Is Now a Good Time to Buy a Rental Property in Ireland?
Ireland’s property market appears to have weathered the pandemic. Prices continue to rise rather than plummet as was predicted in some quarters at the COVID-19 kickoff.
So, with the market showing such resilience is now a good time to buy a rental property? Let’s take a deep dive to decide.
Ireland’s limited housing supply continues to be impacted by COVID-19 constraints. But with fewer homes on the market, many with money to invest are wondering if now is a good time to buy a rental property.
After all, even though the rise in unemployment has caused a dip in demand for rental homes across the country (with the exception of Dublin), demand hasn’t declined as much as the actual supply - meaning the potential tenant pool is still larger than the available property pool. And it’s likely to stay that way for the foreseeable future.
So, what’s the right decision? Well, the truth is that there are both pros and cons to investing in buy-to-rent properties. So before you take the plunge or put your money aside for safekeeping, let’s consider the factors at play.
Factor #1: Short Supply in the Rental Market
A rental property will only provide income to the owner if it’s consistently rented and cash flow from rent is high enough to cover all necessary costs.
Pro: Right now in Ireland, the short supply of houses and apartments in the rental market means that generally speaking, finding occupants for your property shouldn’t be too difficult.
According to the latest Housing Market Monitor from the Banking and Payments Federation Ireland (BPFI), property investors accounted for less than 1% of all mortgage drawdowns in 2020 compared to 20% of mortgage drawdowns in 2006.
If demand for long-term rentals continues - which seems likely - then being one of the few buy-to-rent property owners will likely see you enjoying high occupancy rates, which, all going well, will lead to dependable cash flow.
Con: Though there are fewer private landlords renting properties the slack is being picked up by other non-household buyers. BPFI reports that private companies, charitable organisations and State institutions now account for 23% of all market transactions – a big jump up from 3% in 2010.
These organisations’ entry into the residential market began on the back of the Celtic Tiger bust and have resulted in several significant changes in property regulation and management, particularly in terms of taxation and fixed rents.
One of the hardest changes for private landlords was the introduction of rent pressure zones, which are designated, high-demand areas where rents cannot be increased by more than 4% per annum.
Though this existing system is due to expire at the end of 2021, Minister for Housing Darragh O’Brien has indicated that it will likely be replaced with broader protections for the whole market.
The current and likely future restrictions on rents can affect the overall income you’ll receive from your property – particularly when you take into account other outgoings such as mortgage repayments, insurance costs, property taxes, rental income taxes, and all ongoing repair and maintenance pay-outs.
Bottom line? Make sure you’ve considered the above variables before you buy and don’t expect a king’s income from your first rental property.
Factor #2: Fluctuations in Rent
As noted above, Ireland has a housing shortage but the number of homes available to rent has dropped dramatically (outside the capital city, anyway) since the coronavirus hit our shores last year.
Pro: This has had the added effect of pushing rents upwards. According to recent research, the average monthly rent in Ireland at the end of 2020 came in at €1,414, which is 0.9% higher than the previous year.
In the last three months of 2020, rent rose by 4.8% on average in Cork City and 5.8% in Waterford City. Galway and Limerick also saw an increase of 4.6% and 3.9% respectively.
And while we’re not suggesting that high rents allow potential buy-to-rent property owners to capitalise on other people’s financial burdens, it is important to know market rates to be sure you can cover your overall costs as a landlord.
Con: The truth is, rents can fluctuate. And if you’re already struggling financially with your property, a tumble in tenant payments may see you paying out more than you’re taking in.
For example, Dublin rents from October to December 2020 were down 3.3% year-on-year.
Overall, the impact of COVID-19 on the Dublin rental market has been opposite to elsewhere in the country. Early 2021 clocked up 64% more available rental properties in the capital when compared to the same time last year.
The closure of schools and universities along with industry-layoffs may have influenced the flood of additional properties onto the housing market as many students, families and other Dublin-dwellers ditched the city mid-pandemic, to return “home” or seek out cheaper, larger rural pads from which to work-from-home.
But changing work practices and the hit that salaries have taken in the last year, means that, according to some experts, Dublin rents are not likely to increase in a post-COVID-19 world.
Bottom line? Ensure you have considered whether the amount you can charge for rent covers your overall expenses. It’s also crucial to have some reserve funds in place to take off the immediate pressure if rents start to fluctuate or suddenly your property becomes vacant.
Factor #3: Return on Investment
Anyone thinking of buying rental property in Ireland surely hopes to derive a profit from their purchase. It’s important, then, to know what the return on investment (ROI) will be on the apartment or house you hope to rent out.
From purchase price to closing costs, the initial investment to procure the property should be clear enough. But after that, it’s important to calculate net profit (i.e. the actual profit after expenses) so that you can determine whether you’ll earn enough on the property for the investment to be worthwhile.
Doing this involves establishing what your revenue and expenses are.
- Rental Income: How much you can charge for rent each month.
- Mortgage already paid down: This not only determines how much of the property you initially own, but how much you’ll need to pay in mortgage repayments.
It’s important to be aware too that when it comes to buy-to-let mortgages the Central Bank of Ireland has ruled that borrowers must stump up at least 30% of the property purchase price themselves.
In addition, buy-to-let mortgages tend to come with high rates. According to interest rate data released by the Central Bank in January 2021, Irish borrowers have the highest mortgage interest rates in the EU - 3.04% compared to the EU average of 1.79%. But when it comes to buy-to-let, that rate is closer to 5%.
- Equity: The value of your property will likely increase over the years (though, of course, there are risks in assuming this as the collapse of the Celtic Tiger proved). However, all going well, you will have additional equity beyond the initial mortgage payment put down.
- Mortgage: This is the amount you pay per month in principal and interest.
- Property Insurance: The insurance you carry on your property.
- Local Property Tax (LPT): LPT is a self-assessed tax charged on the market value of residential properties.
The initial national central rate of the tax is 0.18% of a property's value up to €1 million, and 0.25% on the amount of the value over €1 million. Following that, your local authority can adjust the LPT rate by up to 15%. (Get the full lowdown on Local Property Tax here).
- Rental Income Tax: In Ireland, you must pay tax on all income made through rental properties. Typically, you’ll pay either 20% or 40% tax, though the actual percentage will depend on your personal circumstances - i.e. marital status, how much you're charging tenants, whether you have other forms of income.
You will also be able to claim back some rental expenses to reduce your overall tax liability.
- Vacancy Periods: There may be periods between tenants when your property lies vacant. If this happens, you still have to pay your mortgage and taxes. Having a stash of cash set aside for just such a moment will help you over this hump. To figure out how much euro to earmark keep an eye on the market to see how quickly rental properties in your area are snapped up.
Average vacancy rates differ depending on where in the country your property is based. For example, the vacancy rate in rural areas where the population is lower than 3,000 tends to be highest and can range from 13.1% to 18.2% according to the Irish Housing Agency – meaning this is the percentage of the year that the property could sit empty.
However, in a normal functioning rental market, the standard vacancy rate is around 5%. Find out what the rate is in your area, and put enough money aside to cover all expenses for that percentage of time to be on the safe side.
Bottom line? Everyone’s circumstances are different. But knowing your revenue and expenses can help you decide whether right now is a good time to buy-to-rent in Ireland.
Factor #4: The Resilience of the Property Market
Pro: When COVID-19 became a horrendous reality in Ireland, many economic experts predicted two things.
The first prediction was that house prices would plummet. After all, as businesses, shops and pubs and restaurants firmly shut their doors, it looked like we were heading straight into another recession. And we all know what happened to property prices during the last economic bust, right?
But that didn’t happen. Though there was a slight downwards dive during late summer and early autumn of last year, the market held up remarkably well and, since then, prices have continued to rise.
As a result, investing now in property may be relatively low risk as it seems unlikely prices will plummet.
Even before Ireland faced its two lockdowns and the subsequent closure of the building sector, the country wasn’t building enough houses to meet demand - And as long as demand outweighs supply, house prices will continue to rise.
The second prediction was that money would become universally tight for all. Again, this wasn’t the case. While some people were unfortunately hit hard by the onslaught of the virus others found themselves in the unique position of being able to save money.
With shops, restaurants and pub doors firmly shut, folk working-from-home in industries that weren’t badly affected by the pandemic found they had nothing to spend their moola on and instead began saving.
According to the Central Bank, in the 12 months to the end of November 2020, Irish people put €13.4 billion into savings accounts. Much of this money will go back into the housing market as people move homes to meet their changing needs and first-time buyers step onto the property ladder.
And again, the result will be that the resilience of the property market will be maintained.
Con: If property prices do continue to rise, however, it may price some private buy-to-let homeowners out of the market.
According to the annual Residential and Outlook report from the Society of Chartered Surveyors Ireland (SCSI), prices are set to increase by an average of 4-6% this year. Of course, depending on where in Ireland you’re hoping to buy, it could be higher still.
This may lead would be rental property owners to forgo their purchase or to put all their resources towards the initial mortgage down payment - A pretty risky thing to do as it sets the stage for reaping low returns and - if prices do dip - lurching into negative equity.
The bottom line? It’s important only to buy-to-let if you have protection against the above-noted risks. That means looking for a bargain (though that may be hard to find in the current climate) or finding some other way to avoid putting all your wealth into your rental property.
Buying a rental property right now could be a great investment - But only if you’ve considered all the current pros and cons along with whether it suits your financial situation.
The housing market hasn’t collapsed as many thought might happen. But that doesn’t mean that buying property to rent will be an instant cash cow.
If anything, buying-to-let is a long game and one that can be affected by several variables. These include your ability to rent the property in a post-pandemic world and whether it can offer you an attractive return on investment.
All investments have hidden risks and putting money into rental property is no different. But if you know what challenges may arise and are at least prepared for other curveballs, then buying-to-let may be a secure investment that will help you build a steady stream of income in these unpredictable times.