Small landlords who were holding off until the budget to make a decision about selling up now have more data. If you are a small landlord still mulling about whether to stay in the rental sector or get out, here are some factors to consider.
Many small landlords hoping for some budget love were left disappointed. A “meaningful package of measures” had been trailed by Minister for Finance Michael McGrath since last year likely in the hope of persuading landlords to stay.
The latest Residential Tenancies Board (RTB) figures show the landlord exodus of recent years continues apace. There were a total of 4,518 notices to quit served to tenants between July and September 2023. Two thirds of them were due to landlords intending to sell up.
That follows 5,735 notices of termination issued from April to June, some 63 per cent of them cited the landlord’s intention to sell the property as the reason. From January to March, some 4,753 termination notices were issued. So urgent was the need to plug a rental sector draining of tenancies, there was even chatter from Government about pre-budget tax breaks.
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As the months ticked on, however, nothing materialised. The budget tax measures ultimately revealed aren’t meaningful enough for many landlords. Under the new rented residential relief, landlords will be able to set aside a fixed amount – €3,000 in 2024, rising to €4,000 in 2025 and €5,000 in 2026/2027 – which will be liable for tax at the standard rate rather than at the higher 40 per cent rate. The universal social charge and PRSI will still apply.
The upshot is a small landlord will see a reduction of €600 in their November 2025 tax bill. This will increase to an €800 reduction in 2025 and to a reduction of €1000 in 2026 and 2027. That’s a potential saving of €3,400 on tax, but only if the property remains in the rental market for four years. If the landlord exits before the end of the four years, the full amount of the tax saving will be clawed back.
The measures aren’t so much golden handcuffs as some kind of conditional eternity bracelet. The gesture means the Government is acknowledging it needs small landlords to continue to play house, it’s just not going to give them much towards housekeeping. What it does give, it could claw back.
A four-year commitment will be a horizon too far for many small landlords. It means shouldering four more years of risk: high-interest rates, rising costs, slowing property prices and political uncertainty in return for below-market rents in cases where the property is in a rent pressure zone or where the landlord keeps the rent at a certain level to retain good tenants.
Some 35 per cent of those selling a property through estate agent Sherry FitzGerald this year are landlords exiting. That equates to a drop of 15,000 or more tenancies this year. Tax isn’t the only issue driving landlords out, says managing director Marian Finnegan.
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“The budget isn’t going to change anybody’s mind. I think landlords who were planning to leave now will do so. They are not going to hold back and wait,” she says.
The tax relief is tokenism at best, says Mary Conway, chairperson of the Irish Property Owners’ Association (IPOA). “It is a wholly inadequate response to the increasing financial and regulatory burdens on property owners in the rental sector,” she says.
Interest rates
Some 54 per cent of landlords acquired their rental property with an owner-occupier mortgage, according to RTB figures. If you have a variable or tracker mortgage, it’s probably past time to weigh things up. The white-knuckle ride of interest rate hikes over the past year has seen monthly mortgage repayments rise by hundreds of euro.
Close to half of all current rental properties were bought in the Celtic Tiger years, before property values crashed, according to Central Statistics Office (CSO) data. This was the era of tracker mortgages which were heavily sold in Ireland between 2001 and 2008. For those who bought at the peak of the market, fell into negative equity and became accidental landlords to stay afloat, a tracker was the lifeline.
The European Central Bank’s (ECB) main interest rate has been at or below 1 per cent for the decade from 2012 to September last year. This kept mortgage repayments on rental properties low. Between July 2022 and September 2023, however, there have been an unprecedented 10 interest rate rises in quick succession. ECB rates shot up from 0 per cent in June 2022 to 4.5 per cent in September this year. A tracker mortgage has become less a lifeline and more of a weight.
Take for example a first-time buyer turned accidental landlord who took out a tracker with a margin of 1.25 per cent in 2006. Their monthly repayments have risen from €1,233 last June to €1,635 today. That’s an increase of €402 a month.
The ratio of rental income to mortgage repayments is now out of kilter for some landlords. This is particularly so for those with a property in a rent pressure zone where rent increases are limited to 2 per cent a year. Even if rates don’t rise further, they are unlikely to fall for some time, possibly not until 2025. It’s unlikely they will revert to super-low rates again.
About 44 per cent of landlords are PAYE workers.
“The issue is not just interest rates going up, but in the case of PAYE worker landlords, their repayments are coming from after-tax income,” says Aengus Burns, a financial advisory partner with Grant Thornton.
“Yes, the equity is building up, which is a bit of a nest egg for the future, but it’s just becoming harder and harder to cash flow it as the interest rates go up,” says Burns.
Rising costs have left many landlords with minimal headroom. “The RTB process is very slow if a tenant decides to stop paying rent. It’s high-risk if you have one unit. If you have 10 units, you can spread the risk a bit as it’s 10 per cent, but if you have one unit, it’s 100 per cent of the risk. Landlords are concerned about that,” he says.
Inflation
In 2016, rent increases in rent pressure zones were capped at four per cent. The cap dropped to 2 per cent in 2021. Landlords who had held rents at below market rates to retain good tenants were particularly caught out by the caps. Rent increases since 2016 remain linked to that below-market rate.
Though inflation ran at 9 per cent last year – meaning increased property management fees, professional fees, maintenance and repairs costs for landlords – rents remain capped at 2 per cent.
“In the case of properties that were under-rented in 2016 when those regulations came in, many of those landlords are now selling,” says estate agent Owen Reilly.
Some 70 per cent of the properties he has sold this year were landlords exiting. That rose to 72 per cent of sellers in the third quarter. “That’s the highest we have ever recorded,” says Reilly.
A recent IMF health check on the Irish economy recommends the abolition of rent caps.
“What international experience says is increasing supply has proven to be a far more effective way of providing affordable rent than implementing rent controls,” the report noted.
Rent caps don’t look like they are going away anytime soon however. Sinn Féin – the party that recorded the highest level of support in the latest Irish Times/Ipsos opinion poll – says it would ban rent increases and the ending of tenancies altogether.
Cashing out
Landlords may calculate that growth in the value of their asset no longer makes up for the monthly cash flow pain. Having experienced a decade of property price increases since their 2013 nadir, growth is now tailing off.
Property prices rose by 0.9 per cent in the 12 months to August 2023, down from 1.6 per cent in the year to July 2023, according to CSO figures.
In Dublin, residential property prices saw a decrease of 1.9 per cent, while property prices outside Dublin were 3.1 per cent higher in August 2023 than a year earlier.
Some properties have still not returned to the prices paid for them – indeed, Dublin residential property prices are still 8.3 per cent lower than their February 2007 peak. Landlords who bought in the boom are now far enough into their mortgages to be out of negative equity. Even if they haven’t regained what they paid for the property, at least those selling at a loss won’t pay capital gains tax.
Some 69 per cent of landlords with one or two properties are aged 45 and older, according to RTB figures. Life milestones such as kids starting college or retirement may mean some landlords now need cash or want to reduce their risk.
Many existing landlords are tired of anti-landlord rhetoric and just want out and few new landlords want in. Just one in 10 of the properties sold by Sherry Fitzgerald are being bought by investors, says Finnegan. Their motivation differs from previous small landlords.
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“Very few are thinking, I’m just going to buy because I have cash in my bank account and I’m going to invest because this is a really good return. That was true in the 1990s,” she says.
Individual investors these days are either buying through a more tax-efficient pension structure or with college students in mind. “It’s with some other purpose. We’re not seeing people saying, oh this is a great investment,” says Finnegan.
Individuals buying a rental property through a personal retirement savings account don’t pay tax on their investment gains and that makes financial sense, but only if the yield is right, says Burns.
Many new landlords, however, don’t want what some existing landlords are selling. When a landlord sells, a rent cap, which is attached to the property and not the tenancy, makes the property unattractive for another landlord to buy it, says Reilly.
“If a property is rent-capped at €1,500 and it should be getting a market rent of €2,000, that cap applies if another landlord buys it,” he says, adding that owner-occupiers are buying these properties, not landlords.
“That’s why available rental stock continues to deplete, deepening the rental crisis, particularly at the lower end of the market,” says Reilly. It’s precisely the more affordable rental properties that are disappearing.
“The most common question investors ask us is, ‘Is it rent-capped?’ If it is and we tell them that it is, they say ‘No thanks’.”
