(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.
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:
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.
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:
- 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…