When I initially thought of writing this series of posts, my idea was to take the figures of our first year of renting, apply them to Ken McElroy’s principles and find out the purchase price of our flats that would have enabled us to at least break even every year (as you know, we are far from that!). But I figured that I was probably making a mistake at some point as my calculations were giving me some really ridiculous results: we should have bought each flat for half the price we actually paid. Fred and I are aware that we overpaid a little bit one of the studios but we got a pretty good deal for the other one so that, on average, we paid a normal price for both. Even if you consider the decline in prices in 2009 (we bought at the beginning of 2008), prices are still far from reaching the amount my calculations were resulting into. So I finally decided to change my approach for this post: instead of calculating the ideal purchase price, I started thinking and doing some math about what we could have done differently back then in order to at least break even instead of losing money.

The four factors in a loan

When it comes to borrowing money from the bank, four factors can influence your monthly loan payment:

- the purchase price (because it also determines the amount of money you are going to borrow) ;

- your down payment (for the same reason) ;

- the interest rate (because it determines how much money the bank is going to charge you for borrowing money);

- the loan duration (because it influences the amount of your monthly payments).

As I said in the introduction, we did a decent job as far as purchase prices are concerned. Honestly, given the market back then and the current market, I don’t think we could have snatched more than another 5000€ total.

We used all our savings to get those studios so we made the biggest effort we could in terms of down payment. Even if we had been able to, I am not too sure that it would have be such a good idea to make a big initial investment. I am still learning but, according to Robert Kiyosaki and co., one of the most important principles when you want to earn cash flow is to use other people’s money as much as possible. This principle is known as OPM, for Other People’s Money. Of course, you are supposed to apply it correctly, so that you still make money at the end of the year, not like us basically!! Anyway…

We got very good interest rates, I think: 4.58% on the first flat and 4.68% on the second one. Both are by far the lowest we were offered back then and I know that some friends of mine who bought one year later got much higher rates. Those are fixed interest rates because this is more common in France and it is obviously safer, especially in such an unstable economy. So I don’t think we could have done much better in terms of interest rate either.

Finally, our loan payments are spread over 20 years. We wanted a short duration in order to pay as little in interests as possible. But maybe it would have helped to do it over 30 years.

In tomorrow’s post, we’ll find out if borrowing less money and extending the loan duration would have helped lose less money.