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.
https://www.nexvia.lu/investment-returnThis 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.