Hello my dear readers and fellow investors.

I just wanted to give you a quick update on the property I’m in the process of buying. This morning I had a meeting with a bank and the financing finally seems to be settled. I’m allowed to take over the existing mortgage! YAY!

#### The numbers

Here is a quick financial overview of the property:

Original property sales price: 154.500€

My offered (and accepted) price: 141.100€

Down payment: 13.400€

Mortgage size: 115.500€ (81,85%)

Mortgage interest rate: ~1% + fees (approximately 1.5%)

Yearly mortgage expenses: 1.732€

According to Danish law only 80% mortgage is allowed, but since it was so close to 80% it was accepted!

Line of credit from the bank: 20.000€ at a 5.25% interest rate.

I will only use 12.200€ + expenses for lawyer etc. now, but it’s good to have a little extra.

Yearly estimated property expenses: 3.500€

(This covers maintenance, administration, insurance, caretaker, environmental taxes etc.)

Yearly income from tenants: 17.245€

#### Summary

Income: 17.245€

Expenses: 5.932€ (3.500€ property expenses + 1.732€ mortgage + ~700€ line of credit usage)

Net profit: 11.313€

The expense for taking over the mortgage was 670€, but this is a one-time fee.

I think this is an incredible investment! For a down payment of 13.400€ that is equivalent to a 84,4% return on investment?? Of course, the interest rate is variable and could rise over the years. And at least some kind of vacancy (lack of tenants for a short period of time) must be expected. But still, it seems almost too good to be true.

Am I missing something here??? Please share your thoughts below!

Congratulations! Seems like a very good deal, how come the mortgage payments are so small, only 1732 per year?

Thank you Risto. I’m very excited about it! The interest rate on mortgage payments is as low as ever. 1,5% of 115.500€ is 1.732,5€.

You only pay interest, not the loan itself?

I also pay principal back but that’s like paying myself 🙂 That’s why I left it out of the profit calculation. I’m not sure how much principal will be paid back, I haven’t seen the exact loan schedule yet. But it’s not much, because it’s a 30 year loan.

For ROI calculations you cannot exclude the principal, principal is part of the investment.

Can you please explain why you think mortgage principal should be included? I see principal, in this matter, as an agreement to transfer a monthly amount from my current bank accounts to the bank account of “future me”. Kinda like a savings account.

On Bondora for example, it’s a completely different matter, as I have to bring the full principal amount myself.

With that logic you should not even count the down payment then, since it is also principal and you just paid your future yourself (in which case you should count those payments as your income, same logic). In the end you have to pay the full amount both in bondora and the real estate – you will not own the house AND still have the principal paid in your bank account in 30 years. ROI is calculated on the money invested, not just part of the money.

“With that logic you should not even count the down payment then, since it is also principal and you just paid your future yourself”.

I kindly disagree. I could use the down payment for other investments which could earn me eg. 10% a year on a P2P platform. 13.400€ at 10% interest rate would return 1.340€ in a year. 13.400€ invested in this property returns 11.313€. Why is that not comparable?

The principal used for mortgage is not money I have now. It’s money I will have later. Actually, the tenants are going to give me that money. In the end, as you say, I will own the house instead of the principal. But the house should hold the same value (or even appriciate in value over time), which means I have not lost money. So why should it be deducted from my ROI?

Cant you see the fault in that, you are calculating using the money you will have from tenants, but not using the money you will need to pay to the bank? Therefore your formula is incorrect, missing a key element. Yes hopefully you will not have lost money once you own the house, but you will have spent the money. Your calculation and expectation, that the tenants will give you the money does not take into account that you will pay that or at least part of that money to the bank for the the house. You may kindly disagree, but then again, if ROI for a real estate investment would be 80%, this house would not even be available for sale (or you would not have had to go through so much trouble convincing the bankers). Your yearly net profit is money received from tenants minus all expenses, interest and principal included.

https://www.investopedia.com/articles/investing/062215/how-calculate-roi-rental-property.asp

Dr Google to the rescue!

I’m brand new to real estate investing and I have LOTS to learn. That’s the fun part. I appreciate that you take the time to help me understand 🙂

I just read the investopedia article you linked to. Look at this section:

“Some investors add equity into the equation (keep in mind that the equity is not cash-in-hand money you can spend; you would have to sell the property to actually access it). To get the amount of equity, review your mortgage amortization schedule to find out how much of your mortgage payments went towards paying down the principal (which builds up the equity). This is equity that can be added to the cash-flow figure. In our example, the amortization schedule on the loan shows that $1,408.84 of principal is paid down during the first 12 months. So, $4,421.68 ($3,012.84 annual income + $1,408.84 equity) ÷ $31,500 = 0.14. Result: a 14% ROI.”Isn’t this the way I calculated it? If equity was not a part of the equasion the the ROI would be horrible if you chose a 10 year loan and paid back huge chunks of principal every month. But after 10 years you’d own the property and the ROI would sky rise because there’s no principal to be paid back.

Lets say I need to pay 1.732€ interest + 5.160€ principal back every year. That would be a realistic scenario. Lets calculate my property again using the same method as on investopedia.

So, 16.473€ (11.313€ annual income + 5.160€ equity) ÷ 15.440 (13.400€ down payment + 670€ mortgage transfer fee + 1.100 lawyer + 270€ building inspector) = 1.06. Result: a 106% ROI. Even higher than my first calculation of 84%

I think there are a lot of different ways of calculating Return on Investments.

I would calculate the return on investment over the course of the whole period. That would give you a better view of the “real” return, because the more debt you will have the more return on investment you will have, not necessarily higher cashflow.

So I always calculate it based on the whole period;

– You will have around 152k costs in 30 years and 510k income.

– If the value of the house will not increase you will have 141k of equity in the house.

– Therefore 336% Return of investment = 11% per year.

The return will be higher in the beginning and lower later. So probably you will use the overvalue of this building to gain more debt to buy new property in the future to increase your ROI…

Hej Jørgen,

I cant seem to find a contact e-mail, but I am curious and would like to ask you a few questions, as a fellow would-be financially free person 🙂

How are your thoughts on the practicalities with regards to tennants, fixing broken stuff etc? Do you see yourself purchasing more real estate like this in time?

Hi Peter,

I’m not a craftsman so I’m planning to hire professionals to fix broken things.

I am definitely going to purchase more properties in the future. The sooner the better 🙂 In order to buy property number two I need to have at least 20% of the asking price in cash.

What seems incredible to me is the yearly income from tenants, which is actually over 10% of the property’s price. Could you share a bit more about average rent and cost of apartments in your area?

Hi Rasmus,

On average, yearly income of a rental property is about 5% of the property’s price in Denmark. In the bigger cities yield is about 3% and in less attractive locations returns are 7-10%, depending on the condition of the property. I would estimate average rent to be 10€ per square meter per month.

Hello my friend, im Sérgio from Portugal, how much is the current net interest?

Best regards

Hi Sérgio,

The net interest on the mortgage payment is -0,15% at the moment. (Yes, they pay me to borrow money). But the fees attached to the mortgage are higher than the interest, so I still have to pay them after all.

Best regards,

Jørgen

Hi Jørgen,

Awesome blog mate, congrats for the huge work that you put in. Regarding the real estate investment I’ve found out about this guy, Brandon and his site -BiggerPokets.com. This is how he does his math about properties.

https://www.youtube.com/watch?v=T_7vhsSBi7c

Take care!