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How to invest in rental property

Rental properties are a great way to become financially independent. We often get questions about how to invest in rental property. Especially, since we rent them out while we are sailing the world. In this article, we answer the most frequently asked questions about how to invest in rental property.

Ten BIG MISTAKES when investing in rental propertyIf you consider investing in real estate as a rental property, we will provide you with interesting information about how we get a monthly passive income from our rentals while still being able to travel around the world.

We also cover a lot of valuable information about investing in rental property in the blog 10 big mistakes when investing in rental property.

 

Why invest in rental property

In general, it is a smart move to look for investment opportunities. Not investing your hard-earned savings is a triple loose option:

  1. Money in the bank devaluates over time due to tax and inflation
  2. You miss out on the increasing value of your investment in the long-term
  3. You miss out on short-term monthly Return on Investment (ROI) payouts

A few years ago, we decided to invest our savings in a new (second) property. We knew that real estate was underpriced in the city we were living in (Rotterdam, the Netherlands). Back then, we actually weren’t working towards financial independence or trying to create a passive income. We mainly wanted to sort out our pensions as entrepreneurs, since we weren’t building it via an employer.

However, once we started to rent out this new property, we discovered the power of saving extra money due to the rental income. This allowed us to invest faster in the next property.

Nowadays this strategy has given us a passive income to live from while traveling the world on our sailboat.

 

How we invested in rental property

Before we dive into the questions, we get asked the most when it comes to renting out our real estate investments. Let’s tell you a bit more about our real estate portfolio and maybe you get an idea of how to invest in rental property

Over the last few years, we were able to purchase three real estate properties. They all are located in the city of Rotterdam in the Netherlands. In total, we invested 415.000 euros into these three properties. The purchasing prices were: 74.000 euros, 196.000 euros, and 145.000 euros. At the moment, the value of the properties is 644.000 euros, but this is the amount of the Dutch “WOZ-waarde” which is a governmental valuation. In practice, the value in the market tends to be much higher than that.

Out of these three, we rent out two properties. Both of them give room to three students. This means that in total we have six tenants that pay us a monthly rent.

 

Investing in rental properties for beginners – The FAQ

We have financed the rental properties with our own savings. For us, purchasing the first rental property was the most difficult because our financing came entirely from our own savings and we had no other income source. After you have bought your first rental property, you can use the passive income from the first rental property to finance subsequent purchases. Investing in rental property for beginners is therefore the hardest.

We have deliberately chosen not to take out financing for the purchase of any of the rental properties. Without financing, we keep costs low and have a high ROI. We can advise everyone that begins with investing in rental property to have a good look at the monthly costs involved.

 

Question 1. Is it still worth it to invest in real estate as rental property?

Even though prices have been going up like crazy in the Netherlands, real estate is still one of the best ways to invest your money ánd get a monthly fixed income out of it.

how to invest in rental property

However, we often hear that entering the real estate market has become more challenging over the years because prices have been going up. Of course, this totally depends on the location you are looking to invest in. But if we look at the city of Rotterdam in the Netherlands – where our real estate properties are – we indeed see a big increase in the real estate prices over the last years.

When we bought our first apartment in 2010, the average sales price in that neighborhood was 172.327 euros. In 2019, the average price for a house in that same neighborhood was 323.619 euros. That is an increase of 87,8% in only 9 years (source).

Investment-wise such an increase is great. However, assuming that your paycheck didn’t grow by almost 90% in the same period, it is clear that investing in property has become harder than it was in 2010.

By the way, if you like to know how we were able to save enough money to buy our real estate in cash, you can check out our blog on how to save money to pay for your house in cash.

Nowadays, you will have to save up more money, before you can invest in a real estate property. This means it will also take you more time before you will start benefitting from any rental income.

It is also more difficult to find the right property at a reasonable price. Since supply is low, you will have to look harder to find a good opportunity and due to the high demand, there is also more competition in the market.

Next to that, although rents increased as well; they didn’t increase at the same speed as the prices of the real estate. This means that your return on investment from a property you buy now will be lower compared to the return on investment from a property you would have bought in 2010.

All these things are for sure negative for your journey towards financial freedom. It will take longer to achieve Financial Independence Retire Early. But still, it is a rewarding strategy to invest in real estate rental properties.

Due to the high demand for housing, chances are that your investments in real estate will grow more over time. And even though your ROI might be lower, depending on your monthly expenses, it could still be worth investing to get that passive income flowing.

 

Question 2. Do you have a lot of problems with tenants?

Is it easy to be deterred from renting out your real estate due to the possible problems with tenants. Horror stories are everywhere. From not paying the rent to demolishing your house or even starting a cannabis plantation (which happens often in the Netherlands). But after years of renting out our real estate properties, we can honestly say that we didn’t have any major issues.

Of course, there have been incidental damage (most of the time unintended) and there have been situations where we had to ask for the rent because it wasn’t paid in time. But we haven’t had any serious issues.

There are a few obvious things you can do to prevent problems with your tenants, such as drafting up a good contract and make sure there is a deposit in place. But here’s a few other things we have done to prevent issues with our tenants:

  • Renting out to students
    Although students have a bad reputation for not being the cleanest tenants, they actually aren’t that bad. A big advantage of renting out to students and creating a student house is the fact that you have multiple tenants in one property. This way you create a form of social control. It would be difficult for one of them to start a cannabis plantation for instance, without the others knowing about it 😉
  • Setting the deposit higher than one month of rent
    In the beginning, the deposit was the same amount as a full month of rent. When tenants would terminate their contract, they sometimes asked us not to return their deposit to cover the last month of rent. Of course, we didn’t like that, because the deposit was there to cover possible damage to the room or the house to be determined at the end inspection. After we raised the deposit to 1,5 times the monthly rent, we never had this problem again
  • Create a simple way of communicating
    For each rental property, with three students living there, we have created a WhatsApp group. This allows the tenants to communicate with us in a really easy way. In case any problems need to be solved, we rather hear about them sooner than later.

 

Question 3. Do you use a property management company for your rental property?

investing in rental property for beginnersNo, we don’t. From the beginning, we always managed our real estate properties ourselves. We like the idea of being in control and looking after the real estate ourselves.

Since we knew we would travel on our boat and wouldn’t be physically around, we experimented with a property management company. We did a trial period of three months to determine if we would like it, but we weren’t enthusiastic about it.

Property management companies tend to cost you a lot of money. It’s not only because of their monthly fee though It is especially expensive when something needs to be fixed. The problem is that when a property management company receives a notification from a tenant, they directly send a contractor to check the issue.

We’ve had a situation where the heating didn’t work and the property management company send a contractor over, while actually the only thing that had to be done was reset the boiler. Since this contractor charges call-out-costs, that was a- 65-euros-flip-of-the-switch. Pretty costly, right?

When an actual repair has to be done, the price of the contractor is negotiated with the property management company. You only have to agree to the final offer. And while this sounds super chill, it does mean that you are definitely not getting the best price in town, since the one negotiating isn’t the one paying the actual bill.

So, in the end, the property management company killed our ROI and therefore our passive income. But how do we take care of the properties then, you might ask?

Well, we solve a lot of issues by phone, trouble-shooting with the tenant. We also have phone numbers of contractors we have worked with ourselves in the past, such as a plumber and a carpenter. We can engage them if needed. And on top of that, we have given the keys of the properties to a retired handyman we met, who can perform all-round repairs if needed. So far, this set-up works very well for us. And it allows us to travel the world while renting out.

 

Question 4. What do you think about renting out real estate to expats?

When renting out your real estate property, there a several options for the kind of tenants you like. You could rent out to students (as we do), but you could also choose to rent out to a family. Another option is renting out to expats.

Renting out to expats is a very popular option since ex-pats usually are high-educated employees from big, international companies. They work a lot, tend not to party too much, and are therefore ideal to live in your property as they won’t make excessive use of the property. Another benefit is that the actual contract and such are often arranged by a special expat organization.

how to invest in rental property

We definitely considered renting out to expats, but we chose to go for students in the end. The main reason for that is that we like the fact that we can now divide our rental property into three rooms and therefore three income streams.

If a student tenant decided to terminate the contract and we would have a vacant room for a month before the next tenant arrives, we still wouldn’t lose all of our income on that property for that month. By renting out to students, we can diversify our risk a little bit more.

 

Question 5. Is the rental income enough to cover your living expenses?

Yes, for us it is! We do need to rent out two of the three real estate properties though to make it work for our situation. The amount of passive income you need totally depends on your lifestyle. We live on our catamaran and sail around the world. Our average monthly expenses are around 1.800 euros each month. Check out our monthly expense overview if you like to know more.

The total rental income we get from the two properties is 3.414 euros each month. In the Netherlands, this income isn’t taxed. There only is a wealth tax on the real estate you own, but no income tax on the rent. This means that the 3.400 euros are a net income.

Of course, we have to pay the costs for the properties from that. In total the monthly costs for the two properties are 898,74 euros. That leaves us with a monthly rental income of a little more than 2.500 euros per month.

 

Questions about how to invest in rental property?

Hope you liked reading the answers to the frequently asked questions we receive about our rental real estate investments. We liked writing this blog and going a bit more in-depth. If you have any other questions about how to invest in rental property, please leave a comment below. We love to reply to you!

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