Starting investing: my strategy

With more than 100k in the bank account, we have decided it is about time to start creating passive income. Real Estate is our first bet. Rich dad poor dad was probably the book than mostly drove me towards this journey of reaching financial independence and I am following some of the rules I learnt there, while adding some of our own knowledge about the real estate market in Portugal.

  • Invest in a market that you know

Portugal is definitely the way to go. We are from the 2 biggest cities in the country and we truly think that investing in the center of a city there is a safe bet. Prices are high but due to the limited space and to the increasing investment Portugal has done in previous years in transportation, which makes living in the center, without a car, possible and valued. More and more Portuguese value being close to work, supermarkets, restaurants and the possibility to move around easily to other places on the city. It is actually a European trend but it has started late in my country. It is important to know your market, not only because you need to analyse the legal contracts, but also to easily understand the taxes to pay and know the best areas to invest in.

  • Analyse the trends but do not buy an apartment exclusively based on one trend

Tourism in Portugal is increasing very significantly. Renting an apartment through AirBnB is highly profitable and many old buildings are being totally rebuilt for that purpose. Naturally, tourists pay more to stay in the city center and prefer to stay in what we can call typical apartments, i.e., not necessarily big but with national characteristics. This is what we are aiming for in the medium-turn, as the rate of return is quite high. However, we are aware that in a few years this trend may not be as strong, in addition to the fact that supply of houses is actually increasing, which may led to a decrease in prices charged per night in the future. This is why we will invest in a studio in the city centre, which can easily then be rented to students or young couples who do not have kids yet.

  • Do not aim for cheap/low-rent investment

You can always buy a cheap apartment, ask for a low rent and still make a profit. I have to tell you, it is risky, there is a high chance you have an empty apartment for some months, tenants who may not pay, more issues with the construction and neighbours. You do not have to aim for high-end but be aware that the low-end can be very costly.

We will invest 95k in a new 40 sqm studio in the city centre, next to the metro, train and near many supermarkets/restaurants/bars. For your information, check below our expected, but slightly conservative, annual returns on this investment, based on the total cost of the apartment, i.e., including all the costs, such as taxes and furniture in the initial price.

Total cost 101,085
House price 95,000
Registration costs 375
Taxes 1710
Furniture 4000
Long-term rent AirBnB
Annual return 5.03% Annual return 7.64%
Total profit/year 5080 Total profit/year 7720
Average profit/month 423 Average profit/month 643
Months occupied 12 Months occupied 12
Monthly rent 500
Apartment costs/monthly 25 Price/night 60
House insurance/annual 100 Occupation rate 67%
Annual taxes 520 Property manager rate 30%
Monthly expenses 120
Apartment costs/monthly 25
House insurance/annual 100
Annual taxes 520

Risks/concerns:

  • Apartment is not yet totally built – it will be in December – and there can be a delay in construction, which would mean a few more months without earnings. Not very likely though as we have visited the apartment a few weeks ago and it seemed quite advanced. The only risk here is the government licence, which can only be granted after construction and may delay the process.
  • I am not a technical expert; therefore I cannot predict the problems we might have with the construction, where we will have leaking or other issues. I hope not!
  • Construction company going bankrupt. Very low risk as they have other buildings in the city, apart from being property managers of some of them. Also, they are very exposed, very active on social network. But it is still a risk!

To diminish the risks, I have talked to a lawyer to analyse the situation and to make sure there is nothing wrong with the legal contract. Additionally, I did an extensive analysis on the evolution of the real estate market and try to be realistic/towards the pessimistic side with my assumptions. I have also investigated the construction company because they are rather new in the market. But I have realized the risks are rather low and a passive investment which yields, just on passive income, i.e., without taking into account the possible valuation of the asset, which I believe might increase in value, between 5% and 7.6% is a rather good investment.

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