Author Topic: Too good to be true math (small countries in Europe)  (Read 2259 times)

havregryn

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Too good to be true math (small countries in Europe)
« on: February 28, 2018, 07:06:03 AM »
Hey smart Mustachians...this is going to be insanely specific as it involves two tiny countries not represented here by anyone but me but I'd appreciate your thoughts on the principles of the matter.
We've been toying with the idea of investing in some vacation properties in Croatia where I am originally from and which is a third worldly vacation spot with increasing popularity (as they're filming Star Wars and Game of Thrones there nowadays).

Mortgage interest here in Luxembourg is 1,5% and then it creates a bunch of tax benefits that make its actual cost to us closer to 1%.

By taking a second mortgage on our place we can buy several small apartments in Croatia.

All the math on this seems literally too good to be true so what am I missing.

Like, I am offered to buy this for 66000
https://www.booking.com/hotel/hr/fran-center-apartament.en-gb.html?label=gen173nr-1DCAsoZUIWZnJhbi1jZW50ZXItYXBhcnRhbWVudEguWARoiQGIAQGYAS7CAQp3aW5kb3dzIDEwyAEP2AED6AEBkgIBeagCAw;sid=811edf70e10200016346a83f8f78c0fc;dist=0&sb_price_type=total&type=total&

Obviously I'd need to pay someone to manage it completely as we are far away but according to some fairly reliable estimates I'd still get to keep at least 4-5000 per year.

Meanwhile I'd be paying a mortgage where interest would be less than annual inflation adjustments done on my income (I'm a civil servant). 1% of 66 000 is 660, and my salary increases by 100-150 every year (so not counting raises and promotions) when they do an inflation adjustment. Same is done for husband so just inflation gives us extra 3000 per year.

What am I missing here or should I just do it and then keep doing it for as long as the bank is willing to lend this cheap money?
Or can this backfire in ways I am not currently considering?

Thanks!

« Last Edit: February 28, 2018, 07:10:00 AM by havregryn »

atxian

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Re: Too good to be true math (small countries in Europe)
« Reply #1 on: February 28, 2018, 07:36:19 AM »
Is there currency risk? The numbers you are talking about are in euros, but Croatia isn’t on the euro right? What would happen if the Croatian currency plummets or vice versa?

That being said, it does sound pretty good especially since you are from there


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Bracken_Joy

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Re: Too good to be true math (small countries in Europe)
« Reply #2 on: February 28, 2018, 07:45:19 AM »
Yep, my main questions starting out:
-Does it involve currency conversion.
-What is the tax implication?

trollwithamustache

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Re: Too good to be true math (small countries in Europe)
« Reply #3 on: February 28, 2018, 08:07:40 AM »
1. what % occupancy are you using?

2. what are the local rules for foreign landlords?  will you be held to a higher standard for repairs, ect?

havregryn

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Re: Too good to be true math (small countries in Europe)
« Reply #4 on: February 28, 2018, 08:55:39 AM »


On the currency issue, Croatia is an EU member and they're supposed to adopt the euro at some point.. I had to google, seems no date is set but they're aiming for it
https://www.reuters.com/article/us-croatia-euro/croatia-wants-to-adopt-euro-within-7-8-years-prime-minister-idUSKBN1CZ0Q5

Still, the kuna is tied to the euro in many ways, I don't think it is likely those two can part ways in a manner that would  mess up my math.
Also, more than 90% of my guests would be foreign tourists, meaning that the purchasing power of people earning kuna shouldn't have a major effect on my pricing.

In regard of how this calculation is done, mostly based on the current owner's last year's figures (this is a friend of a friend of a friend kind of situation).
I am thinking that they may be inflating the returns a little, as I don't think he would be selling it if it were really that simple. The story though is that he wants to sell it in order to get cash to renovate a couple more places he bought in decrepit condition which I can buy as it is probably difficult to get a mortgage for this in Croatia, interest rates are nowhere near as low as ours (4-5%) and if he made good money on this year last year he feels he can get even more out of having a couple of them.
The reason I feel this may be a good deal is also the fact that this price (2000 per m2) seems fairly average for location and size (based on a casual glimpse of listings on our main real estate site), meaning that he is actually undervaluing the component of this being a fully functional business with great reviews on booking.com and airbnb.

Technically I am not a foreign landlord as I am a citizen there, plus it would mostly be rented out to tourists (this is on the coast and a major tourist destination)
Even though I feel it could ALWAYS be rented out to someone permanently for about 300 per month which would not really make it a great investment, but it would still be a net gain for me.
So I feel I should buy it and try this out.
But of course, even though this is not really a significant portion of our yearly money flow (for reference, we earn about 150 000 net per year, Luxembourg is an outlier when it comes to earning potential and cost of living in Europe) I am a bit nervous.

2Cent

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Re: Too good to be true math (small countries in Europe)
« Reply #5 on: February 28, 2018, 09:59:07 AM »
You can take the risk if you are sure you won't need to sell it anytime soon. Selling something abroad is hard and you will probably take a big loss. Also, check if you need to hire someone for maintainance and cleaning. That will eat your profits.

havregryn

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Re: Too good to be true math (small countries in Europe)
« Reply #6 on: March 06, 2018, 11:37:19 AM »
Thanks guys. We decided to buy it. The idea is that not much can go terribly wrong and it can be a good practice run to consider more substantial investments there or elsewhere (rental returns in Croatia are a lot better than anywhere in western Europe right now). I mean, even if it turns out a hassle for very little profit, it has still cost us very little and we can probably always sell it for roughly this if we decide we want out of the whole thing.
And according to my reliable sources the worst case scenario of just renting it out to an individual person to live permanently is still a net gain for us. That is incredibly easy to find as renting a permanent place there is a nightmare for tenants since everyone wants to rent out to tourists. So we would have very little trouble finding a reliable tenant to pay 350 per month.  Now, earning 4200 gross per year is probably not in any way worth our HCOL hassle, but as said, this is a good practice run if in the future we want to actually attempt to make money on the tourist boom in Croatia.
Now, the current agreement with the guys that will handle the logistics on the spot is that I do all the Internet stuff (booking, marketing, etc) which yes, raises the question is this worth my time but to that the answer is yes, as I want this experience. It has become a bit of a dream for me to buy a property in the Stockholm archipelago that has facilities I can rent out via Airbnb and do that when I semi-FIRE from my job. So this is definitely a set of skills I want to develop, hence win win.

sammybiker

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Re: Too good to be true math (small countries in Europe)
« Reply #7 on: March 06, 2018, 08:49:10 PM »
Congrats on moving forward.  I'd be really interested in hearing more as you progress.

lhamo

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Re: Too good to be true math (small countries in Europe)
« Reply #8 on: March 06, 2018, 08:59:35 PM »
That's really cute!  Now I want to take a vacation in Croatia so I can rent it....

havregryn

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Re: Too good to be true math (small countries in Europe)
« Reply #9 on: March 07, 2018, 03:41:37 AM »
Thanks guys :)
I will keep you updated, especially as we will either conclude that this was a meh idea and we now have a small apartment in Croatia we don't really need or that this was a great idea and that we should buy more next year so there will be more to talk about.
I think it is a good opportunity because as said, the pricing reflects the current real estate prices in the area and doesn't account for the fact that this is a running business with excellent reviews which removes literally all of the start up hurdles involved in buying someonething to renovate and rent out from scratch. It is also done through a reliable and reputable agency (not a given thing in Croatia!) so it removes some of the risks one would face when shopping in a country that ranks disturbingly high when it comes to corruption. And I'm supposed to pay less than a 100 in interest on borrowing this from the bank so...

We have to pay about 5000 in different fees so yeah, need to make at least some money on it for it not to be a net loss but this is all very modest scaled to our budget so I am not concerned.

It will be an interesting adventure and a taste of doing something like this on a larger scale as a way to supplement income in some kind of a semi-retirement (I don't think I can ever fully leave my cushy benefits but I would definitely like to do something with more human contact, so Airbnbing sounds fun).


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Re: Too good to be true math (small countries in Europe)
« Reply #10 on: March 07, 2018, 04:49:53 AM »
Do you know what the legal system is like in practice?  The main potential downside I can see is if legal troubles cause problems and you can't resolve them cheaply or at all - sometimes what legal systems say in theory isn't matched by local practice, especially for an outsider.  I would be asking the managers what legal problems are possible and what resources they have available to deal with them.

Apart from that, looks like an interesting opportunity.

havregryn

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Re: Too good to be true math (small countries in Europe)
« Reply #11 on: March 07, 2018, 11:51:35 AM »
One potential issue we already anticipated.
As I am a Croatian citizen, owning property there would create enough of a connection for me to become liable for tax on global income.
Therefore it is only my husband who is signing the deed. He is not a Croatian citizen and having a rental investment there will not expose him to any particular tax liability there, he will only have to pay very low basic tax on this kind of activity (this is a very specific situation and one more reason why it is interesting to make these kind of investments over there as opposed to somewhere here in the West) and declare the tax on his declaration here but that should not make much of a difference (it is after all at this stage very little extra cash).
I don't think there could be any major legal issues arising...especially for renting out via stuff like Airbnb.  I was a tiny bit concerned what if someone in the building objects to having the property rented out to tourists as I imagine they could have grounds to make it impossible to classify this as a vacation property but to be honest, that is unlikely as everyone there seems to be doing it and I don't think it would even come up as a thought (that's my Swedish experience talking, where your neighbors get to pick your tenants) but as I've said, ultimately, if everything fails, I can just rent it out to a young professional for 350 and be moderately happy with it :D As I still have a small vacation apartment for when retired and someone else is paying it off.

I have a great deal of personal skepticism for everything Croatia related but I feel it makes sense to give it a try as it is really the only truly lucrative way for us to invest in real estate.
Luxembourg and Sweden are not markets where this can be done efficiently and that leaves us good old Croatia.
And people seem to be doing this all the time...maybe a good indicator is that the only well off people I know back there are people who own real estate on the coast. To be honest, I am a little bit surprised that it is actually possible to have this rented out for 100 a night on Airnbnb. I mean, you'd get the same amount of money for a place in Luxembourg. Whereas here the property would have cost you at least 400 000.  Ok, here technically you can keep those prices year round while there it only really works in the summer, but still, it is a huge difference in how much the place costs vs. potential income. All this is telling me that as interest rates creep down, there is a long way to go to make this more expensive.

Oh well, we will see.


havregryn

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Re: Too good to be true math (small countries in Europe)
« Reply #12 on: April 30, 2018, 04:04:04 AM »
Just to update you guys that we have done it now, I signed an electronic order to pay and as of Wednesday (tomorrow is a public holiday all over Europe, not sure about the rest of the world) we own this...and then we will see how it goes.
I will keep you posted, if for no other reason then for the fact I can earn a commission if anyone else wants to get a place in Croatia lol.


sammybiker

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Re: Too good to be true math (small countries in Europe)
« Reply #13 on: April 30, 2018, 01:12:46 PM »
Congrats on moving forward, keep us updated.