Rental investments

[Hanuman]

I'm finally about to rent out my first property, and found @MrMedia 's comments here interesting. Quoting him

Awesome thread. Congrats.

Just as a slight side note without derailing - if you are getting 4% return on cash in rental property something has gone badly wrong. I am guessing this calculated without leverage, ie. mortgage debt.

I'm up to 9 rental properties now all leveraged to the hilt and returns are 12-14% on cash, excluding property appreciation which is sitting at a cool 12% in a year.

If you are looking for somewhere to put exit cash I really would not rule out rental property.

I suck at finance, and so have trouble getting everything. This is what I understand it means:

If a property costs 1 million, and you use all of your savings to buy it in all cash, your returns are lower at 4%. Perhaps because you only afford to buy one property with it.

Instead, if you use it as 20% downpayment for 4 properties, you get rental income from 4 different properties with the same money. You use rental income to pay for the subsequent mortgages. But the returns are like 10 percentage points higher.

Am I understanding it right?

 

[Darth]

Yes, property investments are generally leveraged.

Example: $100K cash.

1. Buy $100K house outright. Get $100 per week = $5.2K per year

OR

2. Put down $25K on 4 x $100K homes. Get $400 per week = $20.8K per year
$75K x 4 loans = $300K @ 3% = $9K interest per year plus principal payments

You can work out your cashflow and yearly profit.

Also, capital gains, if 4 homes go up 50% then you've made $400K x 50% = $200K on that (or down). If just one home, cap gains are $50K.

 

[MrMedia]

Am I understanding it right?

Correct.

 

[Hanuman]

Thanks, guys. My mind has been buzzing since morning about how I can take this up.

For context, the 3-bedroom apartment I own is in a very lucrative area of Bangalore (you have Intel, LinkedIn, Walmart Labs, and Sony all within a 10-minute walking distance from home).

It cost like $225,000 in USD, and I paid it all up since I didn't want the mortgage lingering over me. But India is a bad place for rentals since interest rates are like 8-10% and rental income is not great. I'd probably make like $650 per month in rent from this house.

But since I've moved to Dubai now, I think this is something I should look at pretty seriously.

Dubai is way behind in some ways and it works to my advantage - for example, people pay for houses in yearly or bi-annual cheques. That means, if I let the house today, I will get at least 6 months of rent in my bank account right away. Plus, mortgage is like 2.5-5%.

My idea is to set up a thumb rule and invest in properties that strictly fall in this category:

* Studio or 1 bedroom houses only (they move faster than bigger houses - since Dubai is full of expats often people who move in solo with family back home)
* Should be less than a kilometer from a metro station
* Going to furnish it so it is more attractive
* I am going to price them slightly lower than others in the region - this is so the house is never vacant.

I have been looking up the buy and rent prices of some areas I like here, and according to my calculations, the average ROI is like 17% annually with mortgage.

Let's hope I continue to stay excited on this. If so, this is going to be my Laboratory thread, but for real estate.

 

[illmasterj]

Let's hope I continue to stay excited on this. If so, this is going to be my Laboratory thread, but for real estate.

Build yourself a website/do some marketing and maximize the value you create.

 

[eliquid]

If we are talking about RE investments here, we can't skip the tax advantage to all this.

You said Dubai, so this might not be applicable.. but in the US and most States in the USA there is significant tax advantages even if your cash flow and appreciation from the rental is small.

I'm not saying to jump into a rental purely for the tax advantage. I am also not saying to jump into one with small cashflow or appreciation. I am just pointing out something not mentioned in this thread or the other one the OP referenced.

You're not going to find very many investments where you can make positive cash flow IRL but be negative on paper which means more money in your pocket ultimately.

 

[Philip J. Fry]

In the US, I have two houses that have mortgages (13 years to go, woot!) and two condos paid in cash; and I just purchased an apartment in Germany. Also, just to be clear, I've never been to Dubai and have no idea how RE works there. But, here are comments:

1. You gotta talk to other property owners in the area and people in the industry. They can steer you the right way. When I went to Germany, I thought I knew what I was doing with RE and was schooled here. Here, you're privileged if you can even get the real estate agent to show you the place, as foreign buyers are buying properties sight unseen, in cash. A property might be sold 2 days after listing. In the US, where my 4 properties are, the market is competitive but not this level of competitive. Also, the US has a seller's agent and a buyer's agent. You can be your own agent after a 40 hour course and save the apx. 2.5% fee. In Germany, there is only one agent and he works as the mediator. Totally different ballgame. Talk with locals in Dubai. It will definitely not be India.
2. IDK how it is in dubai but, for Berlin and many major German cities, furnished, short term rentals are all the rage right now. So, yes, get a studio and furnish it and list it on AirBnB or a similar place. You can find renters for 2-6 months there and then charge them more than a "normal" renter who is paying just for an unfurnished flat for 1 year. Check out AirDNA.co for AirBnB intelligence data.
3. The problem with leverage is that you are leveraged. There's a maintenance expense for RE and, if you are over-leveraged (you bought too many houses) repairs can add up and you might not have enough savings to cover them. For my US properties, I have 6 to 8 months of cash reserves in a savings account just sitting there in case something happens where I need to pay for a major repair. The houses are not in bad condition but it's just for peace of mind.
4. I'm not sure if you're managing the property yourself or having others do it but make sure you find good people and make a good team. You can replace them if they're not good anymore. You just really want reliable people so that you can free yourself up.

@MrMedia The numbers in the other thread were made up. It really depends on the RE's area. In Germany, you'll be fortunate to get any good cash flow with rentals, as there's rent control. But, it sounds like my US rentals are having a lower ROI than yours. It's because I chose to go with 15 year mortgages and break even on the cash flow. This way, in 13 more years, I have a steady cashflow that's much greater and I can retire if I want to (or that was my thinking at the time). I'm not about maximizing profits as much as possible. I'm actually about living a good life, which is security, peace of mind, and sleeping well at night. Different mentality.

Also, as we're on RE, anyone here purchased a €1 house in Italy? I might take a trip there to check out Sicily to purchase one. It might end up being €30,000 for a vacation home in Italy, after repairs. Not bad at all.

 

[Hanuman]

This looks too good to be true, so can someone cross-check this for me, please?

All numbers below are in local currency.

I'm looking at a couple of areas in Dubai.

In one area (primarily residential), studio flats cost 500K to buy, and are rented out at 45K per year.
In the second area (financial district), studio flats cost 750K to buy, and rented out at 60K per year.

Assuming a 20% downpayment, and mortgage at 5% - I will be paying 100K, and 150K in downpayment for the two properties.

Given that a recession is coming, should I try to time the market? Or, should I simply go for it when I am ready?

If the table above is legit, then it tells me why I have always been conditioned to believe that RE for investment is a bad idea. This is what the table looks for the property I own in Bangalore:

I'll never be breaking even here, although the chances of property appreciation are much higher. So that is what I am going to bank on. Also, granted this was purchased for me to live in. But life happened and I moved to Dubai.

PS - Found this link that lists cities with the best rental yields. Bless the people of Kiev who put all their hard earned money into RE as a way to provide for their family. That yield should be in the hard negative right now.