Episode 15 - 5 myths when investing in real estate

Quite a lot of properties have recently stood up and bought for investment purposes, people who have collected money are trying to bring a good side, often called "passive" income, some of them are trying to save it for the time when they are old and will not have as much strength and desire to work, and would not rely on one pension, not to mention that this is part of the Bulgarian dream - I will have a property there to rent out, I will work for nothing and I will stand in cafes all day, but unfortunately there are some very misconceptions about real estate investments, which I have called myths and I will describe 5 of them here.

Myth #1 - Apartments are the most profitable investment. Apartments are the fastest liquid form of real estate investment, when you go to buy or sell your apartment you will get or get rid of it the fastest, but that doesn't mean it is the most profitable investment. A simple calculation if we make an average one-bedroom apartment, nice, in a nice location costs in the order of 50 000 euros, for finishing and furnishing we need another 10 000 euros - 60 000 euros, 2 000 euros are our transaction fees, it became 62 000 euros, we can take it about 300 euros monthly rent, from them we have to pay 10% tax - we have 270 euros left, it means that we will recover our investment in about 20 years. This is not a good investment, this is a return of about 5%. Not to mention that apartments have the highest turnover of users - a tenant per apartment sits on average between 1 and 3 years, so you will have for 20 years for example at least 7 tenants, this means that 7 times between tenants you have costs for repairs and repairs, you will have empty months until you find new tenants, so suddenly the return becomes about 4%. Actually apartments are the real estate with the lowest yields. The highest yields are some other properties - commercial or warehouse.

Myth #2 - It's completely passive income - I don't have that much to do. It isn't. Whenever you rent out a property you will have to go to the property at least 1 time a month, maybe twice - to collect your rent, check the property to make sure everything is ok, no broken stuff inside, the tenant hasn't ruined everything and you have to chase. There's no way not to. Most tenants, especially foreigners, want all sorts of things - extra furniture, small fixes and repairs, etc. You can't count on someone to sit in the apartment for 15 years and never want anything from you. He wants to be entertained, he wants activity, and he wants it from you, it's your asset, you can't leave it to the good graces of a stranger.

Myth #3 - I will take 100% of the loan value from the bank, the rent will pay the down payment. This is the biggest stupidity a person can do. The deductible should be 30 - 40%. Imagine a crisis hits and you have to pay a 7-800 leva mortgage on a second flat that sits empty and no tenants for it. It this mortgage is for 20 - 30 years, you can not be sure that for such a period there will not be a single crisis and the apartment will be non stop rented. Especially as it is in Plovdiv and there is a lot of competition in apartment rents - prices will go down and at some point the mortgage may not cover it. So you have to have a deductible.

Myth #4 - I will buy a property that I like and furnish it the way I like it. You won't be living in it - you are buying it for someone else to use, it has to be made that way and be in a place that the user is comfortable in, not you. The tenant's opinion is important. Just because you like orange curtains doesn't mean you'll find someone who also likes orange curtains. You need to buy properties that are in demand, that won't sit empty for you, that when a prospective tenant sees it they can say, yes, I can spend 5 years here. A lot of people make the mistake - I wouldn't do this, I wouldn't do that. Yeah right, but that's what the market wants. "I'll buy a three bedroom apartment, I'll make a lot of money, the rents there I'm 7 -800 euros." Yeah right, but that's less than 2% of the clients on the market with that budget, the chance of it sitting empty for a long time is pretty high. We need to buy properties that go and do them the way clients want and expect them, not the way we like them to be giveable and bring in income.

Myth #5 - I'll buy something simply because it's cheap. It's happened to all of us, we see a property, way below market price, ole, that's my property. And then two years ... no one. Zero. You pay taxes, you pay depreciation, if you took out a loan - hell. There is no such thing, you buy a property that makes sense, that you know you will be able to rent it out, and you don't buy a property that costs, for example, not 800 euros per sqm, like most popular investments in Plovdiv, but costs 350 euros per sqm. Well, he must have something to cost 350 euros per sqm. You don't buy a property just because it's cheap, the purchase has to make sense. It is a financial operation - you give some money and expect some other money in return, for example 10% per year. What if it costs 1100 euros per sqm, what does it matter, it brings us 100 euros per sqm per year, 10% - great, the bank gives me 0, I pay my 10% tax, take 9% and watch my luck. What with it being expensive, it brings me the return I need. That's the way to think. Not - oh, here's a cheap one, give it away, we'll take it, flip it and we're top. Yeah, and then there's no selling.

So watch your rates, watch what you buy, who you buy it with, lest you find you can't get your money back afterwards.

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