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I currently own the following apartment:

Cost when I bought it:     40K
Mortgage left:             30K
Annual Interest:           2% (fixed)
Current estimated value:   45K (I believe I can sell it pretty quick for this price)

I can rent it out for 6K annually. Out of this I have to pay an annual fee of 2,4k for building maintenance and about 0,6k interest (I get back 30% of the paid interest as a tax deduction). This results in about 3,2K per year in profit (which are tax free in my country).

I have no need for the extra money. Would it be smarter if I sell and invest the money in something else or is it better to have a steady stream of extra income from the apartment rent?

Note: In my country there is an ongoing housing shortage which has been leading to rise in home/rent costs for the past several years. The apartment is also in the center of the city, which is very desirable for students attending the university.

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    What are interest rates like in your country? e.g. how much could you earn on a fixed bank deposit? – Chris W. Rea Apr 28 '15 at 12:50
  • @ChrisW.Rea The interest is currently negative. People aren't saving in bank accounts. But even when it wasn't it was almost negligible. – Adam Apr 28 '15 at 13:10
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    Is it safe for us to assume that inflation is also negligible in your country? – Chris W. Rea Apr 28 '15 at 13:20
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    "I have no need for the extra money." Clearly this is a misleading statement or you wouldn't be asking for financial advice. – corsiKa Apr 28 '15 at 21:48
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    You have a money making machine and you're thinking of selling it for $5k more than you bought it for. That is peanuts. I would be asking how do I get more deals like this not should I sell it. – user9822 Apr 29 '15 at 3:57
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There are several factors that can help you make a decision. How friendly are the laws to tenants as opposed to landlords? How easy will it be for you to collect rent? How much management is needed? Do you desire to own rental properties? What does your schedule look like?

Based upon pure numbers I would keep this property. It looks like you can earn 3K per year, which you may have done some math wrong, on about a 15,000 per year investment. About 20%, very good. Even if you only collect half your profits due to maintenance or missed rent checks the numbers still look really good.

If you don't need the extra funds, you can always pay more on the mortgage.

The other thing to consider is the rest of your fiances. Can you cover a couple of months of missed rent? Do you have an emergency fund? Do you have other debts?

  • how did you come up with the 15k per year investment figure? – Ant Apr 28 '15 at 14:44
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    15K looks like what you'd clear if you sold the apartment. Pete's analysis is what I'd have responded as well. – JoeTaxpayer Apr 28 '15 at 15:38
  • What are tax laws like? Often you can substantially reduce your overall tax burden through improvements to the property (at least you can in the U.S.) that will provide tax write offs. Yes, you can get bad tenants. SCREEN OUT THE BAD ONES. My uncle has several low income properties and he screens out the bad tenants by visiting their previous apt/house/etc. Poor housekeeping = no, clean housekeeping = yes. Easier said than done? Sure, but it can help lower the probability of nightmare tenants. It may be a decent bit of work to rent and upkeep but it may be the best investment you make. – N Klosterman Apr 28 '15 at 17:09
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    @enderland: maybe it's an interest-only mortgage. But even if there is a payment of principle, that's still profit since it's reducing the questioner's debt (or to put it another way it's adding to the equity). It's just not liquid. – Steve Jessop Apr 28 '15 at 20:56
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    You may want to change "consider ... the rest of your fiances" to "consider ... the rest of your finances". – Joseph Hansen Apr 28 '15 at 23:35
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I don't know what country you live in or what the laws and practical circumstances of owning rental property there are. But I own a rental property in the U.S., and I can tell you that there are a lot of headaches that go with it.

One: Maintenance. You say you have to pay an annual fee of 2,400 for "building maintenance". Does that cover all maintenance to the unit or only the exterior? I mean, here in the U.S. if you own a condo (we call a unit like you describe a "condo" -- if you rent it, it's an apartment; if you own it, it's a condo) you typically pay an annual fee that cover maintenance "from the walls out", that is, it covers maintenance to the exterior of the building, the parking lot, any common recreational areas like a swimming pool, etc. But it doesn't cover interior maintenance. If there's a problem with interior wiring or plumbing or the carpet needs to be replaced or the place needs painting, that's up to you.

With a rental unit, those expenses can be substantial. On my rental property, sure, most months the maintenance is zero: things don't break every month. But if the furnace needs to be replaced or there's a major plumbing problem, it can cost thousands. And you can get hit with lots of nitnoid expenses. While my place was vacant I turned the water heater down to save on utility expenses. Then a tenant moved in and complained that the water heater didn't work. We sent a plumber out who quickly figured out that she didn't realize she had to turn the knob up. Then of course he had to hang around while the water heated up to make sure that was all it was. It cost me, umm, I think $170 to have someone turn that knob. (But I probably saved over $15 on the gas bill by turning it down for the couple of months the place was empty!)

Two: What happens when you get a bad tenant? Here in the U.S., theoretically you only have to give 3 days notice to evict a tenant who damages the property or fails to pay the rent. But in practice, they don't leave. Then you have to go to court to get the police to throw them out. When you contact the court, they will schedule a hearing in a month or two. If your case is clear cut -- like the tenant hasn't paid the rent for two months or more -- you will win easily. Both times I've had to do this the tenant didn't even bother to show up so I won by default. So then you have a piece of paper saying the court orders them to leave. You have to wait another month or two for the police to get around to actually going to the unit and ordering them out. So say a tenant fails to pay the rent. In real life you're probably not going to evict someone for being a day or two late, but let's say you're pretty hard-nosed about it and start eviction proceedings when they're a month late. There's at least another two or three months before they're actually going to be out of the place. Of course once you send them an eviction notice they're not going to pay the rent any more. So you have to go four, five months with these people living in your property but not paying any rent.

On top of that, some tenants do serious damage to the property. It's not theirs: they don't have much incentive to take care of it. If you evict someone, they may deliberately trash the place out of spite. One tenant I had to evict did over $13,000 in damage.

So I'm not saying, don't rent the place out. What I am saying is, be sure to include all your real costs in your calculation. Think of all the things that could go wrong as well as all the things that could go right.

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    Some really good advice that I got: Buy REITs if you want to invest in real estate. No mortgage, no tenets, no real estate risks, and the ability to invest a small amount. God bless you brother. – Pete B. Apr 28 '15 at 14:07
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    FYI, not that it saves you any money but it can at least make you feel somewhat vindicated, but you can file criminal charges against the tenants if the damage appears to have been deliberate as is likely to occur during an eviction. There is the slim possibility that you might get them to cough up some money to drop the charges. But if they aren't paying rent, they probably can't come up with any money anyways. – Dunk Apr 28 '15 at 17:22
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    That might work in stories of evil landlords, but not in real life. (a) I'd have to go to the property to replace the lock, with people there who don't want me to do it. What if there's a confrontation? Do I want to risk getting beat up? (b) Even if I managed to find a time when they're not there, what if they just break the door down to get back in? Now I've got a busted door on top of all the other repairs. – Jay Apr 28 '15 at 17:58
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    @gerrit "There are also bad landlords." Sure. But if you're considering becoming a landlord, the fact that there are bad tenants is a relevant problem to consider. The fact that there are bad landlords isn't. Unless you're trying to figure out how much you can get away with. – Jay Apr 28 '15 at 18:00
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    Actually, in the US, at least in California, it's absolutely illegal to change locks behind a tenant. – cnst Apr 29 '15 at 2:53
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The trade-off seems to be quite simple:

"How much are you going to get if you sell it" against "How much are you going to get if you rent it out".

Several people already hinted that the rental revenue may be optimistic, I don't have anything to add to this, but keep in mind that if someone pays 45k for your apartment, the net gains for you will likely be lower as well.

Another consideration would be that the value of your apartment can change, if you expect it to rise steadily you may want to think twice before selling.

Now, assuming you have calculated your numbers properly, and a near 0% opportunity cost:

How much are you going to get if you sell it

45,000 right now

How much are you going to get if you rent it out

3,200 per year

What is the resulting return on investment?

The given numbers imply a return on investment of 14 years, or 7.1%.


Personal conclusion: I would be surprised if you can actually get a 3.2k expected net profit for an apartment that rents out at 6k per year, but if you are confident the reward seems to be quite nice.

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    15000 right now, not 45000. – littleadv Apr 28 '15 at 15:59
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    right - the return isn't on 45000, but on his equity, the 15000 he'd clear. It's not like if we found him an 8% bond that he'd come out ahead. – JoeTaxpayer Apr 28 '15 at 16:07
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    Although the investment is leveraged, and often one looks at the ROI only for the portion of capital invested. But what is the stop-loss? A conservative investor might consider the total at-risk investment (others have mentioned the costs due to damage or depreciation). It is worth considering both total ROI and leveraged ROI. – ChuckCottrill Apr 29 '15 at 1:03
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Having lived in a couple of coutries my perspective on this is "Do apartments gain value or lose value in your area over time?"

I've lived in areas where the age of the building vs the inflation of home values has meant apartments steadily lose value and in other areas where they keep up with or beat inflation for most of the life of the building. Have your real estate agent take a look at the market and see how much a similar apartment in an older building goes for. If it seems like apartments rapidly depreciate then it may be a good time to take a win. If age isn't a huge factor in price then it probably doesn't make sense to get rid of a cash generator to put the money into other investments.

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