ᐅ Multi-family residential building as an investment property in a city with an aging population
Created on: 2 Oct 2016 12:08
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MaxPower90
Hello everyone, my concern is not directly related to building a house, but maybe some of you will find it interesting and want to join the discussion, which I would appreciate. Given the low interest rates and the fact that I have saved some equity, I am planning to buy 3 to 4 smaller condominiums to rent out, or even better, a small multi-family building.
I come from the Ruhr area and want to buy in this region as well. Of course, with a property, just like with a nice vacation, I want good value for money. At first glance, for example in Herne, you can find properties without maintenance backlog yielding around 7% net annual rental return. In my opinion, this high return is linked to the fact that Herne is not an attractive city for any age group. I have reviewed all the population forecasts I could find online, and Herne is aging faster than average and is projected to lose up to 10% of its inhabitants by 2040.
My question to you is: Is investing in a city like this likely to be a losing strategy due to falling property prices and probable vacancies? Or could it also be an opportunity if the micro-location is good (shopping facilities, public transport, parks, etc.) and the building could potentially be converted to be barrier-free in the medium term? Especially considering the attractive rental yield and the fact that retirees, whom I imagine to be “good” tenants, might be the main target group.
I have never bought residential property before and find it really difficult to assess. I look forward to your opinions!
I come from the Ruhr area and want to buy in this region as well. Of course, with a property, just like with a nice vacation, I want good value for money. At first glance, for example in Herne, you can find properties without maintenance backlog yielding around 7% net annual rental return. In my opinion, this high return is linked to the fact that Herne is not an attractive city for any age group. I have reviewed all the population forecasts I could find online, and Herne is aging faster than average and is projected to lose up to 10% of its inhabitants by 2040.
My question to you is: Is investing in a city like this likely to be a losing strategy due to falling property prices and probable vacancies? Or could it also be an opportunity if the micro-location is good (shopping facilities, public transport, parks, etc.) and the building could potentially be converted to be barrier-free in the medium term? Especially considering the attractive rental yield and the fact that retirees, whom I imagine to be “good” tenants, might be the main target group.
I have never bought residential property before and find it really difficult to assess. I look forward to your opinions!
Vacancy rates can be included as a percentage; depending on the area and rental market, you can expect around 11 to 11.5 months of rental income per year – which is ultimately a theoretical figure.
However, you won’t get by with €300; the amount you need to cover is approximately €7,400, including realistic maintenance costs. With only €3,300, gradual depreciation occurs due to deferred repairs.
If the money is properly invested and you project a steady income value after paying off the loan, you then achieve a “respectable” €8,500 net return on an investment of approximately €290,000 plus the 15 times €7,500 you have contributed annually, resulting in about 2.1%. This figure can be improved through an increase in the property’s value and rent rises, but it still takes quite a bit of imagination (or "Amaretto") to make it look like 6%.
So, this is only interesting if you push the purchase price down significantly, fully exploit the property, and/or use it as a tax-saving model.
q.e.d.
Dirk Grafe
However, you won’t get by with €300; the amount you need to cover is approximately €7,400, including realistic maintenance costs. With only €3,300, gradual depreciation occurs due to deferred repairs.
If the money is properly invested and you project a steady income value after paying off the loan, you then achieve a “respectable” €8,500 net return on an investment of approximately €290,000 plus the 15 times €7,500 you have contributed annually, resulting in about 2.1%. This figure can be improved through an increase in the property’s value and rent rises, but it still takes quite a bit of imagination (or "Amaretto") to make it look like 6%.
So, this is only interesting if you push the purchase price down significantly, fully exploit the property, and/or use it as a tax-saving model.
q.e.d.
Dirk Grafe
Dirk Grafe schrieb:
That's still quite a lot of Amaretto to drink just to enjoy it at 6% alcohol.Or leverage on credit
MaxPower9015 Oct 2016 20:58Dirk Grafe schrieb:
If you invest the money and assume a constant income value after paying off the loan, you end up with a “respectable” net return of €8,500 (about $8,500) on an investment of €290,000 (about $290,000) plus the 15 × €7,500 (about $7,500) you have contributed each year, resulting in roughly 2.1%. This figure can be improved by increasing the property value and rent, but it still takes quite a bit of amaretto to convince yourself it’s 6%. Ok Dirk, I agree that it’s sensible to increase the maintenance reserve as a precaution. However, I think your calculation should be done differently. When I calculate the final return, I don’t base it on the total price of €290,000 (about $290,000) plus the invested additional funds, but on my equity plus the additional amounts invested, meaning €60,000 (about $60,000) plus 15 × €7,500 (about $7,500), totaling €172,500 (about $172,500). The difference to €290,000 (about $290,000) has been paid by my tenants over the 15 years. Since, as you correctly stated, I’m still diligently building up the maintenance reserve, from the day the loan is fully repaid I achieve a net return of €8,500 (about $8,500), which equals around 5% on my total invested capital.
If I had invested the €60,000 (about $60,000) for 15 years in, for example, an index fund, and added €7,500 (about $7,500) annually like a savings plan, my compound interest calculator says I would need a roughly 6% interest rate per year to reach €290,000 (about $290,000) at the end. Currently, you can only get 6% by taking at least medium risk. And then you would only have €290,000 after 15 years as a lump sum, not even adjusted for inflation. On the other hand, building value should approximately increase with inflation if all other factors (demand, building condition, etc.) remain roughly the same.
Of course, it’s possible that in five years you might get 5% interest on a savings account and stocks could be booming. But buying a house is something that involves many political risks and other uncertainties in the future that can seriously affect your returns, and those risks are difficult to predict.
MaxPower90 schrieb:
Ok Dirk, I understand that it makes sense to increase the maintenance reserve as a precaution. But I think you should calculate the return differently. When I calculate the final yield, I base it not on the total price of €290,000 plus additional invested funds, but on my equity plus additional invested funds, that is €60,000 + 15*€7,500 = €172,500. The difference to the €290,000 was paid by my tenants over the 15 years.Yes, you are absolutely right. That’s why I’m getting involved in the project. You buy the house and grant me a right of first refusal for the day your tenants have fully paid off the mortgage. I will then pay you back the €60,000 equity plus maintenance costs for 15 years, and the house will then belong to me. Strictly speaking, I wouldn’t even have to pay you the full maintenance costs because your tenants have partly covered that already, but I don’t want to be unreasonable.
So—should I arrange a notary appointment or will you take care of it?
Best regards,
Dirk Grafe
MaxPower9016 Oct 2016 15:15Dirk Grafe schrieb:
I will then pay you the €60,000 (approx. $64,000) equity plus maintenance costs for 15 years, and the house will belong to me. Strictly speaking, I wouldn’t even have to pay you the full maintenance costs since your tenants have partially covered that already, but I don’t want to be too harsh.
Dirk GrafeI don’t agree that you would then transfer €60,000 (approx. $64,000) plus 15 times €7,500 (approx. $8,000) to me, since you would have been able to work with that money for 15 years. Instead, you should transfer €60,000 (approx. $64,000) now and €7,500 (approx. $8,000) every year, but at the same time you must provide me with an investment option that guarantees at least 6% per year for 15 years.
No, seriously, please explain where my mistake in reasoning might be. I have thought this through as carefully as possible and believe that my calculation is correct.