Expert Needed

[madridman]

Hello everyone,

My name is Dean and I am from the UK.

I moved to Madrid 3 years ago, and my girlfriend's parents gave us a plot of land (South Madrid).

We build our dream house. We came into a bit of cash, so we paid off 90,000 euros of the construction costs, thus leaving us with a mortgage of around 140,000 euros.

Bear in mind the plot of land was valued at 180,000

Anyway, we now have our mortgage of 140,000 euros, and by early 08 we will have around 30,000 in cash in the bank account.

Now, here is where I need the expertise of you guys and gals to guide me. Bear in mind I know very little about this, so any complex jargon will go straight over my head.

My initial plan was to pay off our mortgage as soon as possible. The mortgage free lifestyle is everyone's dream.... or so I though. Then I met a woman who was worth 30 million+ due to property investment, and she said "Dean, if you get a bit of money, then get another mortgage on another house and rent it out, build a portfolio of property"

Ok, sounds great.

The way I see it, I have 4 distinct paths that I could take (correct me if I am wrong). Today I am asking you experts to tell me what you would do if you were me.

PATH 1 - Use the 30k to buy another property. I don't know the mortgage rules, but I am pretty sure I have to pay xx% of the mortgage and they pay the rest. Would 30k get me very far? Would having an existing valuable property help?

PATH 2 - Sell the current house and buy a smaller home outright, thus leaving me with the working class dream of no mortgage.

PATH 3 - Sell the current house, and buy numerous houses (with mortgages) around the UK and Spain.

PATH 4 - Rent my current home as a luxury rental, then use that money to travel the world, and once I am finished travelling, perhaps get another property.

Now, you guys are going to need some more info, so here goes.

We have not had our house valued. However, we have looked at houses in the area, and we believe around 600,000 euros would be the valuation.

In terms of renting our property - we are 45 mins from Madrid City Centre, this is a bit of an issue, as the business people and expats will likely want to live close by. That said, 600-800 euros in Madrid centre gets you very little, so perhaps I can tempt people to come further away? That said, I would expect at least 2,500 per month as a longterm rental, and 1,000 per week as a holiday one.

* I can't see people wanting to stay here on holiday, not many people speak english, and all the attractions are in the centre. That said, they are building a direct train route to the city from our town, that should be done in 2 years, and should make a huge difference.


Anyway, sorry for the long post.

What would you do if you were me?

Dean

[jessiesc]

Not knowing the Euro market, your financial situation or your age. Generally speaking however, financial direction is a personal option many of us make based on our social behaviours and our future goals.

You might want to consult a financial advisor (to my knowledge, there aren't any on this forum). If it were me, that's where I would start...

But to generalize on your paths...

"Dean, if you get a bit of money, then get another mortgage on another house and rent it out, build a portfolio of property"

Spot on!

PATH 1 - Use the 30k to buy another property. I don't know the mortgage rules, but I am pretty sure I have to pay xx% of the mortgage and they pay the rest. Would 30k get me very far? Would having an existing valuable property help?

This works, but has drawbacks. Not sure what you could get for 30k down or if you could afford 2 mortgages when the additional property wasn't leased.

PATH 2 - Sell the current house and buy a smaller home outright, thus leaving me with the working class dream of no mortgage.

This works also. Gives you no mortgage living and the ability to save and purchase additional properties in time or to invest in other areas.

PATH 3 - Sell the current house, and buy numerous houses (with mortgages) around the UK and Spain.

If this is indeed feasible, this is the one I would go with. If you don't need to live in a 600k house, sell it and purchase additional properties to build a portfolio. With luck and foresight you will hopefully realize enough financial gains to purchase that 600k house in the future anyway.

PATH 4 - Rent my current home as a luxury rental, then use that money to travel the world, and once I am finished travelling, perhaps get another property.

IMO, this is a persons way of looking at things with little regard for the future.

Sure it sounds like a wonderful idea, live care free for awhile, travel and see the world. Eventually you will have to come back to reality with little to no financial stability.

I can poke so many holes in Path 4 example: "Hmm, I live in an apartment and just received $300,000 what should I do, buy a house or buy a Ferrari... Think I'll buy a Ferrarri"! You can travel later in life once you've hit financial independence and really enjoy it. See Path 3...

Food for thought: Most of the wealthiest people in the world got there through real estate.

Anyway, good luck in your decision. I wish someone would give me a piece of property, Care to share

[madridman]

Thanks for the great advice.

Ref point 4, I see what you mean. It would be fun for the short-term, but essentially it would just be a FREE around the world trip. Certainly sounds nice, but in the grand scheme of things, it probably wouldn't achieve much.

Path 3 seems to be the interesting option. My major concerns would be the taxes on new property in Spain (i believe you need to own for 4 or 5 years before it comes down), that said, in theory, I should have between $500k and $600k profit from the sale.

So the question therefore is what would $500k get me if I was to use it to buy rental properties?

I know that is a broad question, so I will re-phrase it...

Previously I thought $500k means you can buy a property up to $500k in value. Now I am told that really all you do is put up say... 20% of the cost, and get a mortgage for the other 80%. Ideally the rental should cover the cost of that mortgage.

So, using my *guess* / estimates, if I was to purchase property with average values of $300k, then 20% would be $60k, therefore, in theory, I could get 8 properties with my $500k

Does that make sense?

Am I way off the mark with this?

Dean

[jessiesc]

Previously I thought $500k means you can buy a property up to $500k in value. Now I am told that really all you do is put up say... 20% of the cost, and get a mortgage for the other 80%. Ideally the rental should cover the cost of that mortgage.

This is called leverage. It is the preferred way to purchase anything if there are tax incentives. Basically, it is using someone elses money to purchase something while retaining as much personal capital as possible. Wiki Description of Financial Leverage.

So, using my *guess* / estimates, if I was to purchase property with average values of $300k, then 20% would be $60k, therefore, in theory, I could get 8 properties with my $500k

In theory, it makes sense, you are not off the mark and you are correct.

However in practice that number may be a bit too aggressive. A few items you are not considering and must for income property may be: Insurance, Taxes, Vacancy Rate, property management fees, reserves as well as a few others.

Either way you have a basic understanding.

[madridman]

Thanks again.

If anything comes from this, I will make sure it was worth your time.

By the way, I am a leading UK Internet Marketing guru, so seeing as this is also a webmaster site... if anyone has any webmaster based questions, I am the man to ask

Jessie, yes, I see what you mean. My estimate left no room for other expenses, so let's go with a non-aggressive estimate...

Instead of 8 properties, I got for 5 and have some money put away incase I am unable to rent some of them.

I have to confess, I like the idea of having 5 properties at approx values of $300k each, than having one luxury house.

Thanks for your input.

Dean

[madridman]

ok, based on reading what you have posted thus far...

In an ideal world I would like to continue living in my current house, but perhaps leverage the value of the house to purchase one additional property, with the aim of renting it to cover the mortgage.

Is this possible?

Dean

[Calgary Agent]

Madridman - Keep in mind that quality of life and risk tolerance are also considerations. It sounds as if your current property (your "dream home") is well suited to your current lifestyle. Are you willing to adjust your level of living if you were to sell and purchase multiple smaller properties? Also, there is considerable work (and headaches) associated with renting properties (being a landlord). Damages, insurance, etc etc etc. Are you willing to take this sort of thing on ... ?

[madridman]

Good points.

We have considered all of this, and that is why we are now ideally looking for a way of purchasing one additional property without selling the current home.

[bahhatte]

Hello,

I'm a property agent from Morocco, if i was :

1/ I'll think of buying another house for example in Marbella, Costa del sol or Almeria with the 30k-45K and start renting it for 1500€-2500€ per week to pay all my loans.

2/ use my 30k to buy in a foreigner country where prices are cheaper than europe like Morocc for example (I do live in Morocco i'm a Real Estate Agent) and move to it where the costs of livind is much cheaper than europe you can live in luxury for 1000€ per month or even less and start renting the house you said you have in Madrid

3/Or you can sell your house as you said for 600 and buy several properties in Morocco and start a simple real estate company as many of my friends have done and they have mad a fortune from that due to the cheap prices and the good areas availlable - ex: an American friend of me has came with a 50 000,00€ he has started his company now he has over than 150 properties and a REAL FORTUNE "sorry i can't ive names" but its true you should start thinking of investment

[Northern_IL]

If you are comfortable with your financial situation, and your current mortgage, AND you would like to keep your house, then path #1 is your choice. You don't need to get crazy and buy a bunch of investment properties, just get one or two. After you start seeing a return, then take out equity loans on the rentals and buy another property. Keep going and soon you'll have several. Once you have a bunch, sell the first 3 or 4 you originally got and pay down the mortgages on the remaining properties. After another year, take another equity loan out and repeat.



If you are not comfortable keeping your existing mortgage and others, then go with #3. This would be your option if you would be unable to afford it if you are unable to find renters for your investment properties.



Good luck.