Real Estate Investing 101 for Software Engineers

+ deep-dive on the Portuguese and European markets, with ROI numbers from my experience.

In a few articles so far, I have mentioned how Software Engineers can use real estate to accelerate their path to financial independence.

This week, I'll talk about a few key concepts and learnings from my experience investing in rental properties in Europe.

I'm not an expert in the field, and my learnings are focused on high-leverage pieces of knowledge that I employ in my life and investments.

So far, the results from my real estate journey have been quite good.

So, even if I'm not going to share anything fancy, it might still be useful for those interested in it. At the end of the day, results come from 10% knowledge and 90% action, so maybe you don't even really need fancy real estate knowledge.

Let me know if you find this topic interesting, so I can decide whether to dive deeper into it in future posts. Quite a few people have DMed me about it so far, that's why I'm addressing it.

Glossary — Key concepts

To start off, let’s discuss a few key concepts relevant to the real estate investment game:
- Rental Yields.
- Cash Flow.
- Mortgages.
- Interest Rates.
- Cash on Cash Returns.
- Equity Gains.

1. Rental Yield

This is the annual rental income from a property divided by its purchase price or current market value, expressed as a percentage: (annual rental income)/(property price). It's a quick way to measure how much cash flow your investment might generate, regardless of monthly costs, financing (i.e. mortgages, loans), etc.

2. Cash Flow

Difference between the monthly rental income and all operating expenses, including mortgage payments, property management fees, taxes, maintenance, insurance, and other miscellaneous costs.

3. Mortgage

Essentially, a loan used to purchase property, with the property itself serving as collateral (i.e. if you fail to make your mortgage payments, the bank can take the property to recover its money).

4. Interest Rates on Mortgages

Interest rates on a mortgage determine how much you will ultimately pay for the property above its listed price. These rates can be:
- Fixed: The interest rate is set at the beginning and does not change throughout the life of the loan.
- Variable/Adjustable: The interest rate can change based on fluctuations in the broader financial market.
Interest rates directly influence your monthly mortgage payments and the total cost of borrowing. High rates increase both your monthly payments and the total cost of the loan, which could affect cash flow and investment returns.

5. Cash on Cash Returns

Cash income earned on the cash invested in a property: it's a way to measure a property's ROI (return on investment). It is calculated by dividing the annual cash flow by the total cash invested. It measures the return on the actual cash you've put into the investment (such as the down payment and any renovation costs), not on the total value of the property.

6. Equity Gains 1 - Appreciation

This refers to the increase in the value of the property over time, contributing to your return on investment when you sell. Usually, you can get estimates on a property appreciation estimates based on the area it's located in.

7. Equity Gains 2 - Principal Paydown

This refers to the portion of the mortgage payment that goes towards reducing the principal balance of the mortgage. Each mortgage payment you make increases your equity in the property because you own a larger portion of it outright. It provides a return by increasing your stake in the property.

Investing in Portugal's Real Estate 🇵🇹🏠

After exploring various European markets, I chose Portugal for real estate investment. Here's why:

1. High Rental Yields

The market offers significant cash flow potential due to high rental demands.

2. Accessibility of Mortgages

Non-residents, especially those in Europe earning above $100k, can typically secure up to an 80% loan-to-value ratio on mortgages.

3. Favorable Interest Rates

With rates generally below 5%, Portugal's interest environment is more appealing compared to much of the Eurozone.

4. Property Appreciation

Chosen locations are likely to appreciate due to increased tourism, the growing number of remote workers, retirees, and overall economic growth.

5. Good Connectivity

Lisbon's airport is big and well-connected, including direct flights to Zurich and many other major cities across Europe, which makes it easy for me to visit.

I've personally invested here and the numbers have been promising. Stay tuned for a deeper dive into my experiences with the Portuguese real estate market.

Here are the numbers from my real estate investment in Portugal 🇵🇹 🏠 👇

As I've previously discussed, I evaluate my real estate investments based on three key ROI types:

1. Cash On Cash (CoC) Returns
2. Property Appreciation
3. Principal Paydown

Disclaimer: The methods I use are tailored to my personal approach and may vary for others.

For privacy, I won't share absolute figures. Instead, I'll discuss the performance indicators of my investments. I think it's still useful to share this info.

Credit-wise, it's 80% mortgage at 4%-5.5% interest rates.

Here are the ROI numbers:

1. Cash On Cash Returns: 6.7% after taxes and management costs.

2. Property Appreciation: 6.8% (assuming 2% appreciation).

3. Principal Paydown: about 3.7%.

So the total yearly ROI is around 17%.

A few things to note:

1. Appreciation is speculative; actual figures can vary. I based my 2% estimate on local market trends.

2. One could argue that the Property Appreciation ROI would need to get reduced because of capital gains taxes in case you sell (which you can avoid if you buy through a company and not as an individual 💡). Since it's a good asset, I don't plan to sell unless there's some great opportunity.

3. I am not pricing in the hours of work I put into this. I consider this more as a side hustle than a passive investment. I also treat it as a way for me to learn (valuable) things outside of Software Engineering.

Some considerations:

1. This is not a good real estate (RE) investment for full-FIRE/retirement: the best one in that scenario is a high cash-flow property with little appreciation potential, bought with no mortgage. You can find these with a CoC ROI of 10%-15%. In that case, you'd only need $200k in savings and a few hours of work per month, to have about $30k yearly income, which is not too bad in some LCOL locations in Europe 😉

2. But it's a good one for wealth-growth IMO, because the overall ROI is quite high and diversified in cash and equity growth.

What are your thoughts? 🙂 I'm guessing most of you prefer ETFs, which is totally fine!

But I know some of you are interested in real estate too 🤓

Other Interesting European Markets

To wrap up this article, let's look at some other markets in Europe that I've explored in my research, and at their numbers.

I didn't end up investing in these locations, but they might be of interest, especially if you have a competitive edge in one of them (language/family/etc).

For each of them, I was analysing the numbers for the scenario in which I were to buy a small/medium flat in a decent area, with the biggest mortgage I could get as a foreign investor with a high salary.

I'm only analysing the Cash-on-Cash ROI here, and not the Equity gains.

Riga, Latvia 🇱🇻

Property Price: €100,000

Down Payment: €20,000

Fees: €5,000

Initial Expenses: €10,000

Mortgage Rate: 4.5%

Term: 30 years

Net Rental Yield: 8%

Rental income tax rate: 10%

Cash-on-Cash ROI: 6.67%

Tallinn, Estonia 🇪🇪

Property Price: €110,000

Down Payment: €33,000

Fees: €2,000

Initial Expenses: €10,000

Mortgage Rate: 4.0%

Term: 30 years

Net Rental Yield: 6%

Rental income tax rate: 20%

Cash-on-Cash ROI: 1.93%

Istanbul, Turkey 🇹🇷

Property Price: €60,000

Down Payment: €30,000

Fees: €2,400

Initial Expenses: €10,000

Mortgage Rate: 10.0%

Term: 30 years

Net Rental Yield: 7%

Rental income tax rate: 20%

Cash-on-Cash ROI: 0.47%

Budapest, Hungary 🇭🇺

Property Price: €90,000

Down Payment: €18,000

Fees: €3,600

Initial Expenses: €10,000

Mortgage Rate: 4.5%

Term: 30 years

Net Rental Yield: 4%

Rental income tax rate: 15%

Cash-on-Cash ROI: -4.17%

Lisbon, Portugal 🇵🇹

Property Price: €200,000

Down Payment: €40,000

Fees: €14,600

Initial Expenses: €10,000

Mortgage Rate: 5.0%

Term: 30 years

Net Rental Yield: 7%

Rental income tax rate: 28%

Cash-on-Cash ROI: -0.35%

Note:

These numbers are for averages investments (probably considering rental yields for long-term entire-flat rental).

So, I think they can be better (in fact, as shown above, I get much better Cash-on-Cash ROI in Portugal than -0.35% with my investments there).

If you've invested in any of these markets or are considering doing so, I'd love to hear about your experiences.

Please share them in the comments or feel free to DM me. Riga looks promising! Maybe also Tallinn 🧐

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