Skip to main content

What are the sources of returns in real estate investing?

Real estate investments in Ireland need significant capital. In general you can get a loan with a 20% down payment (or 10% in certain cases) when buying a property for yourself to live in. Investment property loans (Buy To Let) start with 30% down payments. It’s a big deal! Before you invest, you should check if it’s worth it. You will be locking down a lot of your capital. You could invest it in other ways, for example in a different real estate deal, equities and so on.

Let’s start with considering how you make money via real estate investment. I see three primary ways:
  • Income: cashflow + mortgage paydown
  • Appreciation (natural and forced)
  • Inflation reducing the value of outstanding debt

Income: cashflow + mortgage paydown

The first one is pretty obvious! If you rent the property it should bring you some income. I divide the income into two parts, cashflow and mortgage paydown. Monthly cashflow is the money you are left with after all the other expenses, taxes and mortgage are paid for a given month. It can be negative if your expenses or taxes are high! Mortgage paydown is the non-interest part of the mortgage. It is how much your outstanding balance on the mortgage is reduced by. During the first years of the mortgage you might be paying more in interest than paying down. You can learn more about it in the article about the mortgage amortization.

Appreciation (natural and forced)

Appreciation means increasing in value. People often expect that the value of real estate should be going up with time. It's hard to predict how much, but in general it should keep the pace with the inflation. This is what I call the natural appreciation. Is this a reasonable expectation? Well, it depends! You might be investing in an area that is stagnant or is losing population - this won’t help. You also need to remember that the building will also be getting older and the things will break down. We call it depreciation. Sadly you can’t use depreciation for tax deduction in Ireland.

Forced appreciation is when you add value through a smart project. E.g. you buy the scary looking place and you make it shiny again raising its valuation. As long as you don't underestimate repair costs, you can make a good profit. Popular methods using this technique are Flipping and BRRRR investing.

Appreciation matters in two cases. When you sell or when you are taking the money out of your investment (e.g. by refinancing the mortgage). You need to remember though, that when you sell you might have to pay sizable capital gains taxes.

Inflation reducing the value of outstanding debt while the asset is appreciating

I don’t hear many people talking about it, but getting debt might be quite advantageous due to inflation. This happen when the amount of debt doesn’t keep pace with the property appreciation. How does that work?

Imagine you have 3 properties. Each with 30% down. Let’s imagine that you buy each for 100k. So (simplifying a little) you paid 30k for each and got 70k loans. Let’s imagine that you have an interest only mortgage and let’s ignore the cashflow for now (or assume that it is zero). Interest only mortgage means that you never pay it down, you just keep the amount of debt at the same level. So 25 years later you still have 70k * 3 euros of debt. But the value of assets you control has appreciated! Let’s assume a rate of 4% a year. 100k after 25 years of 4% appreciation will give you about 266k! Now you can sell one of the properties and pay your outstanding debts. This will mean that now after selling one of the properties, can pay off all the mortgages. But, you will be left with two properties free and clear! Or you can sell everything and cash in ~800k, pay your outstanding debt of 210k and be left with ~590k euro. That’s not bad for investing 90! And that doesn’t include money acquired (or lost) through cashflows and paid down equity.

I don't recommend that you take the interest only mortgage, the same principle works for normal mortgages. Interest only mortgage is just used as a simplified example.

Next steps

Knowing those sources of returns you can continue analyzing your deal! I'm planning on writing a series of articles about deal analysis. If you have some specific questions, share them in the comments.

Comments

  1. Essential post which you have shared here about business properties. It's valuable for the individuals who are searching for such a notification post. Keep posting. Favor your heart. Investment Property Loans Australia

    ReplyDelete
  2. It is truly a well-researched content and excellent wording. I got so engaged in this material that I couldn’t wait to read. I am impressed with your work and skill. Thanks. square one auto

    ReplyDelete
  3. I Appreciate this it was a nice article Long Term Investment Option in Nigeria. it was a helpful article for all.

    ReplyDelete
  4. I would like to thank you for posting such informative post about loan. I really got some great knowledge from this post.New Vehicle Loan Winnipeg Keep it up.

    ReplyDelete
  5. I will share it with my other friends as the information is really very useful. Keep sharing your excellent work.Campbell River real estate

    ReplyDelete
  6. You have done a good job with your knowledge that makes our work easy because you are providing such good information. Keep sharing this kind of knowledge with us.
    homes for sale in the Bronx NY

    ReplyDelete

Post a Comment

Popular posts from this blog

DIY index like portfolio, stock investment alternative to index ETFs that is better tax-wise

There is no doubt that stocks can be a great investment. Compared to other asset classes they are pretty easy to acquire, there is no need for tens of thousands of euros for a downpayment, they don't require debt and are very passive. They give us an opportunity to be invested in businesses without having to create those businesses. Last ten years were great for the stock market, even the coronavirus crisis didn’t depress the market for long. This doesn’t mean that the great returns will continue forever, but still the long term outlook for the overall market is great (long term stocks tend to go up as economies grow) especially if we look globally. The problem is that while picking the individual stocks, you might not be able to capture the overall market trend. You might pick the stocks wrong and the price might drop and never recover, or the company simply gets bankrupt. You might pick up a great company, buy it cheap (below intrinsic value), but still not earn money on it for m

Accelerate your financial independence with renting a room in Ireland

Buying is cheaper than renting Rents in Dublin are quite expensive, especially in South Dublin and close to the city center and they keep increasing. There is a significant difference between what the rents were in 2015 and are now even with the rent control. Renting isn't necessarily bad - it has its advantages, e.g. you don't have to worry about the surprise repair costs, you can move easily. But financially in Ireland it's not the best bet. Compared to rents, the house prices are not that high. In 2018 my partner and I decided to buy an apartment in Dublin. We bought a two bedroom apartment close to Grand Canal Dock area. Apartments like that would rent for something like 2000 per month (in a range 1800-2200). We paid 385000 for the apartment, which is quite a lot.  But when you take a look at the mortgage - it actually can be quite cheaper than rent. 30 year mortgage would cost us ~1460 Euro a month which is more than 500 Euro cheaper than rent. There are additional cos

What is net worth and how to track it?

I started tracking my net worth at the end of 2018 and since then I updated it about 28 times. It has been very useful to me and in this post I would like to encourage to start doing it too. What is net worth? Net worth can be defined as your assets minus liabilities. Here are some examples of assets: cash stocks house expensive items, e.g. a car, a horse, a boat debts other people have to you And now some examples of liabilities: car loan student debt mortgage Net worth shows your overall financial picture and the changes in the net worth show you if you are on the right track. For example you could see that you accumulating wealth or getting deeper in debt. Why track it? If you start measuring something regularly, you will  instinctively try to make that number go up. You might end up thinking twice before blowing money on an impulsive purchase or tweaking your budgets so you can save and invest more. And since to track your net worth you need to log into all of your