interest restriction, there is no case for investing in residential property in Ireland,” he says. “You can only lose money.” He makes the point that if, for example, an individual earns €1,000 a year in rent, and they pay €1,000 in mortgage interest, (ignoring other expenses) they are breaking even. However they can only deduct €750 for tax purposes, and therefore will be taxed on €250, even though in reality they did not make a profit.
“It’s one thing to pay tax on income you have. It’s quite another to pay tax on income you don’t have,” he says. He believes that if the 75 per cent interest restriction is not repealed, he’ll be “wiped out” and the property market will not recover. “Investors are never coming back into the market while some of the interest costs are disallowed,” he predicts.
Like many investors, he is only repaying interest on his property borrowings at the moment. “I can only repay capital if I’m making a profit, so I’m interest-only.” He says he has been “invited” by his bank to begin repaying capital, but he has not been “compelled” to do so.
“If I was, it would be become a distressed loan, so the banks can’t afford to go there,” he says. Different banks have different approaches, though, and many investors have been contacted by their lenders in recent months to inform them that they are due to begin repaying capital on their borrowings.
In some cases, investors on tracker mortgages have been presented with two options: begin repaying capital as well as interest, or switch to a more expensive variable rate mortgage and remain interest-only for a further period of, say, two years.
The problem is that many landlords are struggling to meet their interest repayments, let alone repay the principal of the loan. Not only have rents shrunk, but the list of expenses landlords face has grown considerably longer. Firstly, there’s the annual non-principal private residence (NPPR) charge of €200, which cannot be written off for tax purposes.
If the investor’s property is divided up into different flats, bedsits or apartments, this charge applies to each of the units.
Management fees are another area of growing concern for owners of apartments, including buy-to-let investors, as they can run into thousands each year. Landlords also have to register every tenancy with the PRTB now, at a cost of €70.
And as of January 1st, 2009, all homes for sale or rent have been required to have a BER certificate, which indicates how energy efficient the property is. There is no set fee for getting a BER assessment carried out, as it depends on the type of property, but it usually costs between €120 and €300.
“A lot of people are in a situation where they would be better off to have nothing [no property],” a spokeswoman for the IPOA said. “They’d be better off on social welfare instead of working and paying money towards their investment properties. They’re in a situation where they have pared down their own expenses to the bare bone.”
With the most vulnerable sections of society being hit by budget cuts, and family homes being repossessed, there is little sympathy for those who saddled themselves with debt to join the landlord classes.
But with no property market recovery in sight, many investors will soon be forced to choose between paying their taxes and repaying their borrowings, at which point their problems will become the State’s problems too.
Multi-unit bill will prevent rip-offs
NEW legislation which came into force this week may help prevent apartment-owners being ripped off by management companies. The Multi-Unit Development Act, which was signed into law by the President, Mary McAleese, on Monday, addresses major weaknesses in current legal protections for people who buy units in apartment blocks.
A key provision is that ownership of common areas in apartment blocks or housing estates is transferred from the developer to the management company, controlled by owners, before any unit is sold.
Transfer of ownership must occur in a timely fashion for developments already completed or partially completed. This addresses a situation where developers have held on to a small number of units to retain control of the development company. It has led in some cases to management fees running into thousands of euro being levied on apartment owners.
Another requirement will be an annual minimum contribution of €200 per unit for a sinking fund to meet any large, unexpected or non-regular costs. One unit, one vote, will apply on management companies and owners will have to pay charges, whether they are a developer or not and whether the unit is occupied or not.
The Act is one of the last that the current Dáil will pass before it is dissolved. However, the related Property Services (Regulation) Bill, which provided for the setting up of a national house price register, didn’t make it through all stages in the Oireachtas. As a result, housebuyers and sellers will remain in the dark about prices, at least until a new Government tackles the issue.
Costs, benefits for landlords
The dream of capital appreciation has been replaced by the nightmare of negative equity. Most investors who bought between 2004 and 2008 now find their borrowings exceed the value of their properties, in some cases by several hundred thousand euro.
Although rents are showing signs of stabilising, they have fallen to levels last seen at the turn of the millennium.
Mortgage repayments : interest rates are set to rise; many investors are coming to the end of their interest-only term; and only 75 per cent of mortgage interest is now allowed as a deduction for tax purposes.
Annual Non-Principal Private Residence (NPPR) charge : €200 per unit
Cost of registering each tenancy with the PRTB : €70
BER assessment : €120-€300
The buy-to-let investment market has been decimated by the recession and landlords are grappling with the financial consequences. The difficulties they face have also been compounded by increased government levies and taxes.
Previously they were enticed to invest by the government with hefty tax reliefs – such as Section 23 and Section 50 tax incentive properties – but now landlords are dealing with increased taxes, following a series of measures introduced in recent budgets.
And it is the amateur buyers who invested during the boom years that have been hit the hardest.