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Buy-to-Let Real Estate Investing, Set In Stone (I)?

Most people choosing for a secure and well-paid corporate career will encounter this problem after a few years into their working lives: where do you put your money? After your first two years, you realize that even going out to expensive clubs every weekend is not enough to burn through your monthly cash injection, and hence you will ask yourself the question: should I start investing?

Yes, this is a luxury problem, but that does not make it less worth to address it. For those with large (low-interest) student debts: paying it off might feel good, but it’s not likely to be the most efficient use of capital, especially not if you happen to live in a Western European country where you have a nice little tax shield on it. In this article, I will explore a form of investment that more and more young savers seem to adhere: investing in real estate.

Why look at real estate? Some immediate low-hanging fruit: it does not necessarily cost as much time as actively investing in stocks, it is cheaper than passively investing in stocks (fund management fees) and provides a more certain return than putting money in start-ups, provided you don’t regard learning and experience as a secondary type of return. To be more precise: if you want to be in control of your asset yourself but do not want to spend too much time on it, and if you are looking at a not-too-near investment horizon, buy-to-let is worth considering. In this series of articles, I will lay out a framework on how to approach the investment process, from scanning to execution to organisation.

As with all investments where you will go long, it all starts with a proper scanning exercise, which typically is a top down approach. First question to ask: where on earth do you want to be? Sure, you could have a view that land prospectively destined for beach resorts in Hispaniola (Carribean) or Northern Cyprus would will inevitably become worth more, but I in fact I like to structure my real estate investment as a de-levered macro play. This means I want to benefit from increases in value, but at the same time get rental payouts. This means I need to look for places where buy-to-let is realistically possible, and where the rental yield (rent / purchase price) is as high as possible.

This normally leaves the larger cities in more or less stable economies. Realistically, a hurdle rental yield in stable economies will be 5%.

real estate map 1This brings me to the second point: economic stability vs. geographical edge (knowledge) vs. funding currency. Indeed, in the map in here you can see that geographies such as Brazil, Sri Lanka, South Africa, the Middle East and Central Asia have attractive yields, but when not living in these locations, not knowing the local real estate market, economy and political factors in general, I would not invest without help. What is striking is is the yields obtainable in North-America: Las Vegas records almost 15% yield, Fort Lauderdale almost 18%(!). What needs to be considered though is that most of the residential real estate in these places is owned by institutional investment parties, mortgaging in USD as a European will be close to impossible, I have no clue what will happen with local real estate prices and more importantly: how to manage the property. So let’s look a bit closer at home: Europe. It’s true: in the wake of the financial crisis prices in Spain and Italy and especially Greece have fallen spectacularly and private equity investors have buying up whole streets in prime locations, but yields are still not spectacular. In fact, prices in for example Barcelona are rising quickly on the back of the government granting residency permits (here) for anyone buying a house >EUR 500k, bringing in tonnes of Chinese and Russian buyers. real estate map 2Apart from that, getting a mortgage will be more difficult in these finance constrained economies. In fact, North-Western Europe looks not that unattractive, is stable and I will be able to execute my investment here much better.

Germany? EveLikely to be in a real estate boom, even the once so affordable Berlin (here) which is arguably also comes with its own issues regarding tenant protection schemes, and so could be London. Especially in the latter, prime real estate was used as safe haven with interest rates at practically zero. During the economic recovery, capital could leave the market, making prices drop dramatically. Anyway, with this information and hopefully some local knowledge, feel free to pick your European favorite city, and let’s take a look at a more local level next week.


Image source: Flickr

Jorrit Koop

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