One of the biggest benefits of investing in real estate is the opportunity to do so using other people’s money. We do this through financing.
Typically, at home, that will be a mortgage on the property we are buying. But, depending on where you want to buy, it can sometimes be difficult for foreigners to get financing. That’s why it’s a priority for me to ensure many of the deals I negotiate for members of my Real Estate Trend Alert have exclusive developer financing. Sometimes we pay as little as half the interest rate the local banks charge.
In Europe however, you can secure extremely favorable mortgages from the banks at insanely low rates.
For instance, at time of writing, in France it’s possible for an American to borrow 80% for 15 years fixed at a rate of 1.7%. Or the same amount at a rate of 1.9% for 20 years fixed.
In Spain, foreigners can get a mortgage up to 70% of the value of a property.
An Italian mortgage can be granted not just in euro but also in a different currency (such as American dollars or sterling). Rates vary from as little as 1.7% to 3.6%.
As a rule of thumb, you can expect to spend an extra 10% to 14% on the agreed purchase price for taxes and extra expenses in continental Europe. You will need this in cash. It’s a lot of money up front, but annual property taxes in Europe tend to be much lower than in the US.
Use these low mortgage rates to snap up a crisis deal and you could own income-earning real estate for a steal…
Remember, in countries like Spain and Italy, which were already struggling economically, real estate prices will fall even further. I expect best-in-class Italian property to fall as much as 30%.
I’m personally planning to use cheap financing in Europe to buy in Portugal. I’m looking at buying a villa in the central Algarve, somewhere I’ll rent out for the peak season when the Algarve is hot and busy, and enjoy in the spring and fall. And I aim to get bank financing at a rate of 1% or even less.
This is where leverage can be used to supercharge your gains.
Consider this example from one of my contacts in Portugal:
He found an old and unloved villa of around 5,000 square feet. He borrowed 90% of the value of this €420,000 property, so he paid €42,000 down, and repayments are just €830 a month.
After he refurbished the villa it threw off €30,000 in rental income while he and his family traveled abroad during the kids’ summer vacation. (Something he does every summer during that red-hot rental season.)
The villa’s value is now likely €1.2 to €1.5 million. That’s a massive paper gain. And on top of that he can rake in a very generous rental income whenever he’s not using it. He’s ready to sell now as he has identified his next opportunity.
I absolutely love this play. And it’s perfect for anyone who plans to live in the Algarve for just part of the year. With one good rental, you can create some impressive rental yields during peak season from late June to August. I’ve seen many deals where you can cover the year’s mortgage by only renting these 10 weeks. You can use the place yourself the rest of the year or continue to rent it out if you like.
This is how, even with a modest budget, leverage allows you to dream big.
And now, because of the current crisis, you can combine cheap mortgage rates with exceptionally undervalued European real estate, to lock in a dream home for a bargain.
Take Italy, for example. Even before COVID-19 you could find cheap real estate in Italy in places with a surging demand for short-term rentals. The economy was already fragile and there was low confidence and a weak appetite for real estate investing among Italians.
Now, because of the crisis, real estate prices, which have been falling for 18 years, are set to fall further. We will see discounts of up to 30% in blue-chip tourist destinations like Venice, Florence, and Rome—where we can make a 15% yield or more.
There has never been a better time to take full advantage of the magic of leverage and lock in your dream home.
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