Why we are not even close to breaking even in cash flow
So, after listening to that part of the audio book yesterday night, I decided to do these calculations now and…surprise… in the best case scenario, we would have a projected profit next year of a -1000€ per property…!
The expenses we overlooked or underestimated are:
- Management costs: as we are abroad, we need a management company to find a renter, do the paperwork and take care of problems. Finding a renter is charged around 8% of the annual rent income. Managing the property (including unpaid rent coverage and legal protection, to prevent problems like the one we are having to happen again) costs around 10% of the annual rent income (around 7% without rent coverage and legal protection but we learnt that it’s better to pay for it than suffering the consequences of not having it).
- Taxes: France is a country where there are a lot of different taxes. Landlords, just for the sake of being landlords and regardless of their income, have to pay a tax for owning a property. And it doesn’t matter whether you are actually living in the property or if you are renting it out, all landlords have to pay every year. The way to calculate is still a bit confusing for me right now but, in the town where our properties are, it seems to amount to 36% of 6 months of estimated rent income (estimated by the town, not based on what you are really earning, and you can be sure that they will overestimate it!), which I round up to 18% of annual rental income.
- Unexpected works: in one of the property, an emergency decision was made by the community of owners and the expense amounted to 700€ per property owner in the building. Normally, works are planned one year ahead of time. When we requested the document that states if any works have been voted by the community of owners for the year to come, there was no works – and therefore no expenses – planned. But an emergency is an emergency and we ended up having to face this expense anyway. We had taken into account possible unexpected expenses but we had underestimated their amount big time.
And so now what…
The bottom line is that we have purchased two assets that will end up bringing us positive cash flow in the long term, either when rent prices go up a lot or, at least, when we are done paying back our loans. So, it’s not completely useless.
We are lucky that we can afford to cover for the negative cash flow. We are not facing foreclosure…
So now the only thing to do is to look ahead and do our best to limit the losses and learn more to close better deals next time.
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