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.
Here are some photos of the house:
It is 4 bedrooms, but we converted one to a huge walk in closet style room, and one into an office.
Anyway, sorry for the long post.
What would you do if you were me?
Dean
Hi Dean. Find a nice person like me, and let me stay over there with my family rent free for a month or two, and then I will be in a much better position to give you my opinion…….Not quite the response you were after I guess eh? All the best with whatever you decide. Cheers
haha,
I am still living in the property at the moment, so afraid I can't do that.
Just some general, basic pointers would be greatly appreciated.
Dean;
First of all; you need to get a tan, buddy!
Second, after you move out, I'll come and stay for a month free to help you get sorted out.
But seriously – you are in a very good position and it was very lucky for you to have met that lady when you did.
I don't have a clue what a Euro is worth in Aus or US dollars, so I will call it a "dollar".
Based on what you've posted, the rent return of $2,500; assuming you can get it, is a very good return against the MORTGAGE of $140,000.It works out to be;
$2,500 x 12 = $30,000 per year. (based on a permanent rental).
You still owe $140,000.
Divide $30,000 by $140,000, and then multiply by 100 = 21.42% This is an excellent rent return. Depending on the holding costs, and the loan interest rate, this is a positive cashflow amount. This means you get money left over AFTER all the holding costs and the loan are taken out. Probably enough to travel the world (maybe kick in some cash of your own as well) without selling.
On top of this, you will have $30k by early '08. Using the $30k on its own as a deposit will not allow you to buy a lot of property, unless you borrow more from the Bank, which may incur Loan Mortgage Insurance (avoid if possible).
In my opinion, this house is a fabulous asset, and you should not sell, so based on that, you would go with OPTION 4, but with a twist. I think a permanent rental is more reliable income; you may get a higher monthly rate with holiday rentals, but there are usually higher vacancy rates and the fees for cleaning etc are higher.
Here are my thoughts;
Without going into lots of detail to explain, let me say that the $30k will be far better used by paying it into your Mortgage and decreasing the amount owing. The less you owe, the less interest you will pay long term, and the more positive cashflow you will have for you to spend (in my opinion it should be re-invested back into the asset).
You then use this $30k along with the rest of your "equity" for more investing later on.
There are 2 ways to do it, and it depends on how your loan is structured and what your plans are for the house. As I said; I think you should NOT sell, so we'll assume that for this example;
1. Structure your loan so you have an "offset account" with either a "line of credit" (LOC) or a "redraw" as well that you can use for more investing.
In this scenario, the $30k is put into the offset account. The offset allows you to redraw the $30k if you need it at any time, but while it is sitting in the offset, it is reducing the interest you need to pay on your mortgage each month. The LOC is basically credit which is made available through the "equity" in your house – how much of it you actually own after you discount what you owe from the VALUE of the house. For this purpose you would need to have the house revalued by the Bank.
2. Pay the $30k into the mortgage, then structure your loan so you have a "line of credit" that you can use for more investing. You can still redraw the money if you need it, but you need a separate sub-account to separate the personal use and the investment use.The LOC or redraw allows you to access some of the equity in your house (80% of the VALUE is the usual amount you can access), which is used to pay the deposits and purchase costs of another (or more) properties. Normally you would need a deposit of around 20%; anything less and you would have to pay Loan Mortgage Insurance (avoid if possible). The Bank funds the rest (80%).
What I have put forward here is a bit basic, and you really need to get together with a property investment savvy Mortgage Broker to set up the right loan structure.
But basically; do not sell; rent it out and go travel. You have a lot of equity which you can use for more investing when you are ready, without having to sell to access the money.
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