Real estate investing

Real estate investing
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Can it really be that there isn’t yet a dedicated thread for real estate investing on this forum? I couldn’t find one with a search, so let’s open one now.

My interest in real estate investing started years ago, but for various reasons, I still haven’t started, and all my money has so far been put into the stock market. Now, however, I’m starting to have enough capital that, even just for diversification, starting real estate investing could be justified and relatively easy to do without a significant dent in my stock market activities.

I haven’t actively followed the real estate investment market much in recent years, but now that I listened to a recent Rahapodi (Money Podcast) on the topic, the idea came to mind again.

The real estate investment frenzy has been quite intense for years, and the best train for returns has surely already left. Unless you are a professional with excellent networks or get apartments at a bargain price from familiar grandmothers. I myself have started to conclude that perhaps it would be wise to start with a relatively safe property and compromise on rental yields.

In this podcast too, it’s said countless times how important it is to buy an apartment below market price, or else the whole equation becomes weak, and precisely for this reason, starting real estate investing feels quite uninteresting. How is it possible to compete with professional investors for properties sold below market price? The podcast suggests tips like increasing one’s visibility, networking, educating oneself, putting up flyers in stairwells, and courting familiar grandmothers, but somehow it feels like these are not shortcuts to happiness. And when the idea is to acquire, for example, five investment apartments spread out over time alongside other investment activities, one doesn’t want to start doing property scouting full-time.

What thoughts do other real estate investors have about the current market? Is there anything to buy if one is willing to compromise a bit on the required return? Are there any tips on how to look for properties below market price?

And what kind of properties did you start with, and has the solution been effective? What advice would you give to a beginner real estate investor whose idea is to invest non-professionally in a few apartments alongside stock market investments?

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Asunnon ostaminen
Inderesin kahvihuone (Osa 4)
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Of course, the titles are not exactly the same, but the discussion is so slow-paced that I probably wouldn’t open a new thread.

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I also found these, but neither deals directly with only residential property investing. And they seemed to be the only threads in the area.

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I myself have also been somewhat seriously considering buying my first investment apartment for about a year now, and at the beginning of the year, I was close to acquiring one, but then I put that plan on hold a bit because I didn’t want to make a large investment amidst the corona uncertainty, and the stock market has performed so well this summer and early autumn that my interest in this has waned for now.

My own challenge is that I’m looking for an investment apartment in the Helsinki metropolitan area, where housing prices are notoriously high, which means that the investment still requires a fairly significant initial capital (even the more affordable studio apartments often hover around €150k). However, I myself am a strong believer in the continuation of the megatrend of urbanization, so I don’t see it as sensible to buy an investment apartment for a few tens of thousands in a place where I can’t be sure that the apartment will retain its value (and likely increase it). In my opinion, the sure preservation of value is one of the cornerstones of real estate investing, and an increase in value is a significant part of the expected return.

I’ve also been somewhat frustrated listening to these “networking” / “buy before it goes on sale” tips. Anyone can make money if they have inside information and/or can acquire below the fair market price. An ordinary Joe rarely has such an opportunity. I myself have been looking at properties that come on sale publicly, and a few interesting ones have come up, and I’m semi-actively monitoring the market, but for now, the initial investment is still pending.

I don’t imagine that real estate investing would be a goldmine; rather, the goal is a secure and steady return, meaning I will certainly have to compromise on the required return. My biggest attraction is the inexpensive debt leverage, which can be used extensively in real estate investing (unlike in stocks, where it’s much more difficult and expensive). My simplified calculation is that even if the rental income is only 4-5%, if the equity is only the minimum (25%), then roughly the return on equity is four times that, or 15-20%. In my opinion, this is still a very good investment, but since the stock market has offered about 30% returns for the past couple of years, I haven’t yet been able to detach a large part of my portfolio for a real estate investment. As the amount of equity grows through amortizations, the intention would be to use the freed-up equity for the next property, so that the debt leverage would remain high and the return on equity large. The challenge here is getting the net cash flow to be positive; that is, it’s clearly positive in gross terms, but taxes typically throw it slightly into the negative (around -€500/year). With one apartment, this isn’t a problem yet, but with several, it could be.

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A good opening, in my opinion!
I have two investment properties in Jyväskylä.
The first one was bought in 2014 as my first home and then rented out about 2 years ago when I started a family and had to move to a bigger place. This spring, I bought a small studio apartment in Jyväskylä city center with someone else.
It’s really hard to find apartments below market price. Harri Huru always encourages this and tells stories about buying 100K apartments for 70K. He’s a professional, but it’s pretty much impossible to even find such a deal, let alone buy it before others.
The return on the city center studio in Jyväskylä is about 5% and the cash flow is negative.
It’s difficult to find cash flow positive properties in the city centers, but we’ve accepted this because all renovations have been done and renting is easy.
The other apartment is 3km from the city center, where the cash flow is clearly positive. Tenants can be found there too, but most applicants have lost their credit ratings.
A possible next apartment will be acquired outside the city center, because with these salaries, I can’t afford many city center apartments.
If you’re a bit of a stressor like me, I recommend a small studio in the city center, which is easier to rent out, and these are also easy to sell later on. :grin:
Sorry for the messy text :sweat_smile:

P.S. 100% debt leverage for the city center studio.

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Apparently, your own apartment or something similar is being used as additional collateral? This would indeed be an ideal situation for me too, but in the near future, I’ll be upgrading my own apartment to a larger one, so I don’t want to use it as collateral for an investment apartment when I’ll need all the available funds for a new home.

Or are there any other proven ways to reduce the amount of equity needed? At least in my inquiries, it has been 25-30% of the additional collateral required from your own funds.

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Yeah, so my own apartment as collateral. We managed to buy this terraced house from an acquaintance, apparently below market price, as the real estate agent valued the apartment almost 20K more than what we paid.
I was supposed to put 8K of my own money into a studio apartment in the city center, but the bank clerk surprisingly easily agreed to the idea that I wouldn’t need my own money after all :hushed_face: “Is that 8K absolutely necessary?”
“Well, okay. We can be flexible by that much” :rofl:
This was from Osuuspankki.
You should also ask for a loan from them, because of the bonuses.
Edit. And yes, everywhere requires that 20-30% of your own collateral.

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I was in a similar situation and asked the official if 8k made any difference in the overall picture. And when we both concluded that it didn’t, we did the calculations without my own money. I haven’t bought an investment property yet, but it’s on the trigger.

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When you calculate OPO returns to around 15-20%, how do you account for the fact that a large portion of the cash flow goes towards paying back nearly zero-interest debt, meaning the return on a new OPO investment is just above zero?

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Exactly, so if, simply put, the owner-occupied portion (OPO) is 25% at the beginning, the return is about 15-20%. At the point when the loan has been repaid so that the OPO is already 50% of the apartment’s value, the return on OPO is only 7-10%, meaning the OPO decreases continuously as the loan is repaid. In my opinion, there’s no point in a fully owner-occupied investment apartment, because then the return drops to 4-5%. My thinking is based on keeping the OPO share continuously <50%. So, at the latest, when the loan has been repaid to 50%, the released OPO would be used as collateral for the next investment apartment, so that the OPO share in the “housing portfolio” remains consistently between 25-50%, and thus the return stays between 7-20%. If there was no longer any interest in adding new apartments, the released OPO could also be used as collateral for an investment loan, for example, and the loan thus obtained could be invested in stocks, for instance.

As I mentioned above, in my opinion, the biggest attraction of real estate investing is precisely this combination of stable returns and relatively good returns achieved with leverage.

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I have two investment properties. The first is my first home, which costs a gross hundred per month, plus taxes. I acquired the second one when the coronavirus crisis began. I obtained the equity in a textbook manner by slavishly selling off my super funds, accumulated through monthly savings – at a loss, of course.

The property is far from the city center, but the absolute euro price was low. Rental yield 6%, cash flow barely positive. This property was on the market for a month, so maybe I just saw something. Or perhaps others are afraid of the remote location. To me, the property seemed incredibly good.

15% of equity was needed, even though I had 100% leverage from other properties. Perhaps Nordea looked at my total debt, which is starting to be quite massive in relation to my net income.

I am not currently considering acquiring new properties for many reasons. One is the debt burden. Another is the lack of sensible properties. A third is potential oversupply: in Tampere, there are currently 645 studios listed on etuovi.com. Of these, 540 are new developments! The prices are mainly Helsinki-like, and the properties are on leased land. I can’t make that math work meaningfully.

It’s funny, by the way, that there are only 357 studios for sale in Helsinki. Of these, 141 are not new developments.

I have been following the market for years through etuovi.com. Reasonably priced properties are very, very rare. I also don’t understand what these “buy before it goes on sale” channels are. Maybe if you are an investor with a Hurun portfolio, you are offered properties under the table. The seller’s incentive in such a case is probably ease when they don’t want to sell at market price? Cash flow positivity also seems to be mostly a myth. The calculations assume 15% equity, a 20-year loan period, and an interest rate below 1%.

Sijoitusseppo’s point about return is valid and understandable. Of course, it requires continuous portfolio growth, which is annoying :slight_smile: For me, being debt-free is at least partly a goal. In retirement or as a ‘gentleman of leisure’ (oloneuvos), rent would be “salary.” I could also have leveraged properties alongside, but these should be at least cash-flow neutral.

Half of my net worth is in real estate. Total leverage over 70%. 20% of loans are hedged for ten years with an interest rate collar.

Edit: It should also be mentioned that I believe the risks of real estate investing are generally underestimated. Interest rate risk exists, even if it is currently small. When interest rates rise, there will certainly be downward pressure on housing prices. Is there a bubble in prices? As a country bumpkin, I cannot comprehend the housing prices per square meter in the Helsinki metropolitan area. And what about investors playing with housing company loans (taloyhtiölainat) and properties full of studios if there are no tenants?

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I have an apartment in a pretty central location that is fully paid off, which I now plan to rent out. Then, I’ll use it as collateral for a loan to buy a new place to live in myself, and repeat the process one more time in the future once I’ve paid off the leverage. Two investment apartments feel like a suitable number for me. This week, I got an offer from the bank that was quite nice: 0.4% + 12-month Euribor + €2.3/month handling fee. These are pretty good times for real estate investing, at least as long as interest rates stay low, keeping the overall interest rate around zero.

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Remember that you can also deduct capital losses from stock sales from your rental income :wink: This gives you more buffer for potential capital losses from stock sales :+1:

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Does anyone have more detailed information on mortgage interest deductions and the foreign dividend thing? I recall there being something about this, i.e., if you receive enough dividends from abroad (taxed according to a tax treaty, apparently), there was some possibility that you could no longer deduct mortgage interest from your taxes. Did this only apply to first-time home buyer loans, or all loans?

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Yes, a very good point, and this is also on my list of benefits, I just forgot to mention it earlier.

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In the Helsinki metropolitan area, at least, the housing market has been red-hot in recent years, especially for desirable studios in popular postcode areas. However, some apartments are sold outside Oikotie/Etuovi before they even reach public marketing. It just takes more effort to find them. This also happened to me. I think I lost at least 3 bidding wars within a few months, and my offer was always higher than the asking price. The fourth time was a charm, and I found it through Facebook. I also actively posted “for purchase” ads on Tori and Facebook, stating that I had a loan promise in my pocket and quick deals were possible if I found something suitable. Surprisingly many inquiries came, especially through Tori, from older people who had been thinking about selling but hadn’t bothered to tell real estate agents yet. I also openly talked to acquaintances and acquaintances of acquaintances about the area I was looking for and what kind of place I wanted, and I got a few inquiries through that as well.

I finally found my dream investment apartment through Facebook when someone’s grandmother had been thinking about selling her investment studio. I went to see it immediately, checked the papers, offered what was asked, and a deal was quickly arranged. I was very skeptical of this method at first, but it worked for me. For example, on Facebook, there are several housing-related groups, some private, so that real estate agents can’t get into them. It’s worth actively searching and joining these groups. Of course, this is more laborious than finding gems already on the market.

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I found it through Facebook. Of course, it was for my own housing, but we got it for less than the market price. I posted an ad in the area’s group stating what I was looking for, and a deal was made within a couple of days.

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I have been studying the subject for several years now. I have been following the market, drafting an investment plan, and developing sub-processes so that I would be as ready as possible when the “thing starts.” The goal is to acquire my first investment property within 3 years, and the ten-year goal is 10 investment properties. Studying the topic is helped by the fact that I can spar with my mother’s investment properties. My father passed away recently. He was well-versed in the subject; my mother’s knowledge on the topic is still quite limited.

Buying requires hard work. I have thought that acquiring one apartment requires browsing about 1000 listings and a superficial review, familiarizing myself with 100 apartments and companies, making offers on 10 apartments, and then one of them might stick. The offers are meant to be made using only Excel.

Motivated sellers have been extensively covered by Mr. Huru in his blog and on YouTube.

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This is a welcome opening, even though we’re mostly on a stock-focused forum. Of course, well-known investors like the Financial Crisis guru Oksaharju, the MMT-era guru Lepikkö, and the Social Media guru Mähkä, to name a few, have also engaged in real estate investing.

The topic is so broad that even with 18 messages, we’ve managed to cover a lot of ground. Here are my own takeaways on the discussed topics:

  • Finding properties. Even though it’s considered impolite for Finns to talk about this, it’s worth it. It costs nothing but can sometimes lead to an offer you wouldn’t otherwise get. I’ve found one property this way myself. It’s also possible to find good properties in the public market, but it requires speed due to fierce competition. I personally don’t favor “prime location” properties but rather quieter, slightly more spacious properties in areas I know well, where I could imagine living myself.

  • Price paid for properties. Opportunity cost. Even if a -15% or -30% discount looks good on the calculator, finding such properties is quite challenging. One such property has come my way, and of course, it provides a big boost when 70% of the collateral value has been paid after 2 years, even though my own money was only 8%. I don’t recommend buying just anything, but rather according to one’s own strategy, remembering that every year spent searching for the perfect one incurs a cost in the form of lost returns.

  • Return on own capital (OPO). I don’t calculate it myself. I focus on how quickly I can buy the next property as collateral becomes available. In addition, the property must pay for itself. And since interest rate risk is one of the most clearly visible risks, the return on older properties must be over 6% and at least 5% for properties with company loans, so that even a larger increase in interest rates doesn’t immediately become a problem.

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It’s interesting how there can be such different perspectives on the same topic. I, for one, am puzzled by the way real estate investing, especially the acquisition of a (first) property, is often seen as such a complex and high-threshold endeavor.

My own approach is different. I currently have a couple of apartments in my portfolio and aim to add 1-2 apartments to my real estate portfolio every 1-2 years, as life circumstances permit. I can say that by far the most difficult part was just getting started. In this matter too, I believe it’s better to just take action rather than research 1000 properties, only a marginal part of which meet strict criteria. Even if an excellent property isn’t found, many good ones can be missed. While waiting, the wheel of wealth doesn’t turn.

I only invest in new construction in growth centers. New construction because they are maintenance-free. In real estate investing, new and old apartments are often considered similar assets, for which the same yield requirement is allowed. This might work in the inner city of Helsinki, but I believe that in fading provinces, many who invested in an old apartment with a low yield will be disappointed. I base this on the fact that from a tenant’s perspective, a new apartment is a definite asset compared to an old one.

The importance of micro-location is emphasized in real estate investing. One must know the target area and assess the future development of rents and other drivers there. I assess an acceptable entry yield for the property, which includes a suitable safety margin. For example, if I can buy a property in a rapidly growing growth center with a 4.5% yield, for which I anticipate a moderately rising rent development and for which I see at least a 4.0% exit scenario possible in the coming years, I will go for it.

Clear advantages of new construction properties include a moderate equity share. Good construction companies get about 70% of the company loan for their properties, meaning the equity requirement is 30%. This can be lowered if necessary with additional financing. The return on equity can usually be brought to 14-16%, and cash flow to around zero. This is because in new construction properties, the company loan is usually 25 years. For a novice investor, new construction properties have one advantage: a 2-3 year grace period from completion. Although more tax has to be paid during that period, as there is no deductible financing charge, the 2-3 years of net rental income accumulates as a down payment buffer for acquiring the next apartment. I have made my own equation work without 10%-20% discounts from builders. My goal: a 4.5% rental yield and an apartment in a rapidly growing growth center is perfectly sufficient, considering the low interest rates, the relatively stable capital security of the apartment asset, and the expected returns of alternative investment targets.

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