Which of two paths..?

Question

Hi

I'm over in Europe working along the French coast and would like to invest in property. I've seen two places and I wanted to put up the two scenarios for some advice on what is more of a business opportunity please.

Scenario 1 is a 1 bedroom apartment that will cost around 140,000 and give me a 6% annual return. I would have to get a mortgage but I can almost guarantee all year round renters.

Scenario 2 is a small chalet up in the ski resort that will cost 40,000 and predicted 9% annual return.

I can buy this outright.

Is there a rule of thumb for these types of investments? One would think that percentage annual returns bring every opportunity on the same level playing field so always pick the biggest percentage?

Happy for any feedback, thoughts and advice.

Thanks!

Ben

Ben Garrad · Answer

Hi Kevin, thanks for your comment.

I'll give you some more figures.

The price of Appt 1 is 140k but I think I could knock off 5 or 10k but let's say no less than 135,000. The current owner rented it out long term for 900 euros per month but I don't think that was realizing the full potential of the property - especially during the summer months along the French coast with online renting sites such as airbnb. Total costs per year (I am waiting for confirmation figures) I was told by her are roughly 2,000 euros (not including electricity only). Notaire probably 8% and downpayment 20%.

The Chalet current owner is asking 42,000. He tells me for 6 weeks during the winter it can easily rent 400 per week (school holiday dates). As part of the sale he said he would rent it off me for the first two years for a flat rate of 1600 (he still wants to ski!) for the other time during winter. So from Dec 10th until mid April an estimates 4,000 euros for the first two years. I also believe there may be a market for this property during the summer (mountain biking etc) but not as certain.

I admit I need more concrete figures which I'm waiting on. Should I then weigh up ROI for both and go for that? Although I initially thought buying outright and renting would be better than getting a mortgage. Contrarily I heard that it would be more beneficially getting a mortgage at the moment as interest rates are so low.

Kevin Siedlecki · Answer

@Ben Garrad - To give you more guidance, I'd need to know the assumptions you used to get to your numbers. The rules of thumb come in when it comes to getting to your ROI. If you used the same metrics to get there, then the 9% is obviously better than the 6%. The only problem might be if there is a significant difference in the markets or the structures, but you used the same assumptions. You mention that Scenario 1 would have no trouble renting, but did not say the same for Scenario 2. Is that because Scenario 2 will be more likely to have vacancy? Did you factor that in when you got to your predicted ROI? Is one of the buildings in significantly worse shape than the other, and will need more CapEx expenditures sooner? Again, did you factor that into your calculations?