My first real estate investmentOnline Payday Loan For Bad Credit
With this article I start a set of articles that talk about my experience with real estate investing. I must say that I am not an expert on real estate. I like to invest and I have already had some good experiences that I am reporting. Maybe you can give me other tips?
Buying a property from a bank
In fact, my first purchase was not that of a bank property. I bought my own permanent housing when I got married, using credit for housing (I was a bank, so I had special financing conditions). However, I did not consider this my first investment because it was my house that after I left her I considered it an investment.
The first real estate investment I made with the purchase of a house from a bank. Or rather, an investment fund associated with a bank. It was in 2008, and the investors fled for less risky products, the investment fund was faced with many redemptions and the need to sell its assets to generate liquidity. Thus, I had the opportunity to buy a good property, in great condition and for a great price … and now, with good financing conditions.
The rational of investment
I decided to buy this property, a T3 in the zone of Benfica, for € 50,000 and the bills I made were simple. At the time I asked for a 100% loan and I had special financing conditions, namely the exemption of a series of commissions and a spread of 0.5% (yes, I know people who had lower spreads, but already contented with this one).
The installment was € 450 appreciably (because I asked for the loan at 15 years) and the rent that was paid was € 100 (due to the old rental conditions, with the frozen rentals). So along with two more investors we each had to make a monthly delivery of € 150. We looked at this savings as our PPR because with affordable deliveries we would be constituting our savings, being sure that the property was worth at least triple what we paid for it.
The simple rate of return
By making a simple account, we can say that when we bought the house the yield return was modest:
- Annual Return – Only 1.9% per year, net of costs;
- Return on invested capital – 38% per annum
This difference in the return on rents obtained (net of costs) is justified by the level of leverage. That is, how we used total financing, we just had to invest to pay some costs and taxes. Therefore, the return on capital was very high . If you want to calculate the simple rate of return on your investment, simply divide the value of the rent (net of costs) by the value of the investment. It is a simple rate to calculate that not being a perfect indicator is a reasonable indicator.
At the same time we have to consider the return on investment we have to look at risk. In this case, we can consider:
- Deterioration of the property and need for more works;
- Non-payment risk – I can say that the risk here is zero because someone who pays a value that is much lower than the market value has all the incentive to pay the rent on time and hours;
- Geographical risk – We bought a property in a good area of the city of Lisbon so we also have a small risk here;
- Interest rate risk – The risk associated with the rise in interest rates. At the time, however, the EURIBOR rates were at very high levels (close to 4.2%) so the risk was of falling rather than rising.
Evolution of real estate investment
Having a good relationship between risk and return, we were left to live rested and obtain a periodic income without major inconveniences. We had some good news, such as:
- Falling interest rates – Currently the interest rate on our financing is 0.2% since the EURIBOR is negative. Thus, what we pay the installment to the bank is almost 100% of capital amortized;
- Amendment of the lease law – With the new legal regime of rent, it was possible to update our tenant’s rent to more coincident (but still lower) values at market value. Thus, not only did the costs fall by half as the value of rents increased significantly;
- Real estate valuation – With the madness that we are currently experiencing in the real estate market in Lisbon, the value of real estate has been increasing considerably. So a house that costs us 50,000 euros is easily worth 3 to 4 times what we paid for it.