Having different sources of passive income is key in my books for Financial Independence. Having a rental is one of the often seen income sources that people have. Should we as well? (Actually, should we again?)
Having a rental makes only sense to me when it is a cash flow positive investment. This means that the rent should cover all outgoing cash that comes with owning the unit. I am not willing to have hard earned cash flowing into the mortgage on top of the mortgage we have on our main house.
Costs that I see
- Mortgage, paid monthly
- State tax, paid yearly
- Charges for the unit, paid monthly
- Owner insurance, paid monthly
- Mortgage insurance (various payment options)
With this basic info, I started a search in our home town looking for a rental to buy. I did find a few and made some detailed calculations. These calculations are based upon my experience of owning a rental apartment and using calculators on various sites to translate a listed price to an all-in buy price for a property.
My ongoing assumption is that I would make a 20pct down payment and pay for all the associated buying costs myself. This is in any case what the bank requires in order to get the best rate.
When I saw the results, I was not happy. Follow me!
I found this apartment for sale at 129 000. After including all costs, the total purchasing price would be 144 928EUR
The costs at my charge are estimated to be 118 EUR.
I assume the rent is 540 EUR.
In this case, it would take an upfront investment of 57 000 to have a cash flow neutral rental.
- You need some time to find tenants. Ideally, they stay a long, longtime…
- Sometimes, things break down
- If it is an apartment in a block, you need to attend the yearly meeting
There are some items in the list that of course can be outsourced. This outsourcing comes at a cost. I have yet to find a property manger that works for free.
On the other hand, with the interest rats really low and mortgages on 20 year available at 1,4 pct, the leverage is really really good.
At this stage in my life, I prefer to wait. I might look into other cities.