1% rule in the real European world
Ghent, East Flanders · Member since 2017 · 2 posts · 0 votes
Hi,
I'm a new member from Belgium (the country, in Europe).
I've been an enthousiastic subscriber of the BP Podcast since a few months. I'm absorbing knowledge like a sponge while working towards a first deal, but whenever I do my own calculations I get very disapointed.
For example : I come across examples of people owning units which value $140K with an monthly mortage payment of $600 and renting these units for $1340/month. Sounds great right ?
In my area the rent/value-ratio is much, much lower...
I can't seem to understand why someone would pay $1340 monthly as a tennant when he could own the same unit by paying off a loan at a lower price and, additionally get a tax break.
Is it that hard to get appoved for a loan in the US ?
Any comments on my thoughts ?
Hans.
Poor credit, unreliable employment, credit card debt, crazy car loans, student loans, and inability to save for a down payment all lead to renting vs. home owning. So, for instance, my SFH which I purchased in GA for $81,000 and whose down payment + closing costs came out just shy of $19,000 with a monthly mortgage + escrow of $540, you would think the tenants are insane for paying $893 a month in rent + all their own utilities, but they do, and this is a common situation for many.
Hi @Hans Kuyken
Yes, recently in the past year or so house prices have made tremendous increases. This caused many people to unable to afford a home, which creates an affordability problem. There is still a desire to own a home; however, when one decides to get a loan it gets rejected and the house goes back on the market. Also the lender requires many documents to get approved for the loan such as your tax returns, employment, job, bank statement, savings, all assets, all debts etc. Looking to see if you have a stable job and possible job changes factors in a lenders decision making. Most people looking to rent are still trying to build up their savings, plan ahead, and not buying a house anytime soon.
Poor credit, unreliable employment, credit card debt, crazy car loans, student loans, and inability to save for a down payment all lead to renting vs. home owning. So, for instance, my SFH which I purchased in GA for $81,000 and whose down payment + closing costs came out just shy of $19,000 with a monthly mortgage + escrow of $540, you would think the tenants are insane for paying $893 a month in rent + all their own utilities, but they do, and this is a common situation for many.
I arrived to the same conclusion and I have no idea how can people make money here in Belgium.
I never saw a house that could be used to live as it is below 150.000€ and I'm pretty sure if I bought it and put it to rent I could not get 500€ from it.
I'm busy to make calculations for more than one year, I know on my head all the houses that are in all the Immo agents in Aalter. no way they get close to the 1% rule. Not really close.
In Ghent the houses are cheaper but also the rents. It's more or less the same ratio.
I really don't get how can money be done here, and I consider myself a smart guy.
groetjes
Nuno
Hi Nuno,
Nice to hear that I'm not the only one who's having doubts over the feasibility of REI in Belgium right now.
Regards,
Hans.
I'm originally from Portugal, and since 2008 the banks closed the money tap to everybody, now it's much more difficult to get a loan there; that's great for the renting market there.
I'm now shifting my idea to Portugal. In my home town we have the university student market also. A 3 bedroom apartment can cost less than 60.000 and you cash 450 per month during 10 months and 200 per week in July and August months for vacations ( about 800 per month).
If you go in with 20.000 your loan will be about 40.000 = about 125~150 per month insurance included. it means it's cashflow will be about 300 per month.
At the same time here in Belgium (At least in Aalter, where I live ) you can cash 900 for a SFH but you can't find one for less than 250.000; that's four times more.
Hey guys, Belgium (& most of northern Europe are) is quit difficult to reach the same perspective that the US market, this comes as an evidence of investing in the US market is more that an option for us, along lots of people are doing out of state/country REI.
Belgium is difficult but not impossible.
You just can t apply most of the techniques you learn on the web that are for US or Canada.
You need to know the local laws to avoid running into issues ( I did) understand the banks to get a mortage fit for investor (you need good credit).
If you already have lots of cash you can easilly be profitable, if you try to invest with little cash to build a cash flow, it is hard.
And no real investment club to share ideas , find mentors and learn form others neither.
Hi Hans, nice to hear from a fellow Belgian investor. Welcome to the forum!
Researching the Belgian market (more specifically Brussels) for residential rental properties, I've come to similar conclusions. A studio/flat/apartment/house with a market value of around €100k will rent for around €500/month; one with a market value of around 200k will rent for around €1k/month; one with a market value of around 300k will rent for around €1.5k/month; etc.
Besides, even if you obtain a loan for 100% of the purchase price, you usually have to pay 12.5% out of pocket (in Brussels): registration fees and closing costs. This further hampers your ROI percentage.
As such, if you buy at market value or make a decent deal (85%-95% of market value), your projected rental income barely even covers your monthly mortgage payment, let alone projected/unexpected costs (taxes, vacancy, maintenance, repairs, CAPEX, property management, etc.).
Above, you've already mentioned valid reasons for the disparity between the US and the Belgian residential rental property market. In my view, these relatively low rental prices compared to the market values are just as much a result of the high importance (both social and psychological) that most Belgians place on owning (a) house(s) as opposed to renting.
So far, none of the residential deals that I've analyzed make sense from a cash flow perspective, compared to the base scenario of simply renting a place for myself and investing the money in mutual funds instead of spending it on the registration fees (assuming a yearly return of 5%-7%).
Of course, the true residential deals are the ones that are harder to find and are, as such, off-market and/or require rehab. This obviously implies more diverse work, more/better networking (public and private money lenders, contractors, other investors, etc.), more/better marketing and overall a more extensive real estate business.
Given the popularity of and the associated competitiveness for rental property investing in Belgium, other types of real estate investing might just be more worthwhile investigating. Off the top of my head: wholesaling (which isn't really investing, but a job), commercial properties and out of state (country) investing.
Seeing as we are not so numerous on the forum, if any of you wants to have a chat on the matter feel free to send me a private message and/or meet for coffee sometime. Cheers!
Gentlemen,
It sounds in general like you are looking to buy your rental properties at market value, or just under. Standard formula in the U.S. investing community is 70% of market value minus repairs. An often mentioned idea here concerning buying property to fix and flip, or buy and hold, is that you make your money when you buy, which is true. Off market properties at 70% or less is where you need to be looking.
Hello @Luca Gewehr
That is exactly my analysis also. When I compare the numbers with Portugal, they don't make any sense. In Portugal I can make them work, here in Belgium not. It's a really competitive market.
Even after a few years trying to educate myself on the subject, now I had my aha moment. This last sentence from @Kevin Griffin made the click. And I'm pretty sure I heard it before, I don't understand how I haven't paid attention to it. OFF MARKET
Thank you both for your input!
Nuno
Hi Kevin, thanks for your input. I agree that good deals only start at 70% ARV-repairs and under, as a rule of thumb, and this is what we should be aiming for. My market value example was merely to illustrate what the market is like in general, seeing as rental incomes at 0.5% of ARV-repairs imply that even if you get a fantastic deal at 50% of ARV-repairs, the rental income would still only be 1% of ARV. Given these numbers for the Belgian market, it doesn't seem like the ideal location for investing in residential real estate for its rental income. There might just be other alternatives, though.
To give you an example of a fantastic residential real estate deal at 50% of ARV minus repairs in Brussels:
- ARV: €300,000
- Purchase price: €120,000
- Repairs: €30,000
- Total cost: €120,000 + €30,000 = €150,000
- Registration fees + closing costs (out of pocket): 12.5% * €150,000 = €18,750
(12.5% is the rate in Brussels)
- Conventional loan (100%): €150,000
- Monthly loan payoff (mortgage + interest): €150,000 * 0.5% = €750 / month
(you might get a slightly better or a slightly worse deal depending on your situation and depending on what loan you can find)
- Yearly loan payoff (mortgage + interest): €750 * 12 = €9,000 / year
(you might get a slightly better or a slightly worse deal depending on your situation and depending on what loan you can find)
- Monthly rental income = €300000 * 0.5% = €1500 / month
- Yearly rental income = €1500 * 12 = €18000 / year
- Expenses (quick and dirty 50%-rule, not including the mortgage): €18000 / 2 = €9000 / year
We've bought and slightly repaired a house at 50%(!) of the after-repair-value, and we are breaking even on cash flow. Of course, we've made an immediate profit in terms of equity, although this is thanks to the job-part of the business (finding and making deals; fixing) and not the investment-part. Analyzing the deal, we've gained €131,250 in equity (€300,000 market value - €150,000 debt - €18,750 cash out of pocket) from making the deal, which is 7 times our out of pocket investment of €18,750. Holding this property and breaking even on the cash flow year after year, we'd gain €9,000 in equity every year through the loan payoff. For year 1, our €9000 gain in equity equals a ROI of 5.3% (€131,250 equity / €9000 debt payoff), which is decent but certainly not spectacular, given that we could simply sell the house, pay off the debt and invest the gained equity elsewhere. From year 2 onward, the ROI further decreases, seeing as the yearly nominal gain is still €9000, whereas the net equity increases.
I apologize if this was a bit extensive, I was partly writing this to recap some thoughts for myself :) If anyone has come across similar markets and/or knows of ways to handle this, any input is highly appreciated!
Hi, I live and invest in the US but I recently started looking at France for an investment. Here are my 2 cents, I'll let you determine whether some of them apply to Belgium:
- Within the country, there are "appreciation" markets (large cities Paris...) and "cash flow" markets (typically undesirable suburbs with higher risks, smaller towns) and everything in between. 1% rule is easier to find in less desirable markets, in France just like the US.
- Single family homes are not typically what people try to rent in France. They will squeeze in a smaller apartment to save up until they can buy a home for themselves. I saw a similar comment on BP regarding Oslo. So the typical 3 bed house is not the best rental property in my opinion. I look for small multi-family instead and the numbers work better.
- Tax laws for investors in France are more complicated and "unfair" than in the US. Before you buy, you should factor in whether the targeted property and rent level is eligible for tax breaks (up to 85% tax free in some cases) which makes a huge difference on your overall ROI. You may not need the 1% rule if the income is close to tax free.
- Rent control in many cities is another rule keeping rents artificially low. It also keeps multi-family properties purchase price more affordable (less attractive to investors) but it doesn't keep single family homes cost low since you compete with families wanting a place to move into.
- Mortgage rates in France have a far lower interest rate than in the US in my limited experience but the debt to income ratio is tighter. So I believe there is even more competition for cheaper properties and less for expensive ones.
Overall, the French government has many programs from investors tax incentives to tenants subsidies to pay their rent that the RE market is not quite a free market, which makes it hard to analyze and compare to the US experience.
The lack of a central database (MLS in US) is detrimental to getting a good view of the market and market trends so my view is limited to the specific markets I looked at.
I can be more specific if I manage to close on a property in a couple of months ;-)
Let me know if what I mention above appears very different than Belgium.
@Denis F. Thanks for the input. When you say multifamily in France, what exactly do you mean? Are there du/tri/quadplexes, etc,, available there like here in the US? What are some of the markets you have looked at in France?
I am just beginning my research on France and am curious to see if the numbers would work there. Anything you can share is greatly appreciated!
@Felipe Hofstatter Yes, by multifamily, I meant anything with more than 1 unit. They call it "immeuble" meaning "building" and then specify the number and type of units in the ads, often a combination with a store on the ground floor.
I am starting with a 3-plex in St Etienne which is not a very desirable area but should cash flow with 2 very long term tenants. I may add a 4th unit as well in the future. My offer has been verbally accepted and should be signed in a few days.
I also looked at Lyon and some coastal areas in the south based on my vacation destinations :-) but they wouldn't cash flow as well so I want to start with setting up a cash flow stream and then buy where I'd like to retire...
There is quite a lot I can share depending on what you or others are interested in. From market analysis, finding a deal, getting a bank account in France, financing a deal (less than 2% interest for a 15-years fixed loan for a foreign investor!!!), tenants laws, rent control, tax impact on both US and French... I realized I really had to get a reasonable idea of each of those steps to verify whether it was worthwhile for me. I don't want to make a good return if I have to give it all away in taxes.
I am no expert in all domains but after 6 months of focusing my spare time on it, I am getting a clearer idea.
It may better fit under a different BP topic... Let me know what you want me to dig into and I'll share my experience.
So maybe some things that seem to work in the USA don't work as well in Europe.
If there is lots of competition for the purchase of a specific property, that will be a case where many offers lead to a higher sales price - this is just part of the fundamentals of supply and demand, with high demand bringing a high price.
Starting with a property in need of extensive repairs that you purchase for a lower price becomes a necessity then. You have to determine how to identify such properties locally.
And for those who say there are no real estate investing clubs - start your own. You can go to meetup.com (or similar type of site for your local area) to and launch a meeting on the Internet. It starts small, but if nobody starts it it never gets going.
I have been a real estate agent for 10 years in Belgium in the hyper-competitive market of a popular touristic coast town called Knokke. About 80 real estate offices for a population of 33K (excluded second residency)
Is it hard to find deals in Belgium? Yes, if you look in the mainstream places:
So how to find good deals in Belgium?
Rest of Europe
Financing