Perhaps I’m wrong, but most bloggers are probably more organized than I am. I don’t hold a buffer of posts that I can use when I lack inspiration. This often leads to last minute writing (with associated typo’s and spelling errors, sorry!). So, without pre-planning this week, it will hereby turn into “Real Estate Investing Week” at Cheesy Finance. What’s up with the click-bait title, I can hear you ask? Well, it might actually become a reality in the (distant) future. How do we think we can get to €100.000 Rental Income? Let’s review!
As you might be aware, we currently have 5 rental properties and a house of our own. The market segment we prefer includes properties around the social housing norm (defined as a €710/month limit; rents below this limit are determined by a point system here in the Netherlands). The main reason is the relatively large market available, e.g. there are many people that could afford these properties. This makes it easier to rent out these properties and keep vacancy rates low. So far, this has worded out well. The downside is that the tenant turnover is a bit higher. It’s a trade-off we are willing to accept.
We also have one commercial unit, which holds a artisan workshop. This is not our preferred market, but this opportunity presented itself and we took advantage of it. In the future this unit will be rebuild into a residential unit, which will allow a higher monthly rent and a better return on investment.
The Near Future
It probably is not a surprise to you that we are actively looking to expand our Real Estate holdings. We are currently investigating financing options and properties to see if we can expand our rental income. One option we are actively reviewing is a portfolio of 5 units. The yield is pretty good, but there are some other risks associated with this opportunity. This includes limited increase/stagnant rental income and requirements for urgent maintenance/upgrades of bathrooms/kitchens. But if the purchase price is right, this might not be a major concern. Only time will tell if this will become the right investment for us.
€100.000 Rental Income
Now, how do we get from where we are now (~€36.000/year RE income) to €100.000 rental income? Well, it’s something like: “go big or go home” 😉
Firstly we have to do two things with the existing Real Estate: convert the commercial unit and split of our existing house. The idea is to upgrade the workshop to a residential unit, this will probably costs us as much as €75.000 (could be €100.000, subject to work required). We also want to split our current home into two rental units. The costs for this are estimated at €50.000 (new kitchen, heating system, bathroom and partitions + municipal fees and any required works). This would add two rental units to the portfolio and increase income for one. Not unimportantly, we also will need to move 🙂
Secondly, the purchase of the portfolio of 5 units needs to be successful. We have no guarantees at this stage but will keep you updated on developments. Depending on how things go, the direct out of pocket costs for this Real Estate portfolio are about €100.000-125.000. This would mean we have to sell our Dutch dividend shares, sell our ETF portfolio and use most of our cash reserve.
Property Value and Financing
Based on our estimate of the value of all properties combined, we would be in the 7-figure territory. That is a lot of money! See below for a summary of what we believe (and know) the properties should be worth (market value):
Looking at this, we are going to need a lot of financing! This will also cause us to be quite leveraged with this Real Estate investment. Partially this scares the crap out of me! But when looking at the numbers (positive cash flow) and our experience from the last few years, it certainly is possible. A (conservative) estimate of the total financing we need (via investment mortgages and perhaps even personal loans) is shown below:
Right now, our own investment would be about €390.500. This is assuming that everything happens “tomorrow”. This is not the case, as this will take us several years to realize. Realistically, about 4-5 years at a minimum! During that time, principle payments would have increased our “investment value” at bit.
Using the existing rental income, and the estimated rental income of the renovated/upgrades units, we estimate the following:
This should be a realistic estimate, but could vary slightly depending on market conditions. If the economy does well, this should be very much doable. If we get another crisis/recession (and we will), we might temporarily get a bit less.
As noted above, assuming all this happens “tomorrow”, the expenses would look like this (rough estimate):
The expenses includes interest costs, property management, building management, insurance, maintenance reservations and property taxes.
Obviously we won’t be able to make this happen “tomorrow” as we simply don’t have that much money nor the ability to get all financing at once. This is therefore a conservative approximation, as over the coming years we pay down principle and the effective interest expense will go down.
Because all these investments will be considered wealth, the investments will be taxed in “Box 3“. In this case the tax burden (assuming the investment is done “tomorrow”) will be €1.704. The calculation is as follows:
- Total assets are €1.070.000 (estimated market value)
- Total assets corrected for being in “rented state”: €909.500*
- Combined debts are €679.500
- Net Wealth for taxes: €230.000
- First €50.000 of wealth is not taxed (for a couple like us)
- Next €150.000 is effectively taxed at 0.86%
- The final €30.000 is effectively taxed at 1.38%
- Leading to a total tax burden of about €1.704
*: note that we currently don’t know what the property municipal assessments (WOZ) would look like for this portfolio. This assessment is critical as it determines the value you have to add for your personal taxes. In rented state you have to use between 45% and 85% of the assessed value of the property. This percentage depends on the “yearly rental income” over “WOZ value” ratio (see here, Dutch only). We assume 85% for our scenario. This translates into the fact that the “total assets in rented state” is likely an over estimate. This as we used the market value at 85% and not the WOZ value, which generally is (much) lower.
Interesting note, if all mortgages and loans are paid in full. The total tax burden on €909.500 would be €11.082 per year (for the 2017 tax year). This is an effective tax rate of 1.22%
So what are we left with at the end of the day? Based on the above we have the following:
- Income €100.320
- Expenses €67.448
- Net income before personal taxes €32.872
- Personal taxes €1704
- Net income after personal taxes €31.168
Now that is more then enough to become FI for us! It would even give us about €6K more in travel allowances per year, yay 🙂
Note that taxes in this case are only just 5.2% per year! This will obviously rapidly climb as the properties are being paid off and your wealth is increasing. For example, as noted above, the taxes are €11.082 if you have no mortgages/loans. In this case the expenses would drop about €17.000 (2.5% interest on €679.500). Your net income before personal taxes would increase from €32.872 to about €50.000. In this case the tax burden would become about 22%. In that case you are left with about €38.900, that is more than enough for FI in the Netherlands!
How about you, are you interested in real estate investing? What do you like about it? What are you afraid of?