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!
MaxPower90 schrieb:
Then I end up with a 6% net rental yield, of course before taxes. Or am I wrong? Again?Probably – but that’s mostly because you define “net yield” differently or according to your own criteria.
You could theoretically add the additional purchase costs to the house price, but that doesn’t make much sense – the property is worth €245,000 (about $265,000), not €265,000 (about $287,000). If you had to sell the house quickly, you could probably get around €245,000 (about $265,000) again, but it’s unlikely you’d get €265,000 (about $287,000) unless you include speculative profit.
That might improve the net yield at first glance according to your criteria – but those roughly €20,000 (about $22,000) in additional purchase costs eat up the entire first year’s net rental income, and you haven’t even started paying interest or principal to the bank, nor any income tax on the rental income.
You are entitled to consistently refuse to include income tax in the net yield calculation – but that is obviously not realistic. If you want to know what remains from an investment, you logically have to deduct all costs to get the true value.
Also, there are mathematically/accounting-wise no reserves set aside for repairs, and if the house has any backlog of maintenance that doesn’t show up in the listing, the situation looks bleak at first.
Without even picking up a calculator, your yield in the first 2 (probably more like 5) years will be zero or negative – so far from your target of 6%.
How much equity do you currently have available? The land reference value would also be interesting, so we would have an idea what they roughly use for the property value.
Best regards,
Dirk Grafe
Income tax on rental income is first reduced by expenses, such as interest and depreciation, as well as maintenance costs.
Depending on the situation, this can result in a tax refund instead of a tax payment. You would need to calculate it thoroughly.
Therefore, the actual return depends on many factors, including financing and other sources of income.
For this reason, properties are often generally evaluated using the gross rent multiplier or the reciprocal gross yield (net annual rent excluding additional costs / purchase price). The worse the location, the higher the initial gross yield tends to be.
Depending on the situation, this can result in a tax refund instead of a tax payment. You would need to calculate it thoroughly.
Therefore, the actual return depends on many factors, including financing and other sources of income.
For this reason, properties are often generally evaluated using the gross rent multiplier or the reciprocal gross yield (net annual rent excluding additional costs / purchase price). The worse the location, the higher the initial gross yield tends to be.
Grym schrieb:
Depending on the circumstances, this results in an income tax refund instead of an income tax payment. You would need to calculate it in full. You don’t need to explain that to me – but the original poster still doesn’t understand what it means to receive an income tax refund. It simply means that the actual net return (at least initially) is negative.
Yet he is still dreaming of +6%...
Best regards,
Dirk Grafe
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Bieber081514 Oct 2016 06:51Recommended reading (and then do the calculations yourself): Volker Looman, "The Wealth Question: What Exactly Do Real Estate Investments Yield?", faz.de.
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Bauexperte15 Oct 2016 10:21Grym schrieb:
Why should the return improve then? That was meant ironically and as a subtle hint that the KfW often acts as a supporting helper.
Regards, Bauexperte
MaxPower9015 Oct 2016 15:01Dirk Grafe schrieb:
You don’t need to explain that to me – but the original poster still doesn’t understand what it means to receive an income tax refund. It simply means that the actual net return (at least initially) is negative.
Yet he’s still dreaming of +6%...
Regards
Dirk GrafeNo. Now the original poster understands. He promises to include the income tax in his return calculation from now on.
Grym schrieb:
Depending on the circumstances, this results in an income tax refund instead of a payment. You would have to calculate it thoroughly.You’re right. I just did that. A specific property that I have already visited and will inspect again next week together with a building surveyor.
Basic data: Purchase price including additional costs €290,000 (approximately $310,000), equity €60,000 (approximately $64,000) → loan €230,000 (approximately $246,000), full repayment in 15 years at a fixed interest rate of 1.7%. This yields the following return calculation. Copyright of the calculation table belongs to Alexander Goldwein.
So I am adding €3,300 (about $3,500) per year, or about €300 (around $320) per month, let’s say €500 (around $540) including a small maintenance reserve. According to my considerations, that will be it. I understand that I have to pay more if a tenant doesn’t pay rent.
If it turns out that I have made a major error in my calculation, I’ll lock myself in my bedroom and lie down with a bottle of Amaretto.