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Investment Real Estate Strategy #1: Buy–Rent–Sell

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(This is the second article from Real Estate Investment collection. Read previous here)

There are a lot of ways to make money in real estate. As an investor, let’s take a look at some of the ways to receive a POSITIVE RETURN on your investment.

There’s more than one  exit strategy and scenario in order to achieve realistic, sustainable returns on real-estate investing. We will discuss this with a global perspective, and of course cover the Swedish market—as well as touch upon current regulations.

Investor’s role

Everybody is an investor. If you are into building, renovating, or even cooking, sooner or later it will become your profession and consume most of your time—thus, time is an investment.

So, making financial decisions also require an investment in time. You will need to read and understand financial markets, local regulations, geographical areas, building codes and perform market research. But, it is the type of investment that will determine how much of a time-investment effort you need to put in.

When you place assets into an investment, it requires time to realize a return—and how much time depends on your exit strategy. Here are some of them.

Investment Real Estate Strategy #1:

Buy–Rent–Sell

 You buy an apartment, rent it, and then sell it a couple of years later.  

(Pros) Every month you receive cash from your tenant(s). And it is not difficult to find tenants in Stockholm, Uppsala or Gothenburg. The demand for apartments is particularly high in these cities. The day you place an ad for a room or an apartment on www.blocket.se, you will get at least 50 inquiries the first few hours. Costs associated with running the investment (apartment)—like water, sometimes electricity, insurance and internet are deductible.

(Cons) Usually the ROI (return on investment) in this example can be quite low in comparison with your initial investment. But it is stable, and you don’t need to wait until the end of the year for paid-out dividends—you get them every month, in your pocket, in the form of rent paid to you. 

Taxes: If you declare income, you will pay taxes on it. Costs associated with running the investment (apartment)—like water, sometimes electricity, insurance and internet are deductible. The income from renting out real estate counts as income on capital and is taxed at 30% in Sweden. However, you can deduct 40,000 SEK (circa 4,750 USD) first— you will pay taxes on the rest amount.

 For example,

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You purchased a two-room apartment (with kitchen), all cash for 3,000,000 SEK
.

  • Your total monthly fees are 4,000 SEK
  • You rent it out for  18,000 SEK per month
  • Your profit before taxes and deductions will be (18,000 x 12) – (4,000 x 12) = 168,000 SEK
  • After reduction: 168,000 – 40,000 = 128,000 SEK
  • Taxes will be 38,400 SEK
  • Profit =  129 600 (128,000 – 38,400+ 40 000) per year or 10 800 SEK per month.
  • ROI= 129 600/ 3,000,000 x 100% = 4.32%

That means that you will get only 4.32% return on the amount you invested. However, it is still better then what banks offer today.

Since most people cannot afford 3,000,000 SEK (cash) to buy an apartment, we head to the bank and try to convince the banker to loan us the money.

Using the above scenario—but putting down 15% of your own money and borrowing the rest, the apartment price is now 450,000 SEK (3,000,000 x 15%)

Your total monthly fees are still 4,000 SEK, but now you have extra costs—like the interest for the amount you borrowed.

Interest on home loans today, as of September 9, 2015, is two percent. So, that translates into 51,000 SEK per year in interest (3,000,000 – 450,000) x 2%= 51,000 SEK per year.

30% of that interest paid can be written-off (ränteavdrag) at the end of the year. So, now your yearly cost (interest) is 35,700 SEK (51,000 x .70) or 2,975 SEK per month, which is not deductible. You can choose to not amortize your loan and only pay the interest according to Swedish legislation. If you choose to amortize, these cost are not deductible either.

Since we borrowed money to buy this apartment, our initial out-of-pocket cost is smaller—but so is our profits:

Door to increase profit

  • 216,000 – 48,000 (income from tenant- fees) = 168,000 SEK
  • 168,000 – 40,000 (miscellaneous fees) = 128,000SEK
  • 128,000 – 38,400 (taxes) = 89,600 SEK
  • Profit: 89,600 – 35,700 (interest) + 40 000 (reduction)= 93,900 SEK per year, or 7825 SEK per month

The bottom line is that our return on investment (ROI) is now 20.9% (93,900/450,000 x 100%) compared to 4.32% earlier  because we invested only 450,000 SEK.

Conclusion: It is better to borrow money from a bank than to invest your own. However, you need to be careful. You must calculate risks, follow market changes, and stay informed about bank regulations. If interest rates climb, profits fall. Learn more about risks and Swedish rent history here.

Something to think about: Count on 10% of your annual income from rent to go to reparations, refurnishes, etc. And always have a signed contract with your tenants. Also, don’t forget to require a deposit of at least one-month’s rent.

To be continued…

19 Comments

  1. Can you really rent out an apartment that you bought for 3 mln SEK for 18 000 SEK per month? In my, however limited, experience if you buy an apartment today for 3 mln SEK it will mean Solna, Sundbyberg, Söder om Söder, so not super central and rents in these areas are averaging at 12 000 SEK per month.
    At the same time having total fees at only 4000 SEK per month is also lucky. Did you account for yearly insurance and broadband?

  2. Olivier says

    One question; can you rent you apartment like that? The Swedish legislation is somewhat complicated regarding renting. You need to have valid reasons (study abroad, travel abroad, move in with somewhere else and need to see if it works) to to be able to rent your apartment. Usually you can rent your apartment for max 1 year top top 2 years, after that your “bostadsförening” might say no. On top of that the bostadsförening can take an admin fee on your rent ( up to 10%), so you should include it in your cost forecast.
    Good article!
    /Olivier

    • Yes, you can, you just need “to break a code”. Some bostadsförening are required you to pay 10%, some less, some do not at all.
      The case with AirBnB is one of such points.

        • Oliver, let me put it this way. There are a lot of rules and laws that are written in books. For example, it is prohibited to cross a road as pedestrian on a red light. You are not allowed to do that. Great! But what happens if you do?! Of course, you might be involved in an accident if traffic is full, but if the road is empty – you do what you want. Moreover, there are no fines for crossing the street on the red light. You cannot be arrested, etc.

          Same with renting out your apartment for long or short term. If your tenants will make noise, mess and destroy life of your neighbours – you might end up in trouble.

  3. But do you really think that it’s possible to rent an apartment for that much? I had an hard time finding someone to rent out a very nice 1.5 rooms, 41sqm in Vasastan for 15000 just a few months ago. I had to lower the rent to find more interesting tentants, people is asking less than that http://www.bostaddirekt.com/Private/default.aspx?custType=0&apmnt=1&other=0&Room=0&RoomsMin=0&SizeMin=0&RentMax=999999&Furnished=-1&PeriodMinMax=min&Period=1&PublDays=61&EstateID=&Areas=710671077108&SortBy=zip_Name&SortDir=asc&minimize=1&Page=2
    If you managed to do that maybe I should try again! :)

    What do you think about the fact that Sweden is also a country with huge household loans, where people is borrowing like crazy and saving nothing? The interest rate is probably going up soon and this makes me worried that the housing price could even go down, since people don’t have buffers for that. I don’t know if to sell my flat in Vasastan or to hold on it… :)

    Very interesting article and topic! I love this blog! :)

    • Hi, Ele, thanks for the comment. Never use bostaddirekt. They show low prices in order to make you sign up and be a payable user.
      The problem is that people love to ask recommendations and references, etc. But there are people who just enter the country and they do not have any. If you do kreditupplysning on them you will never find info. So they will pay the price you ask.
      Even at blocket, I by myself, has beenin the situation where owner of an apartment is making a open day, and than suggest a bidding war on renting an apartment, the one who gives more – get to rent it. So, same as at Hemnet, where brokers put prices to attract more clients, operates the second- hand renting market.
      More adverts are short-term and let you live only up to 6 months. So you pay less, because in 6 months you will have to move again.
      Some people promise you, that after 6 months you will be able to extend the lease, but they are bluffing and from the beginning they know that they never will.
      There are also many who require you 2 deposits payments in andvance but promise you 3 rooms apartment in Östermalm just for 10 tsek per month…. via Western Union you need to transfer this cash….. and then you never see your money again or an apartment…

    • Answering your questions. Everything in this world is cyclical: erection , fashion, menstruation and financial crises… you name it.
      So if you ask ” Will the market go down?”
      I will always answer, YES! But the more important is by how much? and when?
      People are renting and not saving round the world. In Sweden is more or less regulated in comparison with USA or UK where you can lay your flat and under the collateral to take another loan on more properties.

      I think that with your property you need to ask yourself what you want to do with your life? And how do you want to live your life? Maybe it will work for you to move to hyresrätt, selling your Vasastan apartment and live happily ever after. Maybe you always dreamed to start your business? or travel round the world? Or you want to have a family and live in a country side, so you sell your apartment in city and buy a house somewhere in Kalmar and live debt free?

      • Thank you for the replies Anna! I will try to ask for more money for my apartment then 😉

        My plan for now is to build enough passive income to be able to work when and on what I want. I’m considering selling the apartment to buy a house and rent out the rooms with something like Airbnb. We’ll see! :)

        • Thank you for your comments!

          Sounds like a great plan!

          Just pay attention, when you buy a house, that it is not a single family house, but two. Then you will have more cards in your hands. Some my friends bought houses in suburbs near Stockholm and made a separate apartment in them, with separate entrance, own kitchen and bathroom. They rent them out. They never meet their tenants, even living with them at the same house. And their living costs for house are almost zero!

  4. Pingback: Buy–Repair–Sell

  5. Pingback: Real Estate Investment Strategy #3: Book–Sell

  6. Thanks for the nice article Anna!
    Since there are not enough supply of flats on the market, the final prices (after bidding) are going up like crazy at the moment!

    Considering the new law of compulsary “amortering” that will apply from March 2016, I expect that the housing price trends will change dramatically after that?

    What is your suggestion about buying an appartment in Stockholm now? Should I wait until after March 2016?

    • Dear Mike,

      thank you for your kind words.

      Yes, prices are crazy at the moment. Especially inside the city. I cannot advise you anything, but I may say that I personally will not buy any property that is more expensive than 60 sek per sq meter in 15 – 20 minutes destination from centre of the city.

      About “amortering” the problem is that it is again “föreslås träda i kraft 1 maj 2016”, that means that we are not sure if the law will go through or not.
      All this media speculation with “amortering” is awful, on my opinion. People will find the way to “hack” these new rules anyways. It is just question of the time. Even right now, it is almost impossible to take a bank loan without paying back the loan. Bank will “kindly insist” on paying at least couple of thousands per month.

      I do not know in what economic situation you are right now. If you have a property or just thinking about buying your first one.
      What I know is the market will go down, for how much and when is unclear.

      In a perfect scenario I would sell all properties in January – February 2016, pay taxes and move into a “hyresrätt”.

      • Thanks for your answer Anna!
        I agree with you. I’m actually thinking of buying my first flat.
        You mentioned “What I know is the market will go down”.
        Can you explain your reasoning?
        I appreciate your time and consideration :)

        • Everything in this world is cyclical: election, fashion and financial crises… you name it.
          So if you ask ” Will the market go down?”
          I will always answer, YES! But the more important is by how much? and when?
          People are renting and not saving round the world. In Sweden is more or less regulated in comparison with USA or UK. But markets do go down, it is in their nature.

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