Hi,
Real estate is not my main focus, as I'm in IT, but last year I bought a 65 sq meter (700 sq foot) apartment in Rome, which is where I live, to rent, and I'd like to share my experience so far, both to give back a little to the forum, and because I'd be glad to receive some feedback on it.
I know this is rather specific, but it might be helpful for people buying in relatively expensive areas, as the reasoning behind the investment may be the same for other areas as well.
I'll start with the end, and then explain how I got there: the cost of the apartment was 130,000$ (it was in Euro, but I've converted all numbers in USD for ease of reading), and it's generating 10,800$ rent income yearly so far. Incredibly enough, this equals to (almost) 0 yearly cash flow. I still think this was a decent investment, but I'm curious on your thoughts about it, and whether you think it's worth repeating.
Some background
At this time, the interest rate for a fixed rate mortgage from a bank in Italy (should be similar all over Europe) is approximately 1.5 to 1.6%, all inclusive. Which in my opinion is unreasonably low and bound to change sooner or later. Banks tend to give a maximum of 80% of the value of the apartment you buy at this rate, and you need to demonstrate that the installment is less than 1/3 of your income.
Taxes in Italy average at over 43%, one of the highest in the world (see this link for a comparison with other countries in Europe: Comparison image). I know it's crazy.
Taxation on housing and rent income is relatively low: you pay a fixed 21% of your rental, and it does not add up to your personal income.
After 5 years you buy real estate, you can sell it without paying any tax on any gain you make.
All expenses and taxes are paid when you buy, and not when you sell. This includes agent fees, which average at 3 to 4%. I know this is different in most countries.
In 2008 housing in Rome reached its peak, since then it lost approximately 30% of its value. The average sqm price today is approximately 3400$ per square meter, but it may vary a lot based in the area where you buy.
The story (short version)
I wanted to invest approximately 50k $, and I thought that a good way to do so would be approaching real estate close to where I live. The main obstacle here is that the fork between rent and cost of an apartment is very low. It's considered acceptable that a house costing 100$ only generates 3$ with rent. But since I believe that real estate is one of the safest investments I looked better, and found an area where average costs where much lower than in many other parts of the city. I'd define it as a blue collar area, very safe, and very well connected by public transport: you can walk to the nearest metro station in 5 minutes, and from there it's 20 minutes to the main station (Termini) and 5 minutes more to the Colosseum.
After looking for several weeks, visiting many apartments, I found the perfect fit: it was incredibly dirty, literally stinking, and had furniture you can find in an horror B-movie.
But it also had a nice open view from the windows, was in a decent building, and had two large rooms (20 sqm), a small corridor, a kitchen and a toilet. And the price was VERY low, less than 2200$ per sqm.
What everyone should know but very few people do, is that the cost of works in a house varies very little even if they look terrible. If you redo the kitchen the cost is exactly the same whatever the initial state.
After further reducing the asked price by about 10%, I could buy it for 130,000 $.
Paying all taxes, agency, and works for the house, the final cost went up to about 150,000 $, which I prudently assume would be what I’d make if I sold it today, as the works literally transformed it into a nice place to live.
I decided to rent it by room, so I now have two tenants, paying approximately 450$ per month, plus all bills (electricity, water, gas etc). This is a bit more than what I’d get by renting the whole apartment, but probably less than I’d get with Airbnb or similar.
It’s also worth noting that since putting the announcement, each room was rented within 48 hours. This really surprised me.
Anyway, I got a mortgage, to be paid back in 20 years. The remaining 47,000 dollars, I paid cash.
Long story short: if I consider the mortgage installments, including capital an expense, the cash flow I get is approximately 0, but if I consider the capital to be a gain, I get an interesting 11% return on my 47,000 expense.
You’ll find all the numbers in the Excel file I attached.
I cannot foresee the future, but I’ve made a few assumptions, that cover a “normal case” scenario. The best case is much better, the worst case is simple: I lose everything (earthquake, the communists take the power, aliens destroy Rome…)
In the Excel file you’ll find all the numbers: taxes, mortgage etc. It may be useful for people considering investing in real estate in a similar situation. I've simplified things a little, especially on interest, but it should give a good approximation of the real thing.
I’m also very curious about what you think: does it make sense for you to consolidate your earnings? Personally, I'd do it again, as it seems relatively easy and risk free.
Thanks for your time
Ubu Roi
Real estate is not my main focus, as I'm in IT, but last year I bought a 65 sq meter (700 sq foot) apartment in Rome, which is where I live, to rent, and I'd like to share my experience so far, both to give back a little to the forum, and because I'd be glad to receive some feedback on it.
I know this is rather specific, but it might be helpful for people buying in relatively expensive areas, as the reasoning behind the investment may be the same for other areas as well.
I'll start with the end, and then explain how I got there: the cost of the apartment was 130,000$ (it was in Euro, but I've converted all numbers in USD for ease of reading), and it's generating 10,800$ rent income yearly so far. Incredibly enough, this equals to (almost) 0 yearly cash flow. I still think this was a decent investment, but I'm curious on your thoughts about it, and whether you think it's worth repeating.
Some background
At this time, the interest rate for a fixed rate mortgage from a bank in Italy (should be similar all over Europe) is approximately 1.5 to 1.6%, all inclusive. Which in my opinion is unreasonably low and bound to change sooner or later. Banks tend to give a maximum of 80% of the value of the apartment you buy at this rate, and you need to demonstrate that the installment is less than 1/3 of your income.
Taxes in Italy average at over 43%, one of the highest in the world (see this link for a comparison with other countries in Europe: Comparison image). I know it's crazy.
Taxation on housing and rent income is relatively low: you pay a fixed 21% of your rental, and it does not add up to your personal income.
After 5 years you buy real estate, you can sell it without paying any tax on any gain you make.
All expenses and taxes are paid when you buy, and not when you sell. This includes agent fees, which average at 3 to 4%. I know this is different in most countries.
In 2008 housing in Rome reached its peak, since then it lost approximately 30% of its value. The average sqm price today is approximately 3400$ per square meter, but it may vary a lot based in the area where you buy.
The story (short version)
I wanted to invest approximately 50k $, and I thought that a good way to do so would be approaching real estate close to where I live. The main obstacle here is that the fork between rent and cost of an apartment is very low. It's considered acceptable that a house costing 100$ only generates 3$ with rent. But since I believe that real estate is one of the safest investments I looked better, and found an area where average costs where much lower than in many other parts of the city. I'd define it as a blue collar area, very safe, and very well connected by public transport: you can walk to the nearest metro station in 5 minutes, and from there it's 20 minutes to the main station (Termini) and 5 minutes more to the Colosseum.
After looking for several weeks, visiting many apartments, I found the perfect fit: it was incredibly dirty, literally stinking, and had furniture you can find in an horror B-movie.
But it also had a nice open view from the windows, was in a decent building, and had two large rooms (20 sqm), a small corridor, a kitchen and a toilet. And the price was VERY low, less than 2200$ per sqm.
What everyone should know but very few people do, is that the cost of works in a house varies very little even if they look terrible. If you redo the kitchen the cost is exactly the same whatever the initial state.
After further reducing the asked price by about 10%, I could buy it for 130,000 $.
Paying all taxes, agency, and works for the house, the final cost went up to about 150,000 $, which I prudently assume would be what I’d make if I sold it today, as the works literally transformed it into a nice place to live.
I decided to rent it by room, so I now have two tenants, paying approximately 450$ per month, plus all bills (electricity, water, gas etc). This is a bit more than what I’d get by renting the whole apartment, but probably less than I’d get with Airbnb or similar.
It’s also worth noting that since putting the announcement, each room was rented within 48 hours. This really surprised me.
Anyway, I got a mortgage, to be paid back in 20 years. The remaining 47,000 dollars, I paid cash.
Long story short: if I consider the mortgage installments, including capital an expense, the cash flow I get is approximately 0, but if I consider the capital to be a gain, I get an interesting 11% return on my 47,000 expense.
You’ll find all the numbers in the Excel file I attached.
I cannot foresee the future, but I’ve made a few assumptions, that cover a “normal case” scenario. The best case is much better, the worst case is simple: I lose everything (earthquake, the communists take the power, aliens destroy Rome…)
- The value of the apartment will not change in the next years, but it will cover inflation.
- The apartment will be empty approximately 1 month per year
- The rent will stay the same, covering inflation
- As everything important is brand new, there won’t be huge expenses to make for repairs.
In the Excel file you’ll find all the numbers: taxes, mortgage etc. It may be useful for people considering investing in real estate in a similar situation. I've simplified things a little, especially on interest, but it should give a good approximation of the real thing.
I’m also very curious about what you think: does it make sense for you to consolidate your earnings? Personally, I'd do it again, as it seems relatively easy and risk free.
Thanks for your time
Ubu Roi
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