Well, it sounds good regarding cash flow, as long as interest rates don’t rise and the apartment doesn’t have empty months. Not to mention the bathroom renovation you mentioned.
A quick calculation shows that a 1% rise in interest rates will tip the cash flow into negative, as will one empty month per year for the apartment. The bathroom renovation alone will then consume 2-3 years of cash flow, if interest rates remain at their current level. A balcony renovation is unlikely to break the equation, but even that will require a few months of payment out of your own pocket.
Nevertheless, good luck with your purchase; let’s hope for low interest rates and high returns!
Yep. Now it’s evening, and the caffeine doesn’t affect anymore. And as someone who doesn’t own an investment property, I can’t be bothered to delve into the terms used in the discussions right now. But I generally got the gist of it. Congratulations on the purchase.
I haven’t personally been able to find properties that are computationally cash-flow positive. When I look at apartments, there’s a problem that if the property is cheaper, it has a lower rental yield history. Or, then the property is due for major renovations.
To a new topic: What’s it like to invest in rental properties when the investment property is far from your own place of residence? The thought of having to go meet tenant candidates five hundred kilometers away terrifies me. Or do people make rental agreements blindly without seeing the tenants? I wouldn’t really be keen on that idea either.
I would at least use a rental agent in that situation. And of course, the management of the tenant relationship can also be outsourced, but that eats into the profit:
It’s often the case that acquiring the first property is the most challenging, and one overthinks things as if buying a spaceship. And the world won’t end with one pipe renovation; ultimately, it’s just one renovation among others, once you get “started.”
Perhaps it’s worth looking at the best housing company in the center of a municipality near a growth center. Most likely, people will live there for a long time, and the cash flow will be positive with 70 percent debt leverage. In long-term renting, if you set the rent for a well-maintained apartment slightly below what others ask, the turnover is likely once every three years.
For now, I’m just working on a study to find a cash-flow neutral or positive property. This whole endeavor is heading into the ‘buying space construction’ sector
So I’m not currently buying an apartment where rents wouldn’t cover all expenses, and this makes looking at investment properties a whole new ballgame, compared to just buying a property next door that’s waiting for a pipe renovation and +40,000 euros in additional costs, where the rent covers 70% of the expenses.
I researched those Asuntopehtoorit and sijoitusasunnot.com websites quite thoroughly, but nothing stuck. Well, I don’t want to call them scammers, but let’s just say the feeling is the same as on the website of that company that sells electric bikes “in factory mode”.
Boys (and girls), making money isn’t easy. If I can’t google my way to some shortcut to a cash-flow suitable area in Rovaniemi, Oulu, Jyväskylä, or some other distant place, where I can scout for a property and then fly there or use some gadget to go back and forth to finalize deals, acquire tenants, and handle evictions, then I guess there’s nothing else for me to do but invest in funds, and that’s that. Good night.
I did consider interest rate hedges for this investment property loan, but I concluded that the case can well withstand rising interest rates. I don’t know how you arrived at the calculation that a 1 percentage point increase in interest rates would turn the cash flow negative, but according to my own calculation, only a total interest rate around 6% would turn the cash flow negative. I can’t get a clear/presentable screenshot from my own Excel sheets, but I peer-reviewed my own calculation formulas with sijoitusasunnot.com’s calculator, which provides a fairly clear interest rate sensitivity calculation:
One empty month also doesn’t break the equation yet; in that case, the annual rental yield would drop to around 6.5%, and the full year’s cash flow would go from approximately 1380€ to 810€. Only a third empty month would turn the year’s cash flow negative.
When buying the apartment, I naturally also took into account renovations and other costs that would clearly materialize in the near future; most of the candidate apartments were ultimately rejected because of these. I even went so far in my Excel tinkering as to discount the costs of renovations I predicted for the next 10 years to their present value. However, I eventually concluded that such a level of tinkering isn’t very sensible, as renovation costs increase at least by inflation, and cost estimates are at best accurate to an order of magnitude… In any case, with prices for apartments less than 10 years old (i.e., renovation-free) being too high and rental yields relatively modest, one must focus on older buildings and accept a suitable number of future renovations.
In the case of a bathroom renovation, however, I don’t calculate the costs through rental yield/cash flow, but rather through the capital invested in the apartment on the other side of the equation. I mean that if a 10k€ bathroom renovation is carried out, the equity invested in the apartment increases (3,200€ → 13,200€), as does the value of the apartment (64,000€ → 74,000€). After this, the return on equity would then be “only” 3145€ / 13,200€ = 23.8% (if the rent is not increased). Of course, one empty month or a rent reduction would come on top of that as a separate cost.
On the Border of Good Taste
One could take self-deception even further and convince oneself that they bought a 74,000€ apartment right from the start, of which 10,000€ would only be payable later! On the other hand, the apartment’s value when sold or as collateral would only be 64,000€ until that additional 10,000€ is paid, and a 1:1 appreciation is not at all certain. But this would already be a blatant violation of my own mental accounting standards, don’t take it seriously
I’ve rented quite a bit completely remotely. First, a short phone call with the tenant candidate. After that, the showing is outsourced to the old tenant, and they’ve been able to arrange the showing time among themselves. Contracts are signed with an electronic signature. The old tenant delivers the keys to R-kioski’s key service, and I forward the pickup code to the new tenant. The new tenant handles the move-in inspection with the idea of sending pictures of all defects so that the new tenant cannot be blamed for them.
It’s gone really smoothly. Perhaps the most important factor here has been that when the apartment is in good condition and the rent is competitive, you don’t have to compromise on tenants. In my hometown, I’ve still handled rentals in the traditional face-to-face style, but I’m considering starting to rent completely remotely here too, even though the distances to the apartments aren’t long.
With remote rentals, tenants have changed directly on the fly, but if and when empty months occur, then I’ll probably have to bother with showings myself. So far, rentals have gone so smoothly with a couple of hours of work that I would consider any administration service/rental agent a rip-off.
These days, quite a few apartments are for sale with a tenant already in place. Quite often, these cases are more or less related to forced sale situations, when apartments bought during the boom need to be disposed of in some way.
Terminating a tenancy is a long process, and marketing the apartment can also take a long time, during which costs accrue after the evicted tenant has left but no income is generated. In such cases, it is better to try to sell the apartment already rented out.
Dozens of such pre-rented, somewhat atypical investment apartments can currently be found on Vendo’s lists in Helsinki:
These apartments sold with tenants already in place are very likely properties of Fincap Asunnot Oy. I wrote about this case a while ago in this thread:
Currently, for example, there is a pre-rented two-room apartment from Tuusula on the lists with a 4.4% net rental yield and negative cash flow, even if the 67 k€ portion of the sales price is financed with cash and the housing company loan on top:
I guess some real estate investor from this forum will grab this gem for their portfolio.
I have done exactly the same, and it has worked well. In some cases, I have also done a lighter version of this, where I have handled everything else remotely, but I have personally gone to do inspections and small maintenance checks between tenants. Sometimes a family member has handled this.
Like @Beconi, I have thought that when the apartment is high-quality and you can get reliable and tidy tenants, this model works. If I were renting out an apartment where small maintenance needs would become chronic and I wouldn’t have a very high level of trust in the tenants, I would consider on-site visits much more important.
Additionally, I usually tell the tenant at the beginning of the tenancy that I am happy to write a landlord’s recommendation for a good tenancy, with possible future tenancies in mind. When reminded of this a week before moving out, the motivation for cleaning might be a degree better than it would be in a normal situation, and everyone wins.
Nowadays, when electronic signature services are available for small-scale use for free, and other rental services are easy and cheap (often even free), you can certainly earn a good hourly wage compared to using an agent.
I’m not entirely sure what you mean, but in addition to the apartment itself, financing significantly affects cash flow. If you take a long loan period with low leverage, then cash-flow positive apartments can be found quite easily almost anywhere. But as I’ve mentioned about ten times here before, cash flow tells you almost nothing about the apartment’s returns.
Hi. Where exactly would these locations be? From what I’ve researched, I haven’t found any cash-flow positive properties with a 25-year loan, or there’s been a pipe renovation coming up.
Approximately 7.4% is the rental yield on the debt-free price that is needed so that with a 25-year loan term and a 3% interest rate, one can buy with 100% leverage and be cash flow neutral. A rough calculation. Such apartments exist, but they might have other risks (related to location, condition, etc.).
From there, for example, from a reasonable location in Jyväskylä.
Roughly, the rent would be 500e/month; if you take a loan of 65,000 with a 25-year loan period, the monthly installment is about 300, of which 150 is interest.
Rental yield 500-150-98= 248e, after tax 178e. After loan amortization, cash flow is about 20 euros.
Of course, there might still be a sewer relining coming up.
My spouse and I bought a relatively new studio apartment in Vantaa a couple of years ago. At that time, the 12-month Euribor was roughly at its peak. LTV 90%, 25 years. The purchase price was, even in retrospect, relatively low. The seller was in a hurry to get rid of the apartment. We searched for over a year for a suitable property at a suitable price, meaning finding the property required effort. The housing company had a low maintenance fee level, and the rent level was at market rate.
The apartment is almost cash-flow neutral with current specifications. With a high LTV, it is indeed difficult to find a cash-flow positive property in the capital region. It might be possible with a 70s property, as they can sometimes be acquired at a relatively high yield level.
If you calculate with, for example, 70% financing, a 3% interest rate, and a 25-year loan term, according to Nordea’s calculator, a 4% rental yield is sufficient for cash flow positivity. Specifically, such properties can be found even in growth centers, but at least in the top 10 largest cities. It’s another matter whether an investor considers a 4% rental yield sufficient; I personally do not.
According to the loan calculator, with a pessimistic-realistic average interest rate of 4.4% and a 25-year loan period, the monthly installment for 65,000 euros is: 357 euros.
Plumbing renovation done in 2017. No major renovations (roof, balcony, elevator, facade, etc.) currently in sight.
The maintenance fee is 97 euros.
The plot is owned. This is good.
Downsides: 1st floor (people can see inside), no balcony, surface renovation will cost a couple of thousand.
Costs 357 + 97 = 454
Income 500 → taxes on profit (500-454 = 46) 30% → profit after taxes remains 32 euros.
→ Cash flow positive after taxes by 32 euros.
So, cash flow positive properties can be found Here, the lack of a balcony is probably a decisive factor that lowers the price, but at the same time, there is willingness to rent, perhaps due to the nearby Jamk institution?
