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.
Other considerations
- 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.
Conclusion
At this stage in my life, I prefer to wait. I might look into other cities.
amber tree leaves 
My husband and I have considered the idea of owning rental property, but not in a major city where we currently. Only if we return to the small city of Windsor, Ontario or something similar would it make sense for us. For us, it would have to be a school need a post-secondary institution as students are guaranteed to have cash (thank you student loan epidemic in Canada). There would need to be regular upkeep of the home because students are the worst at keeping things clean, but that can be minimized by only allowing graduate students to rent.
Based on the numbers it does not seem to make sense for you. Good post!
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This is something we want to do as well, property prices are to high in our area right now. Therei s no way we could pull it off at the moment.
Patience is key!
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Patience…. not my best skill 😂
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This sounds terrible but I would check for estate sales in the newspaper. Apartments owned but an elderly person usually requires fixing up and you could get a discount on the price from the kids who may want settle the estate quickly.
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Good idea.i keep my eyes open… may e
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Ciao ATL,
Houses were a good investments in the 1980s, they are not so great anymore in my opinion… Housing taxes are quite high, then you pay rental taxes and maintenance. Lot’s of extraordinary costs and if you are unlucky enough to get a tenant who doesn’t pay then all is “screwed”. Different situation is if you rent abroad, maybe a house that you use for holidays. In that case you get to enjoy the place and save money, while letting it for holiday rents when you are not there (there are management companies that follow all of that). Of course the return is much lower, but it’s not an asset that it’s going to drag resources.
Another issue that I see in Europe is that the housing market is stuck, so it’s likely that properties are not going to rise in price over the years…
ciaociao
Stal
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What is weird in Belgium: prices only stabilise or go up and this for the last 20 years! I prefer being patient at this time
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We own a number of rentals and they are not very passive (and we planned for that). Property managers need to be managed too – but hopefully you could find a good one!
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Indeed, a rental is not always passive. I had one before and with the last tenants, I had more work than I wanted. A property manager is not something I want to pay for now
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Completely agree with all of Stal’s points. Bad yield and no growth, definitely not worth considering at these historical high prices and low interest rates. Good luck finding something good though 🙂
Tristan
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I keep my eyes open!
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I’m renting my condominium full-time as a vacation unit right now, and I’d be interested in buying a second place to rent if the prices were right. Right now, though, there is literally nothing on the market in our region that comes even close to meeting the 1% rule (1% of purchase price in gross monthly rent). I’m waiting to see if prices normalize.
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The units that I see are nowhere near the 1 pct rule…. I will look a little further from home in a cheaper area
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Same here! I’m not even sure we could find something satisfying .5%. The rental we have is not one we would buy again just based on the math — we’re viewing it as a long-term investment that we bought to rent to a relative with specific needs, and we’re happy we were in a position to help. But with taxes on the rental income in addition to the other costs, it’s definitely not a good short-term investment, and we’re in no rush to repeat that! 🙂
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Nice gesture to a family member. I hope that person is thankful and is taking good care of the rental.
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Oh yes, that’s all definitely the case. We’re glad we did it. 🙂
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You’re definitely right that you have to be in the right area to find good cash flowing properties. I’ve been lucky here in the US, particularly in my area – there are fantastic opportunities.
However, there are a lot of people I hear from living elsewhere here in the States that are in a scenario similar to yours. They’ve had to consider exactly what you’re saying and look in other locations. That brings some new variables into the picture, but it can be done.
As a side note, if you haven’t heard me mention BiggerPockets before (www.biggerpockets.com), I would strongly recommend it. I stumbled across them a while back and it’s opened up a whole new light to how I’ve started looking for rentals. The podcasts are fantastic, the forums are great, and they have some rental property calculators that can save you a ton of time (although that part’s not free).
Good luck to you on your search!
— Jim
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129 000 for an aprt in your area? one bedroom? what surface? the price is wonderful, I paid almost double in Brussels ( ok, the rents are almost double).
Following actual bank rates, it is a good and easy investment. For me is the only big issue : the Belgium taxes are HUGE, housing taxes can arrive up to 16.5% … ( probably in your area 12.5% it is a good estimation … ).
I did same simulations. Extra, you need to estimate some work in the kitchen/bathroom/electricity too, before to rent first time ( once for 10 years, said an expert). And try to discuss with a immo agency to see how they tax you in case they will search a renter ( here there is one rent value).
But I think is more profitable to keep the money on the market …
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There are indeed a lot of costs that can come with a rental.
This apartment was more a studio, approx 40m2… One person can live in it, two would be a crowd. It is aimed at students or people that are on their first job.
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ok, in that case at this level you will have a “fluency” of renters, that after 1 year will change (with a bigger one). Do you want this?
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The yearly change does not appeal that much to me. Actually, I still need to define what I want from a rental and the time I want to invest in it.
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Another rental idea from my pocket: to buy a holiday aprt in Spain ( Canary Islands more precisely), to put on a contract with a local tourist agency ( they taxes with 20% ) and they to rent to tourists. 1-2 months to be only for my family ( so to have cheap holidays in same place for the next years). With a rate of ocupacy around 8-10 months per year, at a price of 250 euro per week, the yield is more that 5 🙂 ( comparing to the case of an aprt in brussels I can go up to 3-4% ).
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I am in the same situation, I’m sitting on cash and looking for a way to monetize into an income generating asset. I have considered (and am still considering) rental property. I know plenty of people that make good passive income from rentals, but I haven’t found the right deal yet.
I will say that rental properties are not a quick way to passive income. It seems that breaking even is how you begin and over time, as you pay down the mortgage and the property appreciates (thereby allowing you to charge more rent), you will start to reap the benefits.
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I look the same way at how to make money out of a rental…
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As a banker, I can tell you that most rental projects I see start to pay off when you have over 3-4 units. It is hard to make a good return out of an apartment unless you buy it with a great upside in the value over the next few years (buying a condo in a area that will eventually boom). If not, you rather have more units (triplex, 4plex, etc) or rent for vacations (more time, but a lot more money to be made).
I think you made a good choice in not going forward with this apt. 🙂
Cheers,
Mike.
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Thx for the feedback. At this time, I prefer to have the cash in an account. I wait for my professional life to stabilise before venturing into another adventure. Unless off course, a nice opportunity pops up.
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I have thought about rental properties and still haven’t decided if it is for me or not. Right now, I invest a portion in REITs so I have one real estate exposure. They still might have a future in my portfolio though.
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We are in the waiting boat as well… REITs might be a good alternative
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I’d LOVE to get into the rental game, but being that I am in New York the prices are absolutely ridiculous to start (or at least the up front capital).
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Better opportunities will always come along. Sometimes its best to just go in at it. Good luck on your property rental endeavours!
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Hi ATL,
I have also looked into this mainly at the suggestion of people around who are all doing this. After some preliminary investigations, I arrived at basically the same conclusion as you, that is not for now. A couple of points though;
– general: rental returns in the private market in Belgium are pretty low, about 3.5%. Too low for most institutional investors; so the market is typically for the Belgian dentist types and similar non-professional real estate owners. Reasons are a bit opaque but I think it’s related to general distrust of financial investments which make real estate look better than it actually is, as well as some sort of bias in the sense that real estate has performed well since the early eighties, so it will continue to perform well
– You can only obtain this return by detailed optimisation, serious cost control, close supervision, and leverage. Not really passive nor low risk.
– given the thin margin, there is not much buffer. The first defaulting tenant will mess up the whole calculation; eviction costs are high (pro renter bias in the legal system and courts).
– most people own a house in Belgium (about +70%), so tenants are usually lower quality (except in some niches like student housing, care property, expat zones, etc.)
– The upside is asset appreciation in the long run, but my feeling is that the big gains have been made already.
– purchase price: given the above, when in the market for a rental property, you should push hard to get a better purchase price. It’s almost the only variable that will meaningfully impact your return – buy low. Don’t calculate with the listed price, but negotiate as an Arab, to go as low as you can or just walk away. There is enough on the market. Aim for 25% below the listed price. You will only win this once out of 20 (or more), but hey, that’s your return
– taxes: I need to dig further into this; I am not sure if the 3.5% return that is typically quoted is after income taxes. TAxation is not that bad in Belgium for real estate, but it should not be discounted when the margins are so low. This may also quickly change if the government would start eyeing this type of income for further taxation. The first houwe where you live should be remain to be mostly exempted, but rental properties would be very tempting for our cash-strapped government.
– This is not to say that you cannot make good investments in this type of asset class. I have enough examples around me that do pretty well, but… I don’t know their real numbers, they are typically quite handy (can do house repairs themselves – I have two left hands) and it’s typically houses/apartments that they inherited
In any event, I would be interested in seeing your detailed calculations to compare notes.
Regards,
M
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Thx for the detailed analysis. I gave the same problem: two left hands…
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