Hassen Hachem's advices for a successful real estate investment
Acquiring real estate is an important and involving act. Whether the goal is to build wealth for retirement or tax-free, here are tips for a successful real estate investment in 2017 from a very successful investor: Hassan Hachem.
1. Evaluate your investment capacity
Evaluating your acquisition capacity is the first step to make a successful investment in rental real estate. This estimate will help define your budget, and therefore the type of property that will be researched and negotiated.
For Hassan Hachem, “the first step is to consult your bank to determine your disposable income and the maximum debt capacity that can be dedicated to this real estate project”. This simulation is not an end in itself, it is only a first step to define the budget that can be allocated to the acquisition.
The goal is not necessarily to go into debt at 100% of your possibilities. A good real estate investment must remain an acquisition that does not plummet the monthly budget and requires only a measured and optimal savings effort. In the best of cases, it should be able to give way to a second investment in the more or less long term. For example, it may be advisable to allocate investment between two assets when possible, for example by purchasing two small studios instead of just one two-room apartment.
The simulation therefore gives the maximum acquisition capacity. In the context of rental real estate, future rents will be taken into account in the calculation of the financing. For the best optimized credits, the rents will be close to the amount of the monthly payments. The best thing is that these two sums are equal: this is called "self-financing".
2. Define the right location in a city that we know
The objective of a real estate investor is to have tenants quickly, that they are stable and that they regularly pay their rent. These fundamentals must not be lost sight of by the investor in search of a property, reminds Hassan Hachem. To put all the chances on his side, it is necessary to put himself in the skin of the future tenant.
It is, par excellence, in a known environment that we can at best project the expectations of future tenants. In real estate, the best way to miss his investment is to buy in a city that we do not know and without having moved. This can lead to buying a perfect apartment on paper but never find takers, or to pay too much.
Put yourself in the shoes of a tenant is also validate the location within the city: is it easily accessible (close to transport, main roads)? Is it easy to shop, drop off your kids at school? Is the neighborhood safe from day to night?
Avoid property in distant location: yes, you fell in love with this tiny house near Malabo in Equatorial Guinea, while your web on holidays, but don’t buy: you don’t know the market, you don’t the level of protection given by law, in the 21st century, you can watch your property with a webcam, but the webcam can’t manage problems with the guy who does not pay his rent.
3. Define the type of property sought
The two previous points made it possible to define a maximum budget and a search area. It remains to define and find the ideal property. Should we choose a studio, a 2 room flat, a parking lot ? Buy under Pinel tax exemption law?
It is important to understand that a real estate investment is a personal affair: the ideal property is different for each person. Upstream, the future investor will have to determine his objectives to make his choice on the best type of property possible. Several motivations can indeed push to invest, of which the most current are: to build a patrimony for a supplement of retirement, to exempt from tax, to buy a lodging to lodge his children or parents later, to finance his future secondary residence by the hiring during some years ...
4. Use the right search methods
Several ways are available to find the ideal property, with the Internet in the first place. The web is full of real estate ads. It is easy to make a selection of properties corresponding to your budget and your area of research. Going through a local real estate agency can help save time.
Another less well-known means is to hire the services of a rental real estate hunter. After having identified the client's project (investment objective, geographical area, type of property, etc.), this professional goes in search of corresponding properties. This avoids having to visit each property, or losing hours on the Internet to explore every offer of each site. Interesting point: the specialist real estate hunter can direct his clients towards heritage assets allowing an optimization of the investment, like a Pinel law, the property deficit (if works), the bare ownership or the Malraux law. Paying someone to look for goods for you is particularly profitable if you are an entrepreneur running after time, underlines Hassan Hachem.
5. Lose the "instinctive" side of your choice
The impulse purchase is the number one enemy of the real estate investor. Unlike the acquisition of a main house, the purchase of a property for rental is based on practical and rational criteria, with the quality of the location and the potential profitability of the site. Hassan Hachem insists that two criteria are directly related to the wishes of a tenant: having a property close to his amenities in a reasonable budget. The bought property must please a maximum of people. Better forget the charm of the atypical or a campaign too remote, and keep in mind that few tenants are willing to pay more for accommodation "heart". Prefer the rational spaces (right angles) and the functional ones (cupboards or tidying up, done up kitchen ...) and to remember that one does not choose the housing for oneself but to have a maximum of luck to rent easily, durably and in a way a minimum profitable.
6. Do not rush to invest and always visit
Investing in real estate is not usually an act that is often repeated in one's life. However, it is possible that the bargain is not on the market pile when the future buyer seeks it. If necessary, do not hesitate to postpone your purchase. Be careful, however, not to postpone the purchase for the wrong reasons!
The logic of the investment is that of an investment. To be optimal, it must balance the objectives and constraints of the investor. Thus, not rushing means taking the time to validate the site, learn about the rental market, visit and compare the prices and benefits of several properties.
When a property seems to meet your expectations, going there in person can sometimes avoid great disappointments, admonishes Hassan Hachem. As much to remember, you must always visit and be aware of what you buy. Humor the atmosphere of the neighborhood, look at the condition of property or validate the location of a future construction is a sine qua non condition to any real estate acquisition, even if the property is not intended to be a day inhabited by his owner.
In any case it is imperative to keep in mind that a real estate property meeting all criteria is often difficult or impossible to find. Learning to make concessions is essential. Without ever sacrificing either the quality of the site or the potential profitability of the investment.
7. Evaluate the profitability of selected properties
The profitability of a rental investment is paramount, whatever the objective. The examination of this criterion could in particular make it possible to compare two properties before choosing one for the purchase.
Gross profitability is the annual sum generated by the investment, compared to the amount that had to be spent to obtain it. It is expressed as a percentage. In terms of rental investment, it is calculated as follows:
(Sum of annual rents - sum of annual expenses) / purchase price of the property.
Take for example an apartment bought 120,000 euros notary fees included, generating 400 euros rent per month. On this rent, each month are deducted 50 euros of expenses and 7% of management fees is 28 euros. The net rent each month is therefore:
400 € - 50 € - 28 € = 322 euros.
The gross annual profitability will therefore be:
322 euros x 12 months / 120,000 euros x 100 = 3.22%
This profitability calculation is an approach that compares assets with each other. Indeed, in order to calculate a net profit at least, it would be necessary to remove the taxes generated (income tax depending on the tax bracket of the future investor, property taxes excluding garbage collection and CSG) as well as the other taxes. contingencies (insurance ...) and to reinstate the tax benefit in the event that the acquisition allows (property deficit, Pinel law ...).
8. Getting closer to self-financing
Real estate self-financing
Financially speaking, the best real estate investment is the one that is "self-financing". That is to say that the rents collected cover entirely the monthly payments of the credit which is bound to him. However, few properties allow this for the purchase of rental property without input. The goal is to obtain the best financing ratio rather than to achieve self-financing.
Let's go back to the previous example. By financing the acquisition of a real estate property at 100% by borrowing at a rate of 1.6% for 20 years, we arrive at a monthly credit of 620 euros for 322 euros rent. The saving effort is therefore nearly 300 euros per month.
To optimize the financing and reduce the savings effort, it is possible to increase the initial contribution and reduce the amount of the credit. In the previous case, for property to be self-financing it would be necessary to make a contribution of 50% of its price or 60,000 euros.
Optimizing financing means finding a balance between the investor's available savings, the savings effort he consents to, the amount of credit required for the acquisition and the rents generated.
9. Find a good manager
In terms of rental investment, the manager is very important. His role will be to find the tenants, to make the inventory, to collect the rents, to pay them back to the owner, and to manage the problems if some occur.
“However, not all managers are equal and it is very important to choose a good one to avoid disappointments” warns Hassan Hachem. Let's sweep away the misconceptions: big brands are not necessarily the best performers. To make the right choice, nothing like word of mouth ...
10. Subscribe to an Unpaid Rent (or GLI) Guarantee
When you invest in property, you are exposed to tenants not paying their rent. If the monthly payments of a credit are at the same time to repay, it can plunge the pro owners in a difficult situation. First rule: get into debt in reasonable proportions, so that a possible failure of tenants do not hurt the finances of the household. Second rule: guard against non-payment of rent by subscribing an Unpaid Rent Guarantee with an insurance company. In most cases, the manager can offer the guarantee that he has himself subscribed in the context of a master agreement with an insurer. Some big brands even have this insurance in house. For owners who take care of their own rental management, it is also possible to subscribe to an unpaid rent guarantee from an insurance company. Its cost is approximately 3% of rents. It is largely amortized in case of problem.
11. Leverage: Credit interest for your real estate investments
The real estate leverage makes it possible to develop your wealth more quickly. To put it simply, it is the use of leverage to increase your investment capacity in real estate ... or how to invest in a property to 200,000 € while you only mobilize 20,000 € d 'saving.
Real estate is the best of all investment vehicles. Of course, the real estate is already by nature a support of quality, because on the one hand it answers a vital need: to lodge. Everyone needs shelter and a roof over their heads.
Real estate is also a very interesting investment because it generates regular income, also called annuities. These are the rents you will receive and which allow you to calculate the rental yield. The stock market also provides annuities in the form of dividends. Conversely, this is not the case for other media such as gold, which will not bring you anything each month (and which in addition will cost you in storage costs).
And it is precisely because real estate is a safe and secure investment that banks are willing to lend. Ask your banker to lend you to invest in the stock market, you will see the result.
Financial profitability and rental profitability
The real estate investor must distinguish between rental profitability (or rental yield) and financial profitability. The calculation of financial profitability does not only depend on real estate investment, but also on how to finance it. For example, for the same real estate transaction, whose rental yield is 6.00%, the financial profitability can vary from 6.00% to 100%.
Example for the purchase of a T2 type apartment in Paris:
Total amount of the project: 200.000 €
Annual rent (gross): 12,000 €
Gross rental yield: 6.00% (the calculation is simple: annual rent / total amount invested)
Regarding the financial profitability of the operation, things vary according to the means of financing. Let's analyze two possibilities:
Hypothesis 1: The client finances the transaction in equity, with available money available. The financial return of the funds invested is therefore 6.00%. A priori the customer avoids the bank charges related to the loan. In this case, you should compare this investment of € 200,000 with other financial investments (stock market, savings).
Hypothesis 2: The customer brings 20.000 € to the operation, and borrows 180.000 €. The leverage effect of credit allows it to buy a property at 200,000 € with a contribution of only 10% of the amount. The financial return of the invested capital is thus 12.000 € / 20.000 €. He really mobilized only 20.000 € and touches the fruits (rents in this case) on the totality of the invested sum or on 200.000 €. The financial return made possible by the leverage effect is therefore 60%.
To understand the theoretical aspect, imagine that the bank of our client agrees to lend him as much as he wants. Then his 200.000 € of savings will be able to be used in 10 contributions of 20.000 € ... to invest 2.000.000 € in real estate. This is the perfect illustration of a leverage effect that makes it possible to invest ten times more than in own financing. Rents collected annually would therefore be 10 * 12,000 or 120,000 € annually. With the same contribution as in hypothesis 1). Not bad is not it ?
“Of course, it is a simplified example in the extreme. Many other data are to be taken into account and reduce the financial performance of the operation. I call them financial friction” says Hassan Hachem. These include borrowing interest, possible taxes, or expenses related to pure property (maintenance of buildings) which will of course be proportional to the number of properties.
Effect of real estate leverage and investment without contribution
It is by following this logic of leverage that some investors seek to invest with 0 contribution. Of course, the lower the contribution, the higher the financial return on capital invested. It is still necessary that the bank agrees to lend you ...
Depending on your investor profile you will have to choose the appropriate level of contribution. It depends on your strategy and your goals in terms of real estate investment. Do you want to realize one or more real estate project? Is your goal to invest in a heritage investment, or to capitalize?
In general, banks refuse in 2017 to lend to an investor who refuses to mobilize savings (so that does not make contribution). It all depends on personal situations and your banker, but that's the rule. The 0 contribution is the exception.