Simple rental business — buying property and renting it - is a great option for non-professional investors, who expect to receive a passive income with minimal participation. Development projects, of course, often bring more profit, however, they require from the investor the certain qualification and much bigger involvement.
Income property will keep the capital from political, currency and economic risks. She will become your personal pension fund or provide financial future of the heirs. And the opportunity to obtain a residence permit in Europe is a very nice bonus.
In this article we'll talk about common mistakes of investors.
1. Sale of non-liquid object
Liquid high-quality property is rising in price faster. The annual yield will be less, but you will earn well at resale after 10-15 years, when the capitalization of the object will increase.
Buying of European real estate with the purpose of investing makes sense with a budget of €200,000 and more. Since 50-60% of the cost can be covered through a mortgage loans, you can start to invest with €100,000. For less price is extremely difficult to find the liquid option. With a budget of €2,5 million it is possible to buy retail premises or other commercial facilities.
Invest in countries with developed economy and stable political situation. Choose big cities or their suburbs. Housing near major educational institutions, medical institutions, business centers can be resold much better. For commercial property it is important the presence of bus stops and transport hubs nearby.
2. The pursuit of high yield profitability
Low risks and high profitability in the real estate sector are generally incompatible. A high initial yield carries high risks. The object may simply fall in price, and you'll be left with nothing.
You can sometimes see offers with "guaranteed" returns of 8-10% or even higher. There are several reasons. First, the seller may remain silent in the announcement of the insurance, operating fees (the payment of which, of course, according to the contract with the management company will be charged from the owner).
Sometimes the warranty on the yield is given only for a certain period of time, and management company has the right to redeem the object at expiration. This means that while "favorable" outcome (when the property has in good demand), the management company will redeem it, and the investor will not be able to realize the potential of the object.
There is another scheme of "guaranteed" high returns in a short period of time (e.g., 5 years): the new object is sold to the investor for much more higher price than its real market value. Management company really pays the interest properly. However, after this period she refuses to manage your property and real market conditions are 1.5-2 times worse.
3. The lack of reliable tenants
If you are the owner of profitable residential real estate, choose as tenants a solvent middle class. Choosing a commercial property, make sure that it already has a reliable tenant with whom was signed a long term contract for a period of 10 years. The best way is to rent your premises to banks, large retail chains.
The easiest way is to deal with one tenant. When there are too much tenants, management risks become higher.
Don't be afraid of contracts with long expiry time. They safe you from unfavorable price adjustments. In addition, you will be able to index fares to the rate of inflation, that is, to increase the rent by 1-2% per year.
4. Refinancing/insufficient lending of object
The yield can be increased by the credit attraction. Mortgage funds in Europe are cheaper than money paid by the tenant. For example, in Germany a foreigner can get a loan of up to 60% at a rate of 2-3%. If the net return is 6.5%, with the mortgage account it could rise up to 8-10%.
The basic principle is not to borrow more than you need, but do not borrow too little, if it is possible to get cheaper money than the money paid by the tenant.
The cheapest mortgage loans have floating rate without the ability to repay the mortgage before the end of the loan period. The mortgage has a fixed rate and the option of early repayment will cost you more. In some banks first you return to the Bank only the interest; the body of the loan shall be paid at the final crediting period.
5. Bad time for exit from the project
Liquid objects with a medium yield are better to be reselled in 10-20 years. But even if you have to sell it before the deadline, he will lose in the price less than a risky property with a higher yield.
In the case when the investor initially plans to resale the object in 1-3 years, you should choose high-yield property, but only in those regions that are characterized by growth potential.
If you plan to leave profitable object to the heirs - study tax law, as each country has its own nuances in this point.
Text – Alena Eliseeva, ee24
Photocredit Depositphotos.com