It is a question that he asked me a long time ago after reading the famous book “Rich dad, poor dad”. Yesterday before going to bed it crossed my mind again.
The idea of rents is great but… is it really realistic?
You will be sincere. This is not quick or easy. To start you will need a solid source of income and through a payroll or another type of recurring money flow. When I say “solid” it has to be in the eyes of a bank. Each person is able to create a portfolio of real estate if necessary to maintain a mortgage.
The best answer to the question…
It’s how it always “depends”… If you don’t have a family and you live in your parents’ house, renting an apartment to students may already allow for rent. In my case I have a family with three children. If I add my companies the family is much bigger and they all have to eat.
My situation is not the same as that of a student. The bad thing that also comes with age is that you get used to having a more expensive lifestyle. Before frozen pizza was enough and now every now and then I like to eat it in a restaurant. It is not exaggerated either, but it is a small example of how the monthly budget increases when you go from one phase of life to the next.
ask yourself this question
How much money do you need each month? It is the first question you want to ask to know the amount of real estate you will need. At the time I came up with a figure that has not changed in seven years. I think it’s a good thing, although that figure has always been high. When you are clear about what you want or need to enter, the next step comes.
When do you want to live on rents?
In my case I have time. I want to have a recurring cash flow when I am no longer able or willing to work. This I hope will be around 80 or beyond if all goes well (knock on wood as you type this sentence).
This question is relevant to me since you have to calculate the cash flow generated by a property after paying everything: mortgage, maintenance, taxes, reserves, community, etc. You should always set aside money for contingencies because sooner or later a pipe breaks, a window has to be replaced, etc.
Calculate cash flow
Since I don’t need to live on rent now, I’m not so worried about it. It’s more of a theoretical thing like “if I wanted to…”. When I have reached that age (even before) my properties will be free of mortgage charges, so the cash flow will be much higher.
I have properties that have a mortgage of 500 euros per month but that generate a monthly cash flow of 600-700 euros. If I set aside money for future repairs, I still have a positive cash flow of 500 euros from a property. It’s not bad at all. This is possible in Spain but practically impossible in Germany through investment in buildings.
Calculate the necessary capital
At the time I had to put up some 20,000 euros of capital. The rest was given to me by the bank. Those were other times because today they don’t lend me 90% of the price of the property. With 70% I can already be happy. You could be different if you do it as an individual and the bank does not consider it an investment. In this case, even depending on your economic situation, you can give up 100%.
To replicate the example of the previous building we would have to invest a capital of 40,000 euros. From this I can already get a metric. For every 1,000 euros invested, I can generate 0.5 euros of cash flow. To reach 1,000 euros of cash flow, therefore, I have to have about 80,000 euros. For 2,000 euros, 160,000 euros capital, etc. I think you heard it.
Just like I said at the beginning. Now you can put a specific figure on it depends (or so I hope). In my case, this post has given me the idea of calculating the exact data of my metric to make the numbers.