I have not written much about real estate lately. I mean I still want to invest in real estate, but my mind has been occupied with other tasks and real estate deals are scarce here. Today’s article is about how I’m planning to rent out my apartment once I move out of here.
Moving Out Of My Apartment
Right now I live in my apartment for 3.5 years already. I’m not planning to move out anytime soon, because we like it here and it’s cheap. Everything we buy will be much more expensive, so the longer we can stay the better.
But eventually both my girlfriend and I would like to move to a single family house. Especially when kids come into play, having a bit more space and some dedicated outdoor area would be great.
Heck, even today I would really enjoy having a small garden where I can sit outside and enjoy the ever increasingly hot Dutch summers.
Not Selling. Ever.
I’m not planning on selling this apartment ever. I’ve bought it when it was three years old. The first owner bought it new and when I bought it, it was still all new. The kitchen, appliances, and bathroom were in perfect conditions.
I got a great deal because of the Dutch real estate dip after the financial crisis of 2008. Our real estate only really began to increase in 2015-2016 so when I bought in December 2015 I was right on time. I got the apartment for less than the first owners paid so that’s amazing.
In the meantime the place increased in value by about 50%. I have captured some of that capital by refinancing my apartment last year, but I want to keep this cheap place for a very long time. Even when we move out, I would like to just rent out the apartment and enjoy the cashflow it provides.
The Mechanics Of Renting Out My Apartment
When I buy something new and want to rent out my apartment, I will have to have my personal balance sheet all nice and shiny. I can’t have too much loans, and on the other side having a large investment portfolio will be beneficial.
The reason is that you need quite some capital to be able to rent out apartments. In most cases, you can finance approximately 60% of the free market value of a property. At my bank, they allow you to rent out a property at 75% of the value when rented out. This value is usually 85% of the free market value, hence the 60% (75% * 85% = 63.8%).
When we buy a new home, ideally I don’t want to get a mortgage for 100% of the purchase price. Having a mortgage of 90% loan to value or even lower would be ideal.
This means that we need approximately 15% of the purchase price of the new home (10% capital and 5% purchase costs) just to buy the new home.
Then I need the capital to keep on my current apartment, at 60% LTV. Right now, I’m at about 76% so that means I will have to have an additional 16% of the value of the apartment to put into the mortgage.
Example Of Renting Out My Apartment
My apartment is currently valued at 240k. Maybe I can get 250k these days, since the valuation was done a year ago. But let’s be conservative and calculate with 240,000 euros in this example. Now say that we want to buy a 350,000 euro single-family home at 90% loan to value.
That means that I need to have saved approximately 52,500 (together with Girlfriend) to purchase the new place. I also need about 38,400 to pay off the mortgage on my apartment to be able to rent out at 60% LTV.
Since I will share the new home with Girlfriend, we’ll split this amount. In the end, personally I will have to come up with almost 65,000 euros if I were to do this today.
Every month I’m paying down my mortgage by about 460 euros, so every month that 65k goes down a little bit. Also, if my apartment increases in value this number will go down.
The rest I will finance out of my investment portfolio. I can save a lot every month, so that money will be put to work.
All Plans Fail
The above is just an example of how a real estate adventure might play out over the next few years. However, all plans will fail eventually. As one famous general once said: “no plan survives first contact with the enemy” and it’s true.
A plan itself is useless, but planning is essential. Maybe Girlfriend and I decide to not buy a home for ourselves for the next five years. Who knows? If that’s the case and I find another real estate opportunity I might jump at that. I’ll keep you guys updated either way.
Do you have experiences in real estate you want to share with me? If so, contact me or leave a comment below! Thank you very much!