Is it worth at all?

Question

Hi all,

I started to analyze my local area here in the Czech Republic (Europe) and found out following information:

1) My city has around 65,000 inhabitants

2) Searching websites I found that  there are cca 60 flats selling in my town at the moment ranging from one-room flats (15 sqr meters) to 4-rooms-plus-kitchen flat (143 sqr meters).

3) The prices range from $18,500 for the former to $160,000 for the latter.

4) I was also searching the rental market a bit and it looks like the one-room flats are renting for around $115 - $200 per month (utilities excluded) and the four-room flats are ranging from $400 to $500.

Now, I believe that for the cheapest flats I could get a mortgage for 20 years for 3% p.a. assuming 20% down payment. Still, assuming putting 35% of the rent aside for repairs/maintenance and assuming full occupancy at $200 rent p.m., I am ending up with some $565 of net CF per year which brings me to some 15% cash on cash return.

My question is, is this acceptable amount of profit assuming that there might be vacancies and the rental income will more probably be somewhat lower?

What return are you usually aiming at?

PS: I could probably get even 100% mortgage which would mean that cash on cash would be infinitely high (some $317 per year). In this case, what kind of criteria do you use to assess whether the deal is worth of consideration?

Thanks

Regards

Radek

Roy N. · Answer

Jeremy:

These "rules" of 1% and 2% are merely guidelines - rules of thumb, if you will - which are very much artefacts of the U.S.A. domestic real estate market - and, as such, should not be expected to be applicable globally.   They rarely apply here in Canada which has many societal and economic similarities to the U.S.A.; it should not be assumed they are applicable in Czechoslovakia.

Radek:

There are a few other European investors here on BP, but I'm not certain if there are any investing in Czechoslovakia.   Your best course of action would be to find a successful, local investor and compare your analysis to their experience.  This person could also advise you on the landlord - tenant law in effect in your locale which would give you the full picture on your rights and obligations as well as those of the tenant.  It will also outlined the effort required to evict (remove) a tenant if it becomes necessary.

In addition to validating the accuracy of your analysis, you should compare the return to that available to you through other vehicles of investment (stocks, bonds, etc) to determine if the added workload and risk associated with being a landlord is sufficiently rewarded.

Radek Vytisk · Answer

Well, I believe that the investment property can be depreciated over time here as well. What I am not sure about is whether the depreciation can be used when you own the house/flat as a common person, not an entrepreneur, I think that in such a case you can only write down the rental income by 30% lump sum and the rest of the money is considered as a taxable income. But as I said before, I have not investigated all the details of real estate business in my country yet.

As for the articles, I know it's a pain, I am either using too many of them or too little. But I'm trying to improve this as well :)

Thanks a lot @Cal C.

Radek

Cal C. · Answer

Radek,

One of the things rarely mentioned in the forums is the tax advantages we have in the US concerning real estate, particularly due to depreciation.  This makes the 1% type rules more attractive to many people.  In a nutshell, tax laws let us pretend that a house will be worthless in 27.5 years.  So we get to subtract 1/27.5 of the cost of the house (not the land) from our rental income each year.  Its much more complicated than that but you can quickly see why owning re can be tax advantageous thus lowering the threshold for what is a good deal and what is not a good deal.  Bottomline- Without the tax advantages and without expected appreciation I would be looking for properties that meet at least a 1.25% rent/house cost criteria.

BTW, as a small hint to improve your English, work on using articles.  They are usually superfluous, but we expect to see them.

Radek Vytisk · Answer

Most of foreign forums don't :)

However, thank you for the compliment, I'm trying to practice my English every day, so that when I need to deal with foreigners I have means of communication and it's always good to hear that native speakers understand me :)

Back on topic, I am not aware of any tax advantages, however I believe that even in this country good offers can be found, one only has to know where to look. Unfortunately, it is not particularly common here to rent whole family houses, one either rents a flat or buys a house. But I think that smaller cities like the one I live in can hide some opportunities for rental properties.

I will analyse the environment bit further an I will see what can be done, I've already asked my colleague to get me a contact of his brother who is real estate agent and I will ask him for some thoughts.

Radek

Cal C. · Answer

Sorry I don't think bp likes haceks.

Cal C. · Answer

Ahoj! Radek, Váše Angli?ané je vyborne!

I'm not sure the risk reward is worth it in your case, unless you have some expectation of appreciation and/or there are tax advantages.

Christian Hutchinson · Answer

Thats correct once I calculate my Cash outflows I tack on 10-25%.  Meaning that amount of money is mine, it goes in my pocket.  The 10% of the Acquisition cost represents the opportunity cost of engaging in the transaction.  Like I stated you can get 7% buying an Index fund of the SP500,  So if I spend $100K, $10K a year could be earned in interest doing nothing. SO I have to have a justification for engaging in the transaction.

Radek Vytisk · Answer

Thank you @Christian Hutchinson for your formula, I just want to clarify one thing. Those 115% are representing sort of markup over your cash outflows, is that correct?

Radek

Elizabeth Colegrove · Answer

Sounds like you have a great plan! I totally agree for diversification. That begin said, I am MUCH better at real estate than I ever was in the market. So for me while I can get great for me returns for little work. My ability with the market was much less, so we just invest into fund :)

Radek Vytisk · Answer

Hello Elizabeth and thank you for your thoughts and questions.

I've started with investing like 3 years ago and I started with dividend stocks. Over these 3 years, the stocks are bringing me some 17% of yield per annum. So basically this is one part of my benchmark, I want my other investments to have at least the same yield. Considering the fact that real estate will require more of my direct involvement than stocks do, I think that the yield should be even higher, my thoughts were 25% or more.

As for my goals, I want to reach financial independence before I am 45, which is some 12 and half years from now. One way of reaching this goal is through REI and landlording seems to be most suitable for my country's conditions. AFAIK, things like flipping of RE are not very common here so it's either landlording or buying of RE with prospects of their appreciation in near future and I am more into the landlording.

To reach my goals, I am estimating that I need monthly income from my investments in amount of approximately $7,500 which is quite an ambitious goal for 12 years but I think it is doable.

I believe that one has to diversify his/her portfolio, so to answer your next question, I would rather invest in both stocks and real estate in order not to have all my eggs in one basket.

Now I will have to investigate the financing options I have, so that I know where I stand. We have recently bought a house with my gf and have a fresh mortgage to pay, so I need to know how much more credit I actually have but our monthly incomes combined are about 3.5 times higher than the monthly payment so there should be some space for investments.

Radek

Is it worth at all?

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