Rents

people discuss about graphs and rates

The 4 Types of Successful Apartment Investors

Cyril Soigneux

You may find many articles on how to buy apartment buildings. It seems easy after all…

But what if you follow all these steps only to find out that you have overpaid, you get no or negative cash flows and that you will lose money when you dispose of the property…

The one-size-fits-all method for regret

man comforting crying sorrowful woman with hands together
  1. Find a good property
  2. Get it under contract
  3. Do the inspections
  4. Get bank financing
  5. Hire a local property manager
  6. Close the deal
  7. Realize the deal was not that good and/or did not fit into your strategy and/or was outside your skill set!

The Builder

man wearing black denim pants with carrying hammer on holster
  1. Buy the property
  2. Renovate the buildings and amenities
  3. Stabilize the income and tenant turnover
  4. Improve the Net Operating Income to show strong cash flow during a 12-month period (seasoning)
  5. Refinance to cash-out the forced appreciation gained through the improvements
  6. Repeat the process

The Holder

man and woman walks on dock
  1. Buy the property
  2. Renovate the buildings and amenities
  3. Stabilize the income and tenant turnover
  4. Live off totally or partially from the strong cash flows
  5. Keep the property as a long-term investment (passive income)

The Exchanger

contemporary tall building with glass facade
  1. Buy the property
  2. Renovate the buildings and amenities
  3. Stabilize the income and tenant turnover
  4. Enjoy the strong cash flows on the medium term
  5. Sell the property to cash in the forced appreciation
  6. Immediately reinvest the proceeds tax-efficiently for a larger property
  7. Repeat and enjoy the snowball effect and the deferred taxation

The Syndicator

woman in white long sleeve shirt standing beside woman in white long sleeve shirt
  1. Have relationships in place to find and convince partners
  2. Extensive legal documentation to have in place (especially if the deal falls under security laws) to highlight rights and duties of the parties involved and the strategy
  3. Buy the property with investors
  4. Renovate the buildings and amenities
  5. Stabilize the income and tenant turnover
  6. Improve the Net Operating Income to show strong cash flow during a 12-month period (seasoning)
  7. Collect fees at the different stage of the scheme
  8. Exit / Sell the property
  9. Pay back the investors with the proceeds
  10. Repeat with another deal

Challenge the numbers from the seller or their agent (past vs present)

close up photo of survey spreadsheet
  1. Income : add the vacancy rate of the area to decrease potential income
  2. Expenses: do not use the standard 30% rule, know your market to find the relevant cost per unit
  3. Net Operating Income : to recalculate with the adjusted income and expenses
  4. Cap Rate : may be accurate from the start but to be checked with recent transactions
  5. Property Value: greatly revised down when income and expenses adjustments are factored in
  6. Use this value as a base for your offer

Prepare a pro-forma to find out projected values (future)

man using a laptop
  1. Income : do your research to find the potential rent increase per unit
  2. Expenses: use the relevant figure per unit in the market (same as when adjusting the seller’s figures)
  3. Net Operating Income : to recalculate with the rent increases and correct expenses
  4. Cap Rate : conservatively keep the same current rate
  5. Property Value : derive the potential future value given the projected Net Operating Income
  6. You just found out the upside potential of the deal

To sum up

person writing on notebook
  1. You verify the numbers (past vs present vs future), if you cannot, do not go further
  2. A goal : buying under-priced properties, in a good location, with the ability to raise rents
  3. Know what type of investor you want to be
  4. In-depth description of the four investment strategies will be provided in further articles
Acknowledgements

Peter Harris from Commercial Property Advisors in this video

Luxembourg – Housing in figures (Statec – March 2022)

Cyril Soigneux

Summary of price developments

  1. Prices of apartments and houses in Luxembourg at the end of 2021, +12% over one year, slightly slowing down.
  2. The increase in Q4 is mainly due to apartments under construction (+7.7% over one quarter).
  3. Apartments under construction cost on average between 10 to 20% more expensive than in the existing one.
  4. Average price of a house in the canton of Luxembourg: 1,450 million euros, almost double the price in the north of the country.

Summary on the evolution of rents

  1. + 53.2% increase in rents announced for apartments between 2010 and 2021 (+41.4% for houses).
  2. Discrepancy between the changes in rents announced versus current rents prices due to the low adjustment of rents in Luxembourg (43% of the stock was re-adjusted between 2014-2018, Statec 2019).
  3. Visible consequence on the effort rate of households according to the age of their lease: tenants in place for less than 5 years devote 39.7% of their disposable income to housing, compared to 34.5% for those in place for more than 5 years.
  4. The average rental area has decreased since 2010, from 74m² to 61m², a decrease that is not found for apartments sold (-3m² in 11 years on average).
  5. Studios now represent 30% of apartments rented compared to 10% in 2010.
  6. The average increase in rents is also explained by location, 61% of apartments rented in 2021 are rented in Luxembourg compared to 44% in 2010.

Summary on differentiated trends in rents versus selling prices

  1. Increase in advertised rents +4%/year on average between 2010 and 2021 when the price of apartments increased by +7.2% on average over the same period.
  2. Increase in selling prices due to investors’ appetite for the Luxembourg market and the increase in the solvency of buyers.
  3. Appetite stimulated by housing taxation, historically low credit rates and the extension of repayment maturities and of course the good economic and demographic health of Luxembourg.
  4. However, supply remains inelastic due to difficulties in mobilizing land reserves.
  5. Finally, the rental market is constrained by the incomes of tenants, which are growing at a slower pace than those of landlords.

Link to the full report