Today, we have a guest post from my European friend Benjamin Davis, who is a living example of geographic arbitrage (as he plans to leave high-cost Germany to lower-cost Portugal). He is the man running the show at From cents to Retirement. He recently published his first book, entitled “My strategy to retire early“. While doing his PhD, he developed CFS and fearing he could not work much longer, he decided to create passive income streams to be able to retire early. His future goals including owning 100 rental homes in the next years and turn From Cents To Retirement into a reference blog for early retirement, inspiring others with his own story.
My own view on real estate is ‘mid way’ between the extremes we find among personal finance bloggers. Some hate it, and some like Ben thrive on it. I believe in tactical real estate investment, but just not having a house that limits your career. It is a sweet irony this is published today (May 1), known as May Day or Workers’ Day, where back in 1886, workers walked off their jobs on this day demanding a standard 8-hour work day instead of working till exhaustion. Take it away, Ben.
How Real Estate will enable me to retire in my 30s
My name is Benjamin Davis and I was born in Portugal, to an Italian and Canadian family. In 2012 I started a PhD in Germany and due to the bad environment at the lab, a very demanding boss and the exposure to a new culture, I ended up developing CFS – the Chronic Fatigue Syndrome. Sadly, the CFS doesn’t mean only that you’re tired all the time. On top of being very tired, you feel dizzy and sick, which can prevent you from having a normal life.
Two years after I developed CFS, it was clear that I could not work much longer. As there are no benefits for CFS sufferers, I had to create an income stream. As you can imagine, this is hard if you’re not willing to work. I had stocks since I was 16, so I was already used to the concept of passive income and dividends. Plus, I had huge gains from my stock portfolio, so I knew that it would be possible to live off of dividends if I had enough stock.
One day, I sat down and I reviewed my finances throughly. The idea was to project how much money I would need to live off of dividends. I ended up discovering that I had been spending way too much money on things that I really didn’t have to. I also figured that I would need about $1m to retire and live off of dividends (eventually, this came down to $700k due to Real Estate).
This day is so present that I seem to recall every moment of it. There I was, nickeling and diming my monthly budget. “I can save another 20 bucks here!” I remember thinking. Eventually, I determined that I could retire in my mid thirties, if I saved aggressively and invested wisely. Two weeks later, I was in business, saving every buck I could and throwing it to my investment brokerage account.
A big chunk of the following weeks was spent reading over 100 investing books. Today, I continue to read them and I am putting together a list of the best investment books, where I post summaries and reviews for them (for example, check out my summary of the Rich Dad Poor Dad book).
In this process, I discovered REI – Real Estate Investing. I should say that I’ve always loved Real Estate. Historical buildings make me melt. Financially, I love Real Estate because 1) it tends to appreciate (more than inflation) over time, 2) it pays every single month (thus increasing your liquidity), assuming you can rent it out all the time, and 3) unlike the stock market, you can find spectacular deals all year long. If you have a look at my stocks, you’ll see that I only have minor positions right now (first, Real Estate excites me more than the stock market, two I expect a stock market correction soon).
The kind of deals I look for
When I started to invest in Real Estate, I had to commit to one region, in order to amortize the costs with a property manager. I decided to invest in Portugal, for various reasons. Keep in mind that I know the country very well, as I also grew up there. The primary reason why I chose Portugal, though, was because I’ve identified a sweet spot in terms of Real Estate investing. I noticed that there was a huge number of Portuguese people who emigrated to France and Germany in the 60s and 70s, who inheriting a lot of Real Estate. As they left the country and their children ended up growing up abroad, they tend to see their real estate as a problem (instead of an asset).
They used their Real Estate as vacation homes in Portugal for a number of years, but as they got old, they stop traveling to Portugal. As a result, their Real Estate becomes expensive to maintain and they want to sell. Sometimes, they never used the homes they inherited and they died. As their children don’t have any connection to the country, they also want to sell. These are all motivated sellers, the kind of people I love to work with.
Now, we are primarily talking about old properties, in this case. There is one interesting fact: most old properties in Portugal are multi-units. I love multi-units, because I think that they are extremely optimized in terms of ROI. I bought a 3-unit and a 6-unit for €38k and €33k, respectively. These are extremely low prices, even for distressed properties. What I love the most about multi-units is that, not only you can rent out the same property to different people, 1) remodeling costs are amortized and 2) there are no condo fees. From my experience, a 6-unit property will also sell for much less than 6 single units.
As I said, multi-units are extremely optimized for ROI. This tops my preferences in terms of properties to look for. And as I look for distressed properties, I can amortize the renovation costs a lot (hiring a contractor to remodel a 3-unit property costs, at most, the same as renovating 2 single, disjoint units).
It is also essential to do modern rehabs. You can use 10k in various different ways – you can turn ugly duckling to into a beautiful swan that everybody likes or you can simply turn it into a regular home. I have an advantage in this regard: I traveled a lot during my PhD and I always stayed at beautiful hotels. I know what “cool” looks like. And I apply that to my homes. For instance, have a look at this shower:
You see that window in the middle, where we can put the shampoo? Cost me $30. Yet, the shower looks 10 times more awesome. What about this kitchen:
The classic tiles cost me 30% more than regular tiles. Yet, every single prospective tenant got a kick out of it. The truth is that most people will rent homes because they like them.
I am also pretty much hands on, when it comes to my Real Estate. On my blog, I often publish material on REI, including free real estate books, rental home pro forma explanations and how to get rid of stuff you don’t need, like a couch. Having learned to do this has definitely saved me a lot of money throughout. Most of my real estate yields more than 10% and I’ve got one multi-unit yielding 20%. These investments form the cornerstone of my strategy to retire early.