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Our Homemade REIT (2)

Unser selbst gestrickter Immobilien-Fonds

This ist the second post where I want to share which types of property and rental concepts we use to generate income. You can read the first post here. As I said there, it’s obviously not a REIT in the literal sense. We operate our rented apartments within our personal assets.

There are currently some things going on regarding one of the properties I described in the first part. Maybe that will provide material for a separate post. We’ll see, I’ll keep you posted.

 

Alternative rental concepts

But let’s get back to the general information. We came up with the mode for renting out our third apartment based on my own experience when commuting between our home and my work – a commute of approximately 500 kilometres. That’s why I had to find a place to stay close to my place of work as well. I started out with renting a ‘serviced apartment’, a furnished studio including weekly cleaning and change of linen and towels.

I chose the flat based on the interior design the rental company used. It quite distinctly stood out from the majority of furnished apartments on offer. Those often looked like the landlord had recycled their discarded furniture. That’s a frugal way to furnish a rental apartment. And design is subjective as well. But it wasn’t to my taste.

The rent is obviously higher for this kind of apartment compared with an unfurnished and unserviced one. Although the studio was great and the service very convenient it felt just too much money to spend on convenience for me after a while. I thought it was smarter to rent for less and invest the difference. Since I had been following the expansion of the company offering these design rentals I knew there was a market for this kind of rental concept.

 

Bought from the owner directly

We didn’t want to outsource letting and service to a service provider. Therefore we restricted our search for a suitable property to our home town. We got lucky on Immonet (no affiliate link). A studio with separate sleeping and wardrobe nook, a balcony and a spectacular view, on approximately 42 qm.

The apartment was still in its original state of the early 1970s, though. For us, this was an advantage since it enabled us to bring it up to the exact design and level of quality we wanted. An additional plus was that the studio was on offer by the owner, so no agent fees were involved.

The parking space in the garage in the complex’s basement was offered at a separate price. We negotiated this to be included in the apartment. Since I’d been tracking real estate prices in our city continuously, we had a very good idea of the appropriate price, both unrenovated and refurbished. Lucky coincidence we knew someone owning another apartment in the same complex. So we were able to double-check our valuation.

 

DIY refurbishing

One important factor in our calculation was the fact that my husband wanted to DIY the refurbishment as much as possible. That ended up – as is typical with this kind of projects – taking longer than originally estimated. For short-term ROI this is not optimal. It can make sense to contract out more of the work, putting yourself in a position to collect rents more quickly.

With the German tax code, you have to take into account, though, that the costs of refurbishing are treated as costs of construction (‘Herstellungskosten’) of the property if they exceed more than 15% of the purchase price within three years after purchasing (link in German). In that case they have to be included in the regular depreciation for 40 respectively 50 years. Your own sweat equity is not taken into account into this calculation so that could make a difference to your advantage.

We furbished the apartment to a high standard as well. In a lot of locations that wouldn’t make sense. In this specific case it should enable us to command a comparatively higher rent and high fill-rate. For materials, fittings, appliances etc. we were careful to shop around for the best prices. That kind of research will take time. But it’s time well invested in our experience.

 

Short-term letting extreme

Fun-fact: when we started letting we didn’t go by our original idea. We advertised the apartment on a portal that also listed vacation rentals in our city. We never thought of that as a possibility (AirBnB wasn’t a big thing at this point yet).

So our first renters turned out to be movie productions that looked for two or three week contracts to house actors. That was quite interesting. We continued to advertise the apartment as bookable from three nights and ended up with a fill rate of almost 100%. But we weren’t aware that this kind of letting falls under a law that restricts the rental use of properties if they are not specifically dedicated as vacation homes/apartments (‘Zweckentfremdungsverbot’, link in German). Particularly not, since several apartments in the complex turned out to be let as vacation apartments.

 

Beware of legal restrictions

The tax authorities were happy to take our VAT each month (short-term letting is subject to VAT, link in German) and didn’t bother to give us any hints that our letting might not be legal. And then one day we got a letter from the city that set out quite severe administrative fines if we continued to list the apartment as a holiday rental. To save ourselves further stress, we eventually went back to our original idea.

I have to say that letting so extremely short-term is quite high-maintenance if you want to do it yourself. On the other hand returns were – even in comparison with high-end furnished letting – exceptional given our high fill-rate. Despite this I’m quite critical of the massive AirBnBsation of residential real estate in the big cities around the world.

 

A mixed concept

And even with lets of several months the administrations requires more time than that of an apartment that you rent out long-term. That’s why – and also because it’s in a different city – we’re operating somewhat of a mixed concept in our fourth property. We let the apartment furnished, but without services. We focus on professionals commuting weekly who want to stay in attractive surroundings during the week without having to rent and furnish a ‘second home’.

Having said that, this property would qualify ideally for students due to its location, size and furniture as well. So we’re not restricted to professionals as potential renters. If you want to look at buying a property as investment I would advise to always consider whether it would have rental appeal for different target groups.

 

Sometimes you just get lucky

Our last apartment was quite a lucky find. As I told you, I decided to rent cheaper than in the serviced apartment. So I found a studio in the same area. And in that very same street I noticed a ‘for sale’ sign in the fourth story of an apartment building.

And this is very things got really good: the real estate agent was so convinced of his own method of SEO that he hadn’t bothered to list the apartment on any of the common real estate listing sites. Very bizarre, and resulting in the situation that despite a fantastic location the studio had been on offer for some time already. This seem really incredible in  today’s hot real estate market, but lucky for us things were different in 2010.

On top of this we came across a motivated seller whose parents had bought the studio for him as a student’s apartment originally. The property was in bad need of renovation/refurbishment as well. While the price was already good, that gave us some further room for negotiation.

 

Skilled workers in short supply?

Since I used the apartment in connection with working 500 km from our home, we were entitled to some tax deductions (Doppelte Haushaltsführung’, link in German). We only started the refurbishment after I moved out and prior to letting. Therefore we didn’t have to deal with the tax problem set out above when occurring refurbishment costs within three years of purchasing.

My incredible husband DIY-ed the refurbishment of this apartment to a large extent as well. Which was not the plan. We originally wanted to contract out most or all of the work. A contractor we were recommended took ages to come up with a proposal. When we finally got it, some of the extensive on-site brief wasn’t included. And with some of the material it was quite obvious from our own research above that he would charge us a hefty premium.

We didn’t feel this was a good basis for contracting. So instead, my husband set out to find a skilled worker on a project basis for one or two week to support him on-site. That really didn’t work out although we only contacted workmen that touted for exactly this type of work. That quite surprised us since we didn’t negotiate rates and our project wasn’t too complex either. Anyway, in the end my husband’s dad came out to work with him, which was a great help.

 

Okay, now you’ve got an overview of how you can build up a small portfolio of real estate across the years. You can let all your residential real estate unfurnished and long-term, of course. But I hope the different concepts we use have given you an interesting insight. And maybe one or the other of our ideas inspires you.

Financial Independence Rocks!

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