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!