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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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

A hungry man is not a free man

Most of the people spend all their life driven by others’ expectations or by extrinsic motivation, as Dan Pink very accurately described in his book Drive: The surprising truth about that motivated us. It basically means we spend our lives looking for approval in the society mostly through money and/or recognition at work. However, this only gives us a temporary boost of motivation/satisfaction/happiness. The permanent happiness is found in the intrinsic motivation which, according to Dan Pink, relies on three principles: Autonomy, Purpose and Mastery.

My personal journey to financial freedom is actually part of a bigger journey to autonomy, to finding purpose and to having time to master all the issues I have always been interested in. However, I have to admit that the short-term focus is extrinsic, that currently I am focused on making money, not for the purpose of consumption, which is used by mostly for people as a way to fell that they belong to a certain social status, but for the purpose of saving, of being free from every-day bills. As Adlai Stevenson very wisely said A hungry man is not a free man. Therefore, only when free from obligation we can be free to enjoy life at its fullest.

Your house is not an asset

It is crucial to end up with this non-sense idea that your house (primary residence) is an asset, probably the only one you will ever own and therefore all your savings shall go into that one asset. Work, ask for a mortgage, pay your house and then retire.

 

 

If a house is taking money out of your pocket (insurance, taxes, miscellaneous, etc.) then it is not an asset. Not only you are actually spending money but also you have to consider the opportunity costs of having our money invested into that house, which you wrongly perceive as an investment, whereas you could have invested the same amount of money in another house or investment that could actually yield at least 5%. In a hypothetical example of a 100k house with an average of 2000 per year on expenses, you are actually spending, per year, 7000 = 2000 + 5 000 (5% of 100k). You have to consider the money you actually spend plus the opportunity cost of not using the 100k in another more profitable investment. Here I have assumed that the other profitable investment would yield an average annual return of 5%, which is very conservative if we consider real estate investment.

In addition, there are also two (hidden) costs which I consider very relevant when you buy the house you live in:

1 – You loose flexibility. Either you assume it or not, it is more difficult to move into another city or country if you know you bought the house you are “supposed” to be living in, not only because you are emotionally attached to it and you probably end up more expensive things for your house, in particular furniture, but also because it is really not that simple to rent a house, get a property manager, etc. from one day to another.

2 – You end up of not making the most rational decisions when you invest in a house with the purpose of living in it. You take into account variables that are important to you and not to the market, like being near your family. Or you are willing to accept living in a area which is not as recognized by the market, like the fact that it is near a highway or a factory, because you prefer to pay a bit less. However, those decisions can make this house a very difficult one to sell or rent to a third party and therefore would not yield any cash flow, in case you decide to rent/sell. In sum, it is a very bad investment.

According to Frank Gallinelli there are 2 rules of real estate investing that we should follow: do not hold any sentimental attachment to any of the properties you invest in and if you think it will be difficult to sell/rent, then it is not worth buying.

 

Another sentence I loved in his book What Every Real Estate Investor Needs to Know About Cash Flow… And 36 Other Key Financial Measures which highly reflects my approach on real estate investing is the following:

You are not buying a properly, you are exchanging a fixed price for an income stream.

I create my own luck

Most of the people like to believe that external factors such as luck or being in the right place at the right time play a major role in other’s people successes. I believe those people, in general, are just lazy and it is just easier for them to continue being lazy and believing there is nothing you can do to improve your life than actually making efforts and having a plan.

You live next to your family and enjoy a perfect work-life balance. If I had that, I would also have kids right away. Have you ever thought that maybe the person though a lot before having kids and actually shaped his/her career based on where the grandparents live? That this decision actually required effort and it was not just a matter of luck but most likely the result of a well-thought plan?

You are so lucky, you have a high salary. If I had that salary I would also save more than 50% of my salary. This one actually applies to me. I have worked hard to be successful in the tests and interviews that have put me in this high paying salary. Not only I was rejected many times before and after going to interviews, but also I have spent weeks preparing for every interview, studying more than for an exam. Also, I have carefully planned, together with my husband, the places to live that could be more beneficial both in terms of salary, costs of living, safety, etc. and we have both focused our search in those countries. Plan + hard work + focus = success. Also, not many people would be willing to sell their car, like I did, to think thoroughly before spending your money, and rather focus on generating passive income consistently.

I believe some people just choose to be negative and unlucky. I strongly suggest reading this article from Richard Wiseman where he performed an experiment in two groups of people – lucky and unlucky – and where he shows that “lucky” people are not only more efficient in embracing new opportunities but also they pay more attention to the details that may help them thrive. Therefore, what is generally so-called luck is the result of personality factors, such as optimism, openness to new situations and less anxiety combined with the ability to notice and trust the unexpected. It is not an external factor that cannot be controlled by us.

All of us are lucky to some extent, we just need to work hard, take some risks and embrace the opportunities that come across our paths. Try to learn from the experiences of the lucky people that you meet instead of just assuming that they did nothing to achieve success. I am pretty sure that if you start changing your mindset and your behaviour you will also get lucky in the near future!

You are your biggest asset

When you have no assets that can generate passive income, think of yourself as your biggest asset. Generate the maximum possible income, have low expenses, with the minimum amount of time spent working.

Think of your time spent at work as an investment, i.e., try to get the most out of your work, not only in terms of cash-flow but also in terms of what you learn from it. I have realised that since I have assumed I will not work many more years and, therefore, I see my work as temporary, I take most advantage of it, I enrol in all kinds of interesting trainings, I put myself in challenging situations because I feel I can learn from them and I am not afraid of failure anymore, because I know I will also learn something from failure. I am also more confident to say what I think in meetings and more prone to apply to higher level positions. So, I guess I am better at work and this is due to the fact that I have decided I do not want to work forever and take it as a temporary situation. Ironic, right?

You are your biggest asset! At least until you have no other assets you can live from, think of yourself as an investment: you have to yield the maximum return to your shareholder, which is yourself!