Last time we spoke about profiting from a real estate investment using an exit strategy. Today we add more (exit) strategies.
The Buy-Rent–Sell strategy we discussed earlier is an endeavor that usually lasts only 1-2 years. In other words, cash-in while the getting is good. In the last 20 years, Swedish real estate has increased in value with the exception of 2008 when prices were slightly down, but then suddenly increased the following years.
The funds acquired from the sale of property (the exit) is a huge plus when added to the cash flow created from rent. Today, a 50 square meter apartment in Solna would cost you roughly 2M SEK, which can then be sold for 3M SEK in 1.5 years. That’s 1M SEK in cash flow on a 300,000 SEK investment. Couple that with cash flow from rent, and your ROI would triple!
STRATEGY 2: Buy–Repair–Sell
This strategy still works in the UK and other countries, but seldom is it profitable in Sweden—however, it was profitable several years ago. In comparison to other real estate markets, the Swedish market is very strong. In fact, there is a bidding war going on here.
For example, the opening price of an apartment might go up 50% during the bidding process. In other markets, it’s vice versa—a seller would be happy to get the asking price.
Swedish people tend to keep their real estate in quite good condition, and rarely do they need expensive renovations. But when these few appear and the bidding war starts, some perspective buyers just can’t stop. I’ve witnessed a few examples of this—one of which was a completely destroyed one-room apartment in Karolinska/ Solna that was sold for the same price as various renovated apartments.
(Pros) No issue whatsoever finding tenants!
(Cons) This model carries more risk because you are buying and hiring someone to renovate. It means more money to invest and with that comes more risk to consider. You need to be knowledge about renovations, if you are not, do the research. This model investment takes more planning and control, which means more time—and time is money.
(Taxes) There are a few deductible costs that are allowed by the Swedish legislation—like ROT and RUT—that can help minimize construction/renovation costs….and a cleaning cost up to 50,000 SEK. Additional costs can be defined as costs “to improve the apartment for a better sell” and will minimize your profits before taxes. Even “staging” costs for an apartment can be deductible. But read the fine print (rules and regulations) before hiring assistance
TAXABLE INCOME in Sweden comes mostly from three possible sources.
Earning income from private property is defined as income from capital. This is a good thing because in this case we are not progressively taxed. For example, the more you earn as an employee, the higher you are taxed. But earning from a capital investment, the tax rate is always 30%….and even less if the investment income source is real estate (22% (¾ of 30%)). So, it doesn’t matter if you make 100,000 or 1M SEK, you will always be taxed at the same rate (22%).
More good news! There is an option called “uppskov.” This means that you can delay paying taxes on real estate for up to 1.5 years on new residential property. In this case, you can buy an apartment before selling the old one. And if the new property is “new,” you delay paying taxes, again, for up to 1.5 years!
For example, if you sell your apartment January 1st 2015, and purchased it back on June 30th 2013, you will be granted an “uppskov” on the sale AND have up to 1.5 years to buy a new one, after 1/1/2015.
SOMETHING TO THINK ABOUT
This exit strategy does require you to have knowledge not only about the real estate market but also renovation techniques, materials, and interior design. It is wise to have a partner who is handy—or a trustworthy company that has the skills, knowledge, and proper equipment to deliver quality, affordable work.
to be continued…