How to get into real estate with a limited budget

Question

My friends and I are all young engineers living in Belgium who are looking to get into real estate. I figured it should be a good investment as loans are pretty low right now and real estate is a pretty steady market? (These are assumptions I'm making, please do correct/educate me if I'm wrong)..

Now the first idea we had was to buy an apartment block and rent the rooms out as dorm rooms. The idea is to all do a small loan and buy the building together. That way, we figure, we take less risk and are all able to pay off the loan easily while still being able to buy our own real estate to live in..

As a use case I made the following "loan table"

Then I looked at an apartment building in Ghent (one of the biggest student cities in Belgium). I found a building that goes for €300 000 with 5 rooms (dorms). The location is really good so I estimated the rent price to be at €350 (I'm gonna actually do research into how much similar rooms at that location are, but I won't be far off).

Now imagine we'd be 5 people all doing a loan of 60K. And we want to do a 5 year loan. That would mean we'd pay off €1 060 a month, and get €350 a month from the dorm. Of course there will be additional costs I assume. This doesn't sound too good of a deal? Are we approaching this badly?

Of course this does mean we could resell it after 5 years, probably for about the same price (?) and have made (minus costs for dorm + loan cost) what we got every month, being €21 000 - costs on 5 years which isn't too bad. But I have no idea how big the additional costs would be.

Any advice is welcome :)

Answer 1

You are neglecting a few very important things around real estate transactions in Belgium

1. Aside from the original price you have to pay 10% 'registration rights'. There is a reduction on this, but only if you are going to live there yourselves, you'll pay the full 10%. You may be lucky if it's an older building you only have to pay 5%, but don't count on it.
2. You have to pay the notary for the house transaction. This is not a fixed percentage.
3. You have to pay costs for the loans. There are two systems here but most likely the banks will demand a 'hypothecair krediet' in your case. Together with step 2 most people assume about 5%
4. Every bank will demand you have a life insurance (schuldsaldoverzekering). This is not a huge cost, certainly not for young and presumably healthy people, but don't neglect it.

So in the end a 300K building may cost you more than 340K, let's take some unexpected costs into account and use 350K for remainder of calculation. Even worse if it's newly built (which I doubt) the first percentage is 21% (VAT) instead of 10%. All these costs can be checked on the useful site www.hoeveelkostmijnhuis.be

Now, aside from that most banks will and actually have to demand you pay part of all this yourself. So you can't do 5*60K (or 5*70K now). Mostly banks will only finance up to about 90% of the value of the building, so 90% of 300K, which is 270K (5*54K), the other 80K (5*16K) you have to pay yourselves. But it could be the bank goes as low as 80%.

Another part to complicate the loan is how much you can pay a month. Since the mortgage crisis they're very strict on this. There are lots of banks that will not allow you to make monthly payments of more than 33% of your monthly income when you are going to live there. This is a nuisance even when buying one house, you want to buy 2. Odds seem low they'll accept high monthly payments because you either need an additional loan or need to pay rent, so don't count on a 5y deal.

Now this is all based on a single loan, it will probably be a bit different with multiple loans. However, it is unlikely any bank will accept this, even if all loans are with the same bank. You need to consider the basics of a real-estate loan: A bank trusts you can pay it off and if not they can seize the real-estate hoping to regain their initial investment. It's very hard to seize a complete asset if only one out of 5 loan-takers defected. You could maybe do this with another less restrictive/higher risk type of loan but rates will be a lot higher (think 5-6% instead of 1.5%).

And don't underestimate the running costs: for that price and 5 rooms in that city you're likely looking at an older building. Expect lots of cost for maintenance and keeping the building according to code. Also expect costs for repairs (you rent to students...). You'll also have to pay quite a bit of money on insurances and of course on real estate taxes (which are average in Ghent). Also factor in that currently there is not a housing shortage for Ghent students so you might not always have a guaranteed occupation. Also take into account responsibility: if a fire breaks out or the house collapses or a gas leak occurs, you might be sued. It doesn't matter if you're at fault, it's costly and a big nuisance.

Simply because you didn't think of any of this: don't do this. It's better to invest in real estate funds. But if you still think you can do better then all the landlords Ghent is riddled with, don't do it as a personal investment. Create a BVBA, put some investment in here (like 10-20K each), approach a bank with a serious business plan to get the rest of the money as a loan (towards a single entity - your BVBA) and get things going. When the money comes in you can either give yourselves a salary or pay out profits on the shares.

You may be confused about how rich you can become because we as a nation tend to overestimate the profitability of real estate. It's really not that much better than other investments (otherwise everybody would only invest in real estate funds). There are a few things that skew our vision however:

• Your own house (the one you live in) is a relatively good investment. Not really because of rising prices, but because mortgage rates are low, you get quite a bit of money back due to tax benefits and the alternative, rent, is ridiculously high (certainly in the area you mentioned).
• Many rich(er) people have lots of real-estate: Don't ignore history, house prices went up insanely in the nineties/early 2000s, people who bought multiple houses before that (relatively cheap) are rich now, but it's almost impossible that will repeat itself (they still go up but match inflation more closely). Also don't confuse causality: they may have lots of real estate because they're rich and housing in Belgium is maybe not high-yield but still a relatively 'safe' investment on large scale.

Answer 2

One way to "get into the real estate market" is to invest your money in a fund which has its value tied to real estate. For example, a Real Estate Investment Trust. This fund would fluctuate largely inline with the property values in the area(s) where the fund puts its money. This would have a few (significant) changes from 'traditional' real estate investing, including:

• You would not be actively managing any property. On the upside, this means you wouldn't have to spend your own time doing so. On the downside, part of the value that a 'traditional' real estate investment theoretically offers is that you get value (in the form of theoretically higher rent) from good management. By passing that management off to the REIT, you lose out on the ability to, for example, perform repairs yourself, which is an area where you could theoretically make money. Of course, this management also carries a lot of risk.
• You could invest relatively small amounts of money - similar to just buying a mutual fund from a broker.
• Your fund may not be invested exactly where you want. For example, you may feel that a particular area in a city you know well is going to increase in value. 'Traditional' real estate investing would be a way for you to put money into that specific community. But there may not be any REIT which invests in that area.
• You would not have the "physical asset security" of actually owning a building. I personally think this is an overly vague objective anyway, but I do know some people who like the idea that even in recession etc., they would still be owning something real. Note however that in such a case, being stuck with a mortgage while having your possible rent cut in half which be equally (or even more) devastating.
• Similar to the above, is the idea that if you wanted to move to an area in 5 years, but had to stay where you were, you might benefit from buying a property early, and renting out, with the intention to live there later. This ability to actually get personal use out of the property (and therefore, for example, hedge your risk that the area you want to move to is still affordable in 5 years) is not available in an REIT. Although theoretically, if property values go up, the REIT goes up, making you still able to sell the REIT shares and buy property.