Last week I decided to list two of my properties: Rental Property #1 and Rental Property #2. I want to keep you posted regarding why I did this.
Rental Property 1 – my first rental ever!
First, RP#1. I moved to this property this month, and I love living in it. My tenants left the property in a perfect shape (pretty much how I handed it to them) and it looks lovely. Here is the data as of today:
- Acquisition cost and remodeling = €31,500.
- Balance on the property (deducting net rents) = €28,000.
- Current property value = about €50,000.
- Listing price = €54,000.
- Commission to sell = €5,000 + VAT = €6,150.
This means that if I sell at market value (€50,000) and I have to pay a 5k+VAT commission, I will end up with €43,850. From this, I gotta pay 28% on capital gains. This property VPT is almost €40,000, so there is no actual profit until €40k. If I sell for €50k, I can write off the 5k+VAT commission and therefore end up with a taxable capital gain of about 4k. From this, I can write off about 1k in expenses, including property transfer taxes (when I bought it). This means that the final taxable capital gain is about 3k and I need to pay 28% of that, which is about €850.
So, if I do sell for €50,000, I end up with €43,000. The Real Estate agent (I’ll explain in a bit why I am not selling this property through my own company), however, told me we may sell for €52k or even €53k. This sweetens the numbers up. In the worst case scenario, though, I will end up with a net profit of about €15,000 on this property. Not bad for a €31,500 – I’ll end up very close to a 50% cash on cash return!
…especially if I just moved in? I realized that with this kind of money, I can buy another property for myself (hopefully a 2-unit property, so that I live in one and rent the other out), remodeling it, and put €10k to work! This stroke me when I recently found a very nice condo for less than €20,000. I am not sure yet where I would put the €10,000 to work, but I’d probably split them between P2P, bonds, and stocks (a third each). More than the €10,000, I am particularly eager to buy a 2-unit property. This is the last proof that I have an investing-tailored mind: even my primary home has to return something financially.
Rental Property 2 – a great buy and hold
OK, RP#2 is a totally different ball game. When I mentioned the agent that I wanted to sell RP#1, he told me “don’t you want to sell RP#2 too? I may have a buyer for around €80k”.
RP#2 is one the best deals of my life. It generates almost €6,200 per year, and generates extra cash after I pay the mortgage off. Plus, it is a nice 3-unit property that I bought for less than €40,000. Because I got a mortgage on this property, I only had to put in about €9,000 so far (because I pre-payed 3k of the mortgage!), and I’ve collected about €6,500.
If I sell for €80k, I need to pay a €5,000 + VAT commission, which leaves me with €73,850. Then, I need to pay the mortgage off (currently at €34,500 with a 2% pre-payment penalty). This leaves me with €73,850 – €35,200 = €38,650. I also need to pay high capital gains, because I only have tax-free gains up to €64,000. This leaves me with a taxable tax gain of about €10,000, from which I can only write off about €1,000. On the €9,000 I need to pay about €2,500 on property taxes. So, at the end, selling for €80,000, I’ll end up with about €36,000, with is a 400% cash on cash return. Selling for €75,000 calculates into great numbers still, so I do hope this deal goes through.
I am not yet sure what I will do with the €30k+ that I will net from this property, should I sell it. Most likely, I will find a fix and flip deal and put the money to work there, or find another buy and hold that I buy with this money exclusively. I don’t mind making about €250/mo (vs €500+ I am making with this property), if I lower my liabilities (before the bank) AND I go after a deep value deal (meaning I buy for €30k+ but the property is worth at least €45k+). Ideally, I want to put the money to work fast and extract a high return until the end of the year.
As a buy and hold preacher, am I changing my strategy? No. I simply acknowledged that I can make quick money this way, and I believe that in the long run, I will achieve higher volumes of rent this way.
Why not selling through my company?
If I have a RE company, why not selling these properties through my own company? RP#1 is not adequate – I only have investors as buyers and RP#2 may fall short in terms of ROI. Note that if I sell for €80,000, that will mean a gross annual return of less than 8%. After taxes and property taxes that may mean about 4,5%.Also, this is an old property and renovation may be needed at any time.
To investors that look for our company, we usually propose properties that can are distressed and needed to be entirely rehabbed or properties that expectantly won’t need much maintenance over the next years. This property can actually be attractive before the local market, for investors that are happy with moderate returns. At the same time, I don’t lose anything to list it – there are absolutely no costs and it will continue to be rented in the next years.