Rental property #1

As I have told you before, at the end of 2016, I have invested 100k in my first real estate property in the beautiful city center of Porto, Portugal. I bought it before it was built, so we were finally able to start cashing-in in the beginning of September 2017. We have decided to hire a property manager specialized in short-term rentals and until now it has been going great. Check out my property in Airbnb!

Here is a quick summary of the current situation, with actual values until January 2018 and estimated values for the future months:

net profit

I will have around 6400 Euros net per year which represents a yield of 5.9% on my initial investment (my initial investment includes not only the cost of the apartment, but also taxes, furniture, etc. anything I had to pay before the apartment was ready). It sounds like a pretty good investment to me! However, I can still improve it, as I do not have the most efficient situation in terms of taxes and I can maybe still negotiate the cost of the property manager.

This experience has been very exciting! At first, we were concerned and a bit annoyed because there were some delays in furnishing the apartment, so could not start cashing-in in August 2017 which is a pretty good month for tourism. But, once everything was settled, there is not much you have to do, apart from seeing the money coming in into our account every month! With so much free time, we have decided to do a quick analysis on the strengths and risks/weaknesses of our investment.

 

Strengths:

  • New apartment in the city center (my opinion is that the city center hardly ever devaluates, in particular in Portugal where prices are still low and the reconstruction of the city centers in big cities started very recently)
  • Perfect for tourism but also can be rented long-term (we were contacted by an agency with an offer for our furnished apartment which would yield us 5500 Euros net per year)
  • Tourism is growing at very high rates in Portugal and this growth is expected to continue in the future

 

Risks/weaknesses:

  • Legal changes in short-term rental laws in Portugal (tourism has been the main driver of growth so I think this risk is small but it should be considered)
  • Small apartment with no parking space

 

We have weighted the pros and cons and we have decided that it is a really good investment and a niche that we would like to focus on: small apartments in premium areas in cities we are familiar with. This is why,  a few days ago, we have decided to buy property #2, a very similar apartment to property #1, for the same purposes: short-term rental. We were a bit unlucky this time (or lucky in the first time) as the prices are quickly increasing, therefore the price of this property is 35k higher than the first one (auch!). But, whereas in the rental property #1 we had to wait 1 year until we started cashing in because the apartment was not built when we bought it, rental property #2 is almost built and we hope to start cashing-in before July. All the same, instead of a 5.9% annual return, we are expecting around 4.5%.

Our following steps are to check with a tax adviser if we can/should create a commercial company for our real estate investments so we can deduct the costs of the investment for tax purposes. Currently, we are paying a significant amount of taxes because we cannot deduct the costs that we have on the investment. At the same time, with 2 apartments, we hope to be able to negotiate the cost of the property manager.

I am so excited about this project! Not only it is profitable but also I am learning so much about real state, Portuguese laws and about taxation. I fell I am an expert by now, so feel free to ask me any questions related to these topics!

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Financial Statement – January

I have just realized that my last post was written on September 2017, almost 5 months ago!!! Lack of time I could say? But let’s face it, we never really have lack of time, just time management issues or different priorities. I have been a bit busy with managing working full-time + having a baby + my first real estate investment. And, although I feel having a blog is useful as it makes me fell accountable for how I manage my money, I couldn’t find the time/motivation to sit in front of a computer. I missed it though!

Since it is of no use crying over spilt milk, I will just go on and update you on what happened in my life in the past 5 months (many exciting real estate news!) but first I want to update you on my financial net worth at the end of January 2018.

Cash 44,900
Peer to Peer 700
Pensions 71,920
Security deposit for current house 4,000
Rental Property #1 100,000
Rental Property #2 133,000
Debt (Rental Property #2) -94,000
Total net worth 260,520

This is, of course, mine and my husband’s.

Check out the next post to see how I am managing my first real estate property and how I am currently on my way to buy the second one!

Tracking my expenses

Yes, I do not (yet) track my expenses. I know how important it is but since I was pretty happy with our savings rate (around 60%) and my husband was not a fan of tracking expenses I decided there was no point in doing it myself.

Luckily, nowadays banks do this for you since they categorize your expenses automatically. You just need to make sure it is the right category and categorize a few when the bank does not have information on the correct category of a specific expense. The only thing you have to do is try to use your card always, if possible. If it is not possible and you need to cash out, which in our case it is only to pay the cleaning lady and some lunches/coffees, it is fine. So, I managed to convince my husband and we will track our expenses from today onwards!

This graph below is my idea of how I currently spend my money. In one month, I will compare it with how I actually spend my money.

expenses

Keep posted, I will keep you updated on my real expenses and on my first month as a real estate investor. I have learned so much in this process of buying a house for short-term rental and hiring a management company and I will share all the tricks and tips that worked for me!

Is renting really too expensive?

This is by far the best calculator I have found online that provides an estimate between the cost of renting vs the cost of buying. I love this calculator because it takes into account all the costs of owning a house, which are underestimated by some people, in addition to the opportunity cost of not investing in other assets that might yield better returns, in particular on the value of the down payment.

This should be used to evaluate the pros and cons of buying the apartment/house you will live in. Do not make the mistake of just comparing the monthly bank payment with the monthly rent. Much more (significant) costs have to be considered when owning a house.

Food for thought: the fisherman and the business man

There was once a businessman who was sitting by the beach in a small Brazilian village.
As he sat, he saw a Brazilian fisherman rowing a small boat towards the shore having caught quite few big fish.
The businessman was impressed and asked the fisherman, “How long does it take you to catch so many fish?”
The fisherman replied, “Oh, just a short while.”
“Then why don’t you stay longer at sea and catch even more?” The businessman was astonished.
“This is enough to feed my whole family,” the fisherman said.
The businessman then asked, “So, what do you do for the rest of the day?”
The fisherman replied, “Well, I usually wake up early in the morning, go out to sea and catch a few fish, then go back and play with my kids. In the afternoon, I take a nap with my wife, and evening comes, I join my buddies in the village for a drink — we play guitar, sing and dance throughout the night.”

The businessman offered a suggestion to the fisherman.
“I am a PhD in business management. I could help you to become a more successful person. From now on, you should spend more time at sea and try to catch as many fish as possible. When you have saved enough money, you could buy a bigger boat and catch even more fish. Soon you will be able to afford to buy more boats, set up your own company, your own production plant for canned food and distribution network. By then, you will have moved out of this village and to Sao Paulo, where you can set up HQ to manage your other branches.”

The fisherman continues, “And after that?”
The businessman laughs heartily, “After that, you can live like a king in your own house, and when the time is right, you can go public and float your shares in the Stock Exchange, and you will be rich.”
The fisherman asks, “And after that?”
The businessman says, “After that, you can finally retire, you can move to a house by the fishing village, wake up early in the morning, catch a few fish, then return home to play with kids, have a nice afternoon nap with your wife, and when evening comes, you can join your buddies for a drink, play the guitar, sing and dance throughout the night!”
The fisherman was puzzled, “Isn’t that what I am doing now?”

From Paulo Coelho blog

Financial Statement – August

 

Euros July August Gain
Mine 41,400 38,950 -2,450
M 24,200 30,800 6,600
M Pension 31,000 31,000 0
My Pension 34,840 34,840 0
House guarantee 4,000 4,000 0
House paid 100,000 100,000 0
Total 235,440 239,590 4,150
Cash 65,600 69,750 4,150

This month and the following will be atypical. My salary is much lower because I am on my parental leave until the end of September. M, on the other hand, got some money back from taxes. So, overall, an increase of 4k is not bad for a low salary month!

We are currently thinking where to invest next.. having 70k in cash is killing me! I feel I am losing money every day for not having it invested. Index funds? Or real estate?

An image worth more than a thousand words

The Eurostoxx 50 and the S&P 500 have historically been fairly correlated. However, since 2009/2010 we clearly see them splitting, as Europe is rather stable and the US presents amazing returns.

Index fund investing as a simple strategy is more complex than what John C. Bogle says. There are too many options to choose from. For investing in Europe I am confident that ishares is the best, do you have any other suggestion?

Naturally many other factors have to be taken into account when deciding what to do in terms of investment, in particular which index funds to buy. But, as we know, there is no point in thinking too much about an investment strategy; even financial experts rarely beat the market. So, would you say there will be a crash soon in the US? Shall we invest in the EuroStoxx? Let me know your views!