The Full Guide to Property Mortgages Investments in Europe PART II

Property Mortgages

Considering all the points addressed in the first part of this article, there are few Real Estate Investing Strategies you should consider for investment.

1. Fix-and-Flip

The Fix-and-Flip strategy is the business of finding properties that need work, doing the repairs and reselling them at top price for a profit. 

Pros

  • The potential ROI is very high
  • The ROI is delivered in one lump and after a relatively short term
  • No property management headache with renters

Cons

  • You need to be a good marketer in order to monetize a maximum on the investment
  • High risk – If you miscalculated the renovation costs you may find yourself at a loss down the road
  • The costs of acquiring, renovating and reselling involve a lot of taxes, fees, and insurances
  • The loans for such investment are short term and missing the repayment deadline may cost your profit margin.
  • Your profits will be subject to Capital Gain taxes.

2. Buy-to-let

This strategy revolves around the buying of a home or an apartment with the purpose of renting the property for a profit.

There are two kinds:

  1. Investing in Short Term Rental Properties

Also known as Airbnb rentals or vacation rentals, the basic idea is similar to investing in traditional rentals, but this time you rent out your property on a short term basis – usually per night – rather than on a monthly or even annual basis. 

  1. Investing in Long Term Rental Properties

Buying an investment property to rent out on a long term basis has been and remains one of the best ways to make money in Real Estate. The most important benefit of traditional rentals is that an investor gets to make money both in the short-run (through rental income) and in the long haul (though Real Estate appreciation). 

Using a rental property calculator could help you forecast the steady income you could make from renting the property.
While using the calculator make sure to keep a vacancy rate of at least 7% and significant annual repair/maintenance expenses, to be on the safe side; do not forget to include property management expenses as well.

Pros

  • Predictable income from the rent
  • Tax benefits allow you to deduct many expenses connected with the rental property and therefore reduce the tax on your profits in the categories of:
    • Mortgage interest payments
    • money spent on mortgage interest
    • repairs, and maintenance costs
    • Insurance premiums
    • Tenant screening fees
    • Legal costs – for the lease agreement
    • property taxes
    • lawn care
    • losses from casualties (floods, hurricanes, etc.)
    • homeowners association fee (HOA fees) 
    • condo or co-op maintenance fees.
  • You can sell a rental property and invest in another of “like-kind” without paying capital gains taxes

Cons

  • Besides generating income, rental properties also generate expenses ranging from 37% to 45% for the maintenance of the property
  • Consider hiring a property manager
  • The housing market can fluctuate depending on location, supply and demand, and the economy can affect the rent
  • Lack of liquidity, the cost of upkeep, and the potential for difficult tenants and for the neighborhood’s appeal to decline 
  • Tenants may fall behind on rent and/or damage your units, having tenants always includes the risks of them not paying rent, having to evict them and finding your property damaged ( these scenarios can be avoided by resourcing to aggressive tenant screening, holding on to guarantees and/or invest in rent insurance)

3. House Hacking

House Hacking means living in a home that also produces income, like in a duplex, triplex, fourplex, or house with extra rentable space like a basement, guest house, or spare bedrooms. By renting out part of your residence, you are getting someone to pay off your mortgage for you via cohabitation.

These types of dwellings still qualify for the best traditional home financing, while actually doubling as investment properties

Pros

  • If the goal is ultimately to own the property, house hacking will get you there while benefiting from living in the home and get rent from multiple tenants, ultimately covering the mortgage on the property (This can extend to utilities as well, such as cable, internet, phone, water, electric, gas, and so on).

Cons

  • It requires work as a landlord
  • The home is no longer just yours and you need to live with your tenants – it can be awkward at times (Lack of privacy)
  • Tenants may fall behind on rent and/or damage your units, having tenants always includes the risks of them not paying rent, having to evict them and finding your property damaged ( these scenarios can be avoided by resourcing to aggressive tenant screening, holding on to guarantees and/or invest in rent insurance)
  • Vacancy costs and maintenance must be considered

4. Live-In-Flip

The Live-In Flip is a strategy where one buys and moves into a home, fixes it up while living in, and waits two years or more to resell it for a profit. 

Pros

  • It eliminates double mortgages 
  • enjoy homeowner tax breaks- Live-in flipping exempts owners from paying capital gains taxes on the sale- up to $250,000 for an individual or $500,000 for a couple filing jointly- check tax rules in your country.

Cons

  • Remodeling takes over one’s life- the home becomes a construction zone
  • One will have to move every few years to continue making significant tax-free profits,.
  • One will need to evaluate accurately the cost of the renovation if they don’t want it to eat up their profit margin
  • Understand thoroughly the market and what will sell in that area – one may end up living in a house for a few years which doesn’t answer their needs but will ultimately sell well.

5. Buy-Remodel-Rent-Refinance-Repeat Investing (BRRRR)

Essentially you look for fixer-upper properties that you can buy below their full value. You use short-term cash or financing to buy a property in need of repairs, renovate it, rent it out, refinance it for cheaper long-term financing, and repeat.

Make sure you’re confident in the investment property’s after-repair value. Your long-term financing depends on it!

Pros

  • Once the renovations are complete, you can refinance based on ARV of the investment property, rather than what you paid for the property, meaning you can not only pull out the initial invested cash, but you may even pull out profit
  • Most fix-and-flip lenders will finance 100% of your renovation costs.
  • It’s an excellent way to build a rental portfolio without running out of cash early in your investing career.
  • The numbers are predictable: the purchase costs and the renovation costs are known (assuming there are no surprises), and you have a strong sense of the ARV.
  • The Final Product Is a Long-Term Investment Property in Excellent Condition

Cons

  • The “refinance” part implies a second round of closing costs with a second lender, who will charge another round of fees.
  • The rush to refinance can lead to rushing with the leasing part, not screening the renter compromising on their quality.
  • Relying on a refinance while not being able to guarantee the property value will increase enough to qualify for one will prevent you from getting a new loan at the rate you were aiming for in your plans.

6.  Buy and Hold

This strategy is a way to make money in the long term and not in the short run: it entails buying a real estate property and renting it out while holding on to it until natural appreciation pushes its value sufficiently high to make sense for you to sell it. 

The key to success with this Real Estate strategy is to buy a property below market value and/or in a cold (buyer’s) market which is expected to heat up in the coming years. 

Pros

  • Long term ownership doesn’t imply that the property has to be leased for long term rental; instead, it could be rented for higher returns as a vacation rental or short-term corporate rental
  • Provides an ongoing passive income
  • Tax benefits allow you to deduct many expenses connected with the rental property and therefore reduce the tax on your profits in the categories of:
    • Mortgage interest payments
    • money spent on mortgage interest
    • repairs, and maintenance costs
    • Insurance premiums
    • Tenant screening fees
    • Legal costs – for the lease agreement
    • property taxes
    • lawn care
    • losses from casualties (floods, hurricanes, etc.)
    • homeowners association fee (HOA fees) 
    • condo or co-op maintenance fees.
  • The return inherently adjusts for inflation and continues rising year after year.
  • As you leverage your tenant rent to pay out your mortgage (and then some) you gradually accumulate equity on your property and a steady stream of cash flow.

Cons

  • You will depend on your tenants to keep up with your payments
  • Tenants may fall behind on rent and/or damage your units, having tenants always includes the risks of them not paying rent, having to evict them and finding your property damaged ( these scenarios can be avoided by resourcing to aggressive tenant screening, holding on to guarantees and/or invest in rent insurance)

Mortgages in Europe- Facts & Statistics 

Although each European country has its own dynamics when it comes to mortgage finance, the average mortgage interest rates across Europe as of Q4 of 2019 were all under 6%, fluctuating from under 1% in Denmark and Finland, to 5.41% in Romania.

Mortgage rates have a tendency to be lower in Nordic countries due to the economic stability there and the reliability of its borrowers. 

Other factors that have an effect on the mortgage interest rates include the overall situation of the housing market, inflation, monetary policies, economic growth, and the bond market. Therefore, more stable markets tend to have higher average prices

In the United Kingdom (UK), a new Real Estate property costs on average 4.4 thousand euros per square meter.

The strength of a country’s economy has a direct correlation to the stability of the interest paid on a mortgage. 

Countries such as Germany have seen interest rates remain under 3% for over five years. As of Q4 of 2019, Germany, Spain, and Italy all had interest mortgage rates of under 2%.

Below, the average price per square meter for residential properties in Europe and its mortgage interest rate:

Countryprice/square meter June 2020Mortgage rate Q4 2019
Germany€5,9071.28%
Spain€4,9781.76%
Italy€6,5891.44%
UK€21,1791.44%
Denmark€4,2790.56%
Norway€8,2811.88%
Sweden€6,9911.52%

Key information to assess and compare offers

You should make market research and compare offers from different lenders before making a decision on a mortgage loan. 

When making an official offer, the lender has to provide you with the European Standardised Information Sheet (ESIS). It is a document designed to give you the best and most comprehensive overview of the terms and conditions of the mortgage credit on offer.

The ESIS includes the following information:

  • the amount of the loan
  • the duration of the loan
  • the type of interest rate
  • the total amount to be reimbursed at the end of the term
  • the annual percentage rate of charge (APRC): a single figure representing the total cost of the loan, presented as an annual percentage. The APRC is provided to help you compare easily different offers. 
  • any costs, such as fees, to be paid regularly or on a one-off basis
  • the number of payments due, their frequency and size
  • conditions for an early repayment possibility: it should include charges or penalties you would be liable for if you decide to repay your loan early. The compensation is meant to cover for the income the credit provider is forfeiting. The total “fine” can not exceed the total amount of interest actually forgone by the lender
  • if you are taking out a loan in a foreign currency: the document needs to explain the exchange rate potential impact on your mortgage credit

Under EU rules, the lender or credit intermediary has to give you reflection time of at least 7 days to assess the offer; in some countries, you will even get the option to withdraw within 14 calendar days of signing the credit agreement, and you won’t have to give the credit provider an explanation, but you’ll have to refund the money you borrowed, plus interest and non-refundable charges already paid by the credit provider.

Mortgage credit insurance

Lenders may try to set as a condition for the loan the acquisition of a mortgage credit insurance policy.

The lender may propose a policy to you as a package with the mortgage credit agreement proposal, but this can not be made a condition for you to obtain the mortgage credit.

You always have the freedom of looking for better conditions from other insurers, as long as they are equivalent to what is required by the lender.

Nonetheless, lenders can set as a condition for the loan that you open a payment or savings account with them, from which you will be requested to repay the loan.