Buy An Investment Property, Not A Rental Relationship
Investment property: Sometimes you hear someone considering buying an investment property because they have a good tenant ready for it. This is very human and understandable. After all, it’s practically guaranteed income.
On the other hand, this is a rather short-sighted investment. If, for example, your cousin’s son has got a place to study, and you think that there will be a secure tenant for five years, then now is a good place to get an investment property.
In itself, five years is already 1/4 of the time it takes for the apartment to pay for itself debt-free, i.e., quite a good chunk.
But what if the boy finds a girlfriend after the first year and wants to move with her to a bigger apartment? The tenancy could last only one year.
Are you going to insist that he live for the five years originally thought? Legally, this right does not exist if the lease agreement has not been concluded for five years. Are you talking to your cousin that this is breaking the spirit of the contract?
And even if the contract was made for a five-year term, would you stick to it at the risk of your relationship with your cousin suffering?
In other words, it is not worth getting an investment apartment just because there is now a known good tenant for it. If the location of the apartment is good, there will always be a tenant, a cousin’s son, or someone else.
Therefore, it makes sense to get a good investment property. That is one whose location, condition of the housing association, and purchase price are good.
If these criteria are met, it is only a plus if you have a tenant ready for it, as long as you think in advance about how you will deal with the problems of the tenancy relationship.
Because the downside of renting to someone you know is that if something goes wrong, how strictly do you dare to pursue your interests? If, for example, the final cleaning is poorly done, do you ask your cousin to clean again or do you pay the cleaning bill yourself?
These issues can be avoided or at least mitigated by an open discussion in advance. Visit the apartment with your cousin and his son and agree on the rules of the game, that if the final cleaning is not done, it will be deducted from the deposit.
Or if the walls have larger than normal dents, they will be patched and painted at the tenant’s expense.
In business premises, it is even more important to buy specifically the business premises, and not its tenant. Is the office in such a location that it can be rented again if the current tenant leaves?
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You can easily be attracted by a high temporary rental income in business premises, but try to think if it is possible to maintain it in the coming years.
If Liiketila is located on the stone base of a withering municipality, it is not much comfort, even if its rental income is currently in double digits.
During the last year, there have been reports of cases where Liiketila has been sold to passers-by for a euro (and probably given money or a stronger man). In this way, the seller gets out of the problem situation, and the payment of the consideration is transferred to the “buyer’s” problem.
Of course, there is no intention to pay the consideration. The seller’s comment in these cases has usually been “the buyer can do what he wants with his property” even though he knows very well what is going on.
The housing company will take over the Commercial Space and try to sell or rent it, which will be difficult if not impossible.
This has a bit of the same logic as when buying an apartment in a remote area of a place with heavy migration losses. Even if the apartment has a rental yield of 20%, there is a chance that the investment is bad.
Can you rent the apartment when the current tenant leaves? How many empty months will there be? For example, three empty months drop the rental income by about 5 percentage points, i.e., 20% → 15%.
And what is the value of the apartment in five or six years when it is paid off debt-free? The value may be close to zero. Or if there is still value, and you decide to sell it, what was the total return?
It may have happened that you have worked for five years and taken a risk so that you now have a debt-free apartment with a value of 5,000 euros. Was it worth the risk and effort? Maybe not.
And if the apartment is still rented after five years, what kind of return is it in euros? It may be that we are talking about absolutely small sums, even though in percentage terms the figure is large. Think about whether these euros are worth the effort.
The same consideration should be made if you are buying a small space tailored for special use. For example, a single-family house or a small apartment building that has been converted into a commercial space, hotel, or restaurant.
Even if there was a tenant with a long lease at the time of purchase, what do you do with the property when the lease ends and the tenant leaves?
Or what if the tenant’s business is not profitable, and it goes bankrupt in the middle of the tenancy? Is it possible to rent the space as it is to the next tenant, or does it require expensive alterations?
This is why I like to invest in new apartments in good locations. The yield at the time of purchase is lower, but the long-term visibility is positive and the risk of re-renting is really low.
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