Investment in rental properties

Investment in rental properties

Dec 2, 2021, 12:56:55 PM Business

It is difficult to get a return on your money in these times when the deposit rate is negative and where the stock market fluctuates up and down.

It is, therefore, no wonder that investors are looking for alternative investment opportunities, and there are several offers on the market such as forest investment, wind and solar energy, and of course, traditional property development projects, where you typically acquire a stake in a newly built property complex with rental housing. and/or profession.

These projects often advertise a return on invested capital of 7-9%, which is well above what can be achieved otherwise.

However, it must be borne in mind that the total return largely depends on the value development of the asset in which you invest, and here it is obvious that the more exotic investment offers also contain the greatest risk.

The Purpose of this Article is therefore To Dive A Little Deeper Into the Method of Real Estate investing.

A rental property is typically financed through 3 elements: a deductible, a bank loan, and a credit union loan. In the case of a residential rental property, the starting point will be that 80% credit union mortgages can be obtained, while commercial properties can only be mortgaged with 60%. On the other hand, the return/return percentage will typically be higher for commercial properties than for residential properties (here the return percentage is calculated on the basis of the total annual net return set in relation to the total purchase price).

When assessing the potential of a property development project, it must therefore be taken into account that you typically have access to 80% of the purchase price at a very cheap price (currently at level 0 -2% incl. Contribution).

If, for example, you are thinking of a property that is bought for DKK 10 million. and has a business percentage of 5, and the purchase is financed with DKK 2 million. deductible and DKK 8 million. credit union loans, the calculation will look like this:

Net yield p .: 500,000

Credit union loans (1.5% p.a.): 120,000

Return on invested capital: 380,000 / 2,000,000 = 19%!

It Is Therefore In This Context that one must see the Property Development projects' 7-9%:

It must be admitted that properties with good locations in the university towns can not necessarily be acquired at a return of 5%, just as it undeniably takes a lot of time to maintain and re-let a rental property, but regardless of this, it must be obvious to anyone to sell / The property developer pays very well for his work - both in connection with the actual sale of ownership shares and in the subsequent administration.

This is not to say that this is a bad investment, because as mentioned at the outset, it can be significantly better than the alternatives on many levels, and it must be admitted that many investors do not want to manage a rental property themselves and therefore would not consider this as a relevant investment if there was no "package deal".

The calculation example, however, provides food for thought, because it is absolutely possible to pay off from the administration part itself and thus achieve a significantly higher return if you "buy the property directly". In addition, local real estate investments will be able to generate a somewhat higher rate of return than the 5% of the example.

It is also possible that several investors merge into one investment company - still with the premise of "saving the property developer away". However, this requires that time be spent before agreeing on rules of the game (ownership agreement), starting a company, etc., but there will basically still be plenty of money to save - in addition to the joy of investing with people you know.

Property types - pros and cons:

A distinction is made between definite residential properties, commercial properties, office properties, and industrial properties, each with its own advantages and disadvantages.

Residential properties are usually traded at the lowest return, as the risk of vacancy here is estimated to be very small. On the other hand, it is not possible to depreciate on a residential property, just as the development in rental income is usually quite moderate.

Commercial properties with shops as tenants have the advantage that a price indexation of the rent will often be agreed, just as there is a right of depreciation and the possibility of VAT registration, so that VAT can be deducted from building maintenance, etc. On the other hand, all types of commercial leases are to some extent cyclically sensitive, as “bad times” can lead to store deaths with consequent vacancy.

It is not possible to depreciate office properties, but otherwise, these are assessed in many ways as other commercial properties. Here, too, there will traditionally be a moderate cyclical sensitivity.

Published by Jhon Bell

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