Investment Case Study: Foreign Real Estate or VT?

ThePortugueseExpat · March 10, 2021, 3:23pm

Hi everyone,

I wanted to propose an investment case analysis. I don’t have enough FIRE-minded friends so decided to post it here.

Starting point:
→ 40k EUR
→ Ability to get a mortgage at investment country with 90% financing. (10k as transaction costs is usual; financing is at around 1% + 3 months Euribor, so 0,48% at the moment)
→ Mid Twenties, stable job, not married
→ Risk profile: Aggressive (comfortable with 95% stocks portfolio)

Option 1: Buy a 200,000€ Flat generating 750€ per month in gross rent.
Required Cash: 20,000€ for downpayment + 10,000€ for transaction costs.
Further 10,000€ would be converted to USD and invested in VT.

Option 2: Convert full amount to USD and invest in VT.

Looking forward to understanding your thought process!

REandSTOCK · March 10, 2021, 4:04pm

Buying an investment property with a 90% mortgage is probably the equivalent of a 150+% stock allocation (without considering the idosyncratic risk). I am not sure it fits to your risk profile.

s-g · March 10, 2021, 4:12pm

Also gross rent is not telling much, real estate related expenses and taxes can change a lot from one country to the other. You’ll need to figure out the net yield before making a choice.

Patirou · March 10, 2021, 4:19pm

First I would fix how much time you want to put into this. The beauty of VT or any other combination of broadband ETF is that it takes you 10 minutes a month, including tax declaration, and you can expect about 5% return post-tax and inflation.

Once you have property outside of Switzerland, it is much more work. Tax declaration gonna be a nightmare (have fun reading the DTA, you will have to pay some property manager… Sure looks like 30% gross return on cash (but, as stated s-g, not really meaningful)

ThePortugueseExpat · March 10, 2021, 4:25pm

My way of thinking and breaking down the numbers:

Gross Rent: 750€/month
After tax rent (28% tax): 540€
180,000€ Loan w/ insurances and random fees comes out to roughly (40y loan duration): 400€/month
Reserve for future repairs costs (10% of monthly rent): 75€/month (until 5k)
The apartment would be brand new construction so no repair costs expected in the beginning.

Cash flow (probably I am missing some cost, feel free to point them out!): 65€

ThePortugueseExpat · March 10, 2021, 4:38pm

Yeah, tax declaration complications are something that I have consider and something that makes me hesitant.

There would be some initial time commitment to find an apartment and renting it out (can be done by an agency, usually with a 1 months rent fee). Day to day stuff that would come up would be dealt by family that lives in area.

The simplicity and portability of ETF investing is something that I like as well. I can’t necessarily sell a house with 1-click and would probably be looking at 5-7% transactions costs for selling & buying when it comes to real estate investing.

The main thing that attracts me about real estate is the ability to be leveraged with limited downside. Even if I have to take over the mortgage due to not being able to rent the flat, 400€/month would not impact my life significantly.

I am leaning towards going 95% VT & 5% 7y Bonds (1.38% average yield + linked to GDP growth)

mabi · March 10, 2021, 6:12pm

You have awaken my curiosity, what is that 7y bond you are referring to?

Barto · March 10, 2021, 8:14pm

The right investment property can be a relatively safely way to take advantage of leverage and boost wealth but this is not the right property. You need to have a bigger safety margin in your cashflow.

Theoretical gross rent 4.2% of purchase price, before vacancies, is too low. Historical long term interest rates are 5%. In Euro zone I would look for 5 or 6% min net after letting agency costs. And do you have to pay tax on the gross rent before deducing costs in this country?

xerox5003 · March 10, 2021, 10:14pm

A very interesting topic.

Since a couple of friends of mine have properties which are rented out, I have a front row seat regarding them managing the real estates.

Being able to get their insights and experiences I have decided as a long term strategy (>30y), that I will invest in VTI, VEA, VWO, VIOV and in some leveraged and/or high volatile securities (e.g. meme stocks, BTC, UPRO, TQQQ).
When owning a property, then just a self-owned one.

It is not primarily because of tax or legal questions (e.g. how is the owner/tenant protection in this country?), but because of the simplicity of the handling. In comparison to tenants, managing a portfolio is - in my eyes - less time-intensive and you are more flexible.
You do not have to struggle with requests from tenants or renovating the apartments because of carelessness of tenants - especially when you have a full time job.

This is just my view

ThePortugueseExpat · March 11, 2021, 8:01am

Sure, I think you need to have a portuguese fiscal id number to invest in them (not 100% sure) plus they are in EUR:

In this issuance they caped the amount of GDP growth that you could benefit from but on their previous issuance you had uncapped GDP growth.
Previous issuance: AGÊNCIA DE GESTÃO DA TESOURARIA E DA DÍVIDA PÚBLICA – IGCP, E.P.E. - IGCP

5th year for me was 2021 so no GDP growth but still 3,25% interest.
4th year was supposed to be 2,75% and I eventually got 4,33% interest with the GDP growth

They also have an interesting deck for investors (in english): AGÊNCIA DE GESTÃO DA TESOURARIA E DA DÍVIDA PÚBLICA – IGCP, E.P.E. - IGCP

My thesis for investing in them is:

I am comfortable holding bonds of the country I plan to retire to eventually/am from
After the contraction of GDP due to Covid there is a lower basis to start with

Main downsides:

Lower credit rating than most countries in Europe
Even tho you are investing in bonds, these are not traded in the open market so you don’t benefit from appreciation. If you want to get your investment back before 7 years you need to submit a request (processed in under 1 week) but you can only do so after holding them for 1 year and 1 day
Need to have a portuguese tax number to invest

mabi · March 12, 2021, 7:40am

Thanks for sharing the details about this bond, it’s always interesting to see what’s available.

You might also be interested by this thread on the forum, although there are no conclusions or best solutions/alternatives really and has also been discussing REITs in the last few posts: