### Buying property for investment purposes when it comes to consumer-friendly loans?

In this article, I will try to give you an indication of when this action can / should not be addressed, what to pay attention to? As far as possible, I incorporate all existing tools and support into a realistic solution!

## What is the purchase of real estate for investment purposes?

There is often a need to invest our unnecessary money by investing in credit for investment purposes. This means that we buy an apartment that we bring up-to-date and advertise it for rent or sell it further at a higher price. Let’s look at the rental now. The question arises as to what general principle should be taken into account when it comes to investment?

- if we can let it out for rent immediately (the loss of empty property will cause us)
- if the tenant is correct and always pays on time
- if the amortization is minimal
- if we can count on an IRR of 10% per year
- if in the medium term the value of real estate does not fall, but at least stagnates or rises
- if I can easily sell the apartment at any time

## What are the costs?

- overheads
- amortization
- cost of empty job
- taxation (PIT payment)

Let us count on the fact that we would like to buy an apartment of HUF 28 million in Budapest with a loan of HUF 20 million, which we can now rent at a price of HUF 130,000. If we deduct the tax and other costs (15% PIT, EHO expires in 2018 + 5% other cost item) = – HUF 312,000. So we have 1 248 000, which is 104 000 / month

## Consider depreciation and initial refurbishment costs

Before we begin to calculate the return on our loan, it is important to consider a frequently neglected item. The 20 million forints are only the purchase price, above which the fee (4%), the initial refurbishment (calculated with 5%) and the depreciation within 10 years (additional 5%).

Thus, the actual cost of depreciation is 800,000+ HUF 1,000,000 at first, and an additional HUF 1,000,000 for the next 10 years (this is replaced by what you count on). HUF 2 800 000, as divided by 10 years, we receive HUF 23 333 per month. This is deducted from our net profit and our monthly earnings are actually $ 104,000- € 23,333.

## Changing interest or 10-year fix?

It is always a question of choosing a cheaper variable rate loan or fixing it for 10 years? Gábor’s question was basically about the qualified consumer friendly loan, which makes the choice clear, since we cannot claim a consumer-friendly loan for a 3-month interest period (the 3-year interest period is the minimum requirement).

It is often argued that a floating rate loan is worth the current low interest rate environment, because when the world gets worse, we simply change the interest period or sell the property in our case and run away. We should not forget that we have the same information as the market and we know much less than the bank.

- By the time we get to change the interest period in the loan agreement, the bank raised the interest by then. In addition, you get a free hand for a market loan. As a solution, we can consider a type of credit redemption (but it has hundreds of thousands of costs) with qualified consumer credit. But it should not be forgotten that in this case we can fix a higher priced interest.
- If interest rates rise, it always means a reduction in lending. If lending is reduced, less property is bought. As a result, we can witness a significant drop in prices or we may not find a buyer for months because our demand for solvency is becoming narrower.

## What kind of interest rate will we calculate in the coming years?

This is where we need to talk about fiction rather than facts. In fact, no one can predict what will happen in a few years, as the multitude of internal and external economic processes will influence the decision-makers of the MNB and thus the central bank base rate. We can see that the central bank is now at a record low and is already shrinking further.

We do not know how long this state can be maintained.

The 3-month variable interest rate loan is priced at 3-month Bank (interbank interest rate). This pricing technique immediately reacts to market changes. Currently, the 3-month Bank is 0.04%, while the 3-month Bank (in our example) is 2.44%, which means that the most favorable bank has set a 2.4% surcharge .

A qualified consumer-friendly home loan is calculated at the rate of 10-year-old GFCF (currently 2.49%), and the bank can raise it by up to 3.5%. So in this case the most expensive loan available is 2.49% + 3.5% = 5.99%. But the bank may deviate from it in a positive direction and diverging at the moment. Our calculation is based on a 4.59% bid, which means that the bank has calculated a 2.1% surcharge .

## What is expected?

Let’s count on the fact that in the worst case scenario, we have a 5% interest rate. We assumed that the forint interest rate would be on average 3% higher than the euro interest rate, which we expect around 2%. If we add this interest rate over our Bank to this value, we get our expected interest rate. Our interest is 8% for a 3% surcharge.

On the other hand, a qualified consumer-friendly home loan can be calculated with a 3.5% interest margin, which means that the bank cannot count on a higher surcharge on our loan at one of the interest rate cycles. The premium is charged to Bank or ÁKKH depending on the length of the interest period we chose

If we assume that the variable interest payable in the next 4 years will remain at 2.44%, while in the next 6 years the average interest rate will be 8%, our monthly installment will be as shown in the figure for the 10-year fixed rate loan:

## Interpretation of the calculation

Based on the static example, the interest rate on the floating rate loan will remain in the next 4 years (2.23%). I then examined how the repayment of the floating rate loan and the total repayment are relative to the 10-year fixed rate qualified consumer friendly loan, if in the worst case the interest rate would be 8% in the last 6 years in case of variable interest (5%) rise in interest rates).

We can see that a 5% interest rate change from the fifth year would result in a 41% increase in our original repayment installment (variable interest rate), whereas this increase would be 10.2% compared to the initially higher fixed rate repayment. The equilibrium state, when we pay exactly the same amount, is 7.55% interest rate after 4 years for our floating rate loan.

In this example, our ultimate conclusion is that we can imagine a situation where, over the next 10 years, our variable interest rate will be higher than 7.55%?

## What strategy do I use for borrowing?

At this point, we need to take into account strategic solutions such as housing savings or self-help funds. With these items we can significantly reduce the total amount to be repaid if I am willing to pay more in the first few years than our monthly repayment. The limit of these items can actually be set by our own wallet.

We can see that in case of floating interest we would have our initial repayment of HUF 105,397 (we should always pay 10%). The question is, how much money do we spend on the transaction? We receive an additional state subsidy of HUF 72,000 per year for housing savings, while in the case of a self-help fund, we can bring in tens of thousands annually. This will have a significant impact on our rate of return.

## Is it worth buying real estate for investment purposes?

We can see that, with the example below, our actual net profit at 100% occupancy is HUF 80,667 monthly for rent, which is HUF 9,680,040 over 10 years. If we expect 20% real estate growth in the next 10 years due to market effects or our own real estate renovation plan, we can sell real estate worth HUF 28,000,000 today for HUF 33,600,000.

So we have a total of 33,600,000+ HUF 9,680,040 on the revenue side. The issue is reduced by taxes, depreciation and other expenses (we have deducted this from the monthly rent) and the repayment of the loan and the remaining principal of 10 years. (+ 2 or 1% final repayment fee depending on whether the loan was taken on a market basis or as a qualified loan).

If we choose a 10-year fixed rate loan, we have paid HUF 15,386,280 in 10 years, and our remaining principal debt is HUF 12,251,382 (+ 1% fee, which is HUF 122,513). In total, the release was published on 27,760,175 forints.

## Rate of Opportunity Cost- Lost Profit

We have to take into account that at the very beginning we had HUF 8,000,000 in own capital that we could have invested for up to 10 years. For the sake of the example, I expect a net return of 3% per annum, which has recently been recorded in Premium State Securities, but a risk-averse investment fund has been able to do so in the last 10 years.

We would collect 10 751 331 forints. This means that in 10 years our profit could have been 2 751 331 forints!

33 600 000 (total revenue) – 27 760 175 (total assumed expenditures) – 2 751 331 (assumed loss of profit) = + 3 088 494 HUF profit, which is 2 533 640 HUF at present value, with assumed inflation of 2% per annum also.

## Risks

Even on a 10-year fixed loan, it seems to be a good deal on paper, but you should not forget the risks:

- the value of our property may not increase or even decrease
- we may not be able to give you a rental rental every day for 10 years
- it is not certain that our “only” 5% will be our depreciation cost
- it is not certain that the current taxation will remain and will not increase
- it should not be forgotten that the timeframe has been washed in the calculation, while some amounts are not dispersed, but they are an expense as a whole at a given moment to be funded