Author Topic: When rental investing follows the opposite of the 1% rule...  (Read 2586 times)


  • Pencil Stache
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When rental investing follows the opposite of the 1% rule...
« on: March 28, 2018, 07:11:40 AM »
So, we live in Luxembourg, a small incredibly wealthy tax haven in Europe.

Yet, for a financial capital, private investing around here is more or less exclusively focused on real estate. When I asked our bank advisor about buying S&P 500 he had no idea what that was, so...
I mean, just as an illustration of how unlikely it is that an average private person would be investing in anything other than brick.

But well, nothing wrong with that, provided it made some kind of a mathematical sense.
For a long time now I've been curious about this because my casual perusing of real estate sites always implied that renting was cheapish compared to buying, even if everyone (and really, everyone and their grandma) insists, using all kinds of creative maths, that buying pays off already after six months.

This was all in my head until an online tool popped up.

This is a handy tool that allowed me to calculate that buying a 2 bedroom apartment in our area at current prices and renting it out for what may actually be a slightly optimistic amount and assuming a vacancy rate of 5% (not convinced either, but this is the default in the tool) and zero maintenance (long story, but knowing the game here it is possible, the tenant is supposed to pay for running maintenance and if you're buying a new place I guess you can get away with not spending anything on structural maintenance over 10 years) with 80% leverage and 2% interest rate would give me an annual return of -0.6% and 140 000 of negative cash flow over 10 years . That is if I am not counting on appreciation.

If I assume 3% annual appreciation, the negative cash flow is still there but I have presumably made 6.6% annually after I sell the place.  However, that would imply that in 10 years, a 2 bedroom apartment in this area will be selling for well above 1 million euros which sounds a bit far fetched to me. So you need to make a really wild assumption about future appreciation in order to achieve this spectacular return of less than 7%.

Should I be afraid, I mean, this sounds like a monumental speculative bubble that's bound to pop?  I am not kidding, people are investing in this like crazy.
Because we do own a place here (see the part on having to maintain someone else's lousy rental investment if you rent for why) so would be nice to know when to sell. We already missed the peak of similar insanity in Stockholm which is now a regret (I saw it coming but we were too lazy and too sentimental to sell our old place) so I am trying to avoid repeating this here. We could today sell the place for 150 000 more than we paid for it but we have a 15 year mortgage with 1.5% fixed interest, it's not really costing us God knows what to sit on this and wait. Plus we actually live here and it's fine for now.


  • Handlebar Stache
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Re: When rental investing follows the opposite of the 1% rule...
« Reply #1 on: March 28, 2018, 07:24:25 AM »
If you're planning to move, then sell it. If you're otherwise happy, and it's a good location for everything else in your life, then don't worry about what other people are doing.


  • Magnum Stache
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Re: When rental investing follows the opposite of the 1% rule...
« Reply #2 on: March 28, 2018, 03:38:33 PM »
Market crashes really only become a problem with real estate when you can't afford the payments. Otherwise, you just wait it out. Between paying down the mortgage over time and the market recovering, eventually you'll be ok. (typically, there are exceptions of course)


  • Walrus Stache
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Re: When rental investing follows the opposite of the 1% rule...
« Reply #3 on: April 01, 2018, 08:03:52 PM »
Every property market in the world is different. Every suburb property market within a city is different.

Lemme publish some actual numbers here, based on an investment I have that also doesn't follow "the rules".

I've held this one for 3 and a half years now and in that time the after tax cash outflow has been about $11,000* (cash loss).

In that time it has gone up in value by $120-$150k. What do I care if it costs me a couple of grand a year to hold, and every few years I get some large appreciation in the 10's of thousands?

The cap gain is also concessionally taxed compared to income cash returns, so there's a double win.

*Financial years July-June
2015: ($2,157) 9 months
2016: ($3,543) 12 months, installed new dishwasher
2017: ($3,989) 12 months, installed new carpet
2018: ($1,431) 9 months to March, installed new cooktop

Purchase price: $450k ($468k including settlement costs and stamp duty)
Current value: $580k-$620k
Rent increase from $390 to $435 per week over that period.

Luxembourg doesn't exactly have a lot of land. Squeeze too many people into too small space of land and prices are going to go up, provided Lux stays the desirable financial hub that it is. Your $1m Euro apartment may not be as farfetched as it seems.

Simple supply and demand.


  • Bristles
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Re: When rental investing follows the opposite of the 1% rule...
« Reply #4 on: April 01, 2018, 10:56:34 PM »
I think one of the reasons people are willing to be "generous" with numbers when it comes to real estate investing is the same reason they are willing to be "generous" with numbers when it comes to owning land. It's a romantic idea with a legacy of old money style wealth and people have this idea that if they do it, they will be rich, period, and it's almost impossible to talk them out of it. I guess it does help some people because if they buy a house or land with a mortgage, the mortgage essentially acts like a forced savings account and makes them save some money, which is much more than they'd save otherwise.

With that said, it's true that Luxembourg is a very very small country and the "they're not making anymore land" argument may hold true in it. Is it worth it to roll the dice and become a landlord? Only time will tell for sure, but I personally don't think I'd bother.

Hula Hoop

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Re: When rental investing follows the opposite of the 1% rule...
« Reply #5 on: April 02, 2018, 02:02:06 AM »
Marty - Isn't Sydney one huge property bubble though?  Kind of like Vancouver?  What happens when it pops? 

« Last Edit: April 02, 2018, 02:26:26 AM by Hula Hoop »


  • Pencil Stache
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Re: When rental investing follows the opposite of the 1% rule...
« Reply #6 on: April 02, 2018, 06:35:05 AM »
Thanks guys for the input.
The thing is we do need to move somewhere else eventually. Well, "need to" is a strong word but this is a 2 bedroom apartment and we are a family with two boys. They are now 1 and 4 so more than fit to share a room but I don't think it's necessarily the best thing for teenagers. And we are not unable to afford a bigger place, we are just terrified of getting it under current conditions.

I am quite worried that this is a bubble. I've lived through some before so the whole "this time it's different" argument doesn't really convince me. The only thing speaking against it is this whole "Luxembourg is tiny" thing but it's not THAT small as most of it is very rural. We are centuries away from being a Hong Kong or something like that. It's just the center (Lux city and immediate surroundings) that is mega inflated and that mostly because the traffic infrastructure is horrendous (they keep building new housing but nothing else) so commuting is a nightmare that is difficult to describe.

That is also why it is literally unthinkable for us to move further out for cheaper housing (we don't have nor want a car) so if we want a house, we have to count on forking out between 1 and 1,5 million euros. Our income can hold for that but well, I don't need to explain to a Mustachian forum why "we'd qualify for a mortgage" is not the only consideration when making a plan lol.

Mortgage interest here is around 1,5% and heavily tax deductible, meaning that the more you earn, the more it pays off to buy real estate like mad. In this calculator I shared it is fairly obvious that the key selling point for them is a)supposed appreciation and b) tax deductions..i.e. you only really get promised meaningful return if your taxable income is six digits and you expect 2-3% annual appreciation. This country is full of rich people and everyone is taking the appreciation for granted so this is why everyone is investing in this like crazy. Thus, in my opinion at least, inflating an epic bubble that will pop the minute interest rates start going up. And at some point they have to, where else would they go from 1.5 (the math will no longer work if interest rates are 3-4%)?

Our taxable income is actually laughably low as my salary is not taxable but taxation is joint, meaning that I am effectively a tax deduction for my husband even though I bring in more than him. So for us there is not THAT much appeal to going all in if we fear price contraction.

Our current place seems to be a good deal whichever way we go...we can live here for at least 5 more years, we like it here (main reason we bought to begin with was our attachment to the exact location as it works perfectly for our car-free lifestyle) , we paid 500 000 in 2016 with 80 000 down and fixed interest of 1,5% for 15 years so after the tax deduction we pay something like 300 in interest per month. Neighbors sold an identical one for 650 000 last month.  We could rent out for 1500-1600. So by now I am thinking we can just keep this and see. If it will actually be worth a million in ten years, well, woohoo, if it contracts in value it will make a fairly decent rental once we no longer owe much on it.

But I don't know. If prices really do keep up at this pace a house will cost 2, 2,5 million so we won't be getting one ever.