Turning €60 euros into €426,000 with Italian Real Estate BRRRR method
I’m truthfully geeking out right now. Why? Well let me tell you about the last few weeks. Many of you know that I’ve been working on the BRRRR method here in Italy. I started it a few months ago before making a number of videos on one euro homes. If you want to catch up just check out the playlist in the corner after this video.
Well, life gets busy sometimes and not every plan goes according to plan. I started talking to appraisers and banks about our current portfolio trying to pull equity out of them. Shortly after I started I found a property that was perfect for repeating the process and have already done a few videos about it. Well, when it comes to an auction investment, sticking to deadlines is huge since there is a limited window for auction participation. As the weeks passed, my spirits weakened since it became more apparent everyday that the auction day of this motivation property was going to come and go and I wouldn’t be able to participate.
Auction day was Tuesday. December 18th. I was confident someone would buy it at its current price since it is a giant of a villa. I expected that even if I participated, I would have slim chances of picking up the auction at my target price range. December 17th at 12am it became certain I wouldn’t be participating and all I could do was sit and watch as the auction was awarded to another. Tuesday I had planned to create a video about my disappointment but that I would be pressing forward with my objectives. When prepping that video, I felt lethargic and wanted to avoid it completely. I opted to create one more video about Sicily in its place. After posting that video I decided to check out the updated status of the Tuesday’s auction. Typically it isn’t updated for a few days, but I decided to check anyway.
Guys!
The auction was deserted! That means that no one showed up. Reading this I literally jumped out of my chair and felt like this was the reason I couldn’t make Tuesday’s video. Due to this shot of adrenaline, I thought it would be a great opportunity to explain what happens in the case the auction is deserted.
First off, understand that if I had applied, the villa would have been mine for just shy of 200,000. For a property 5672 SF on a ¼ acre lot built in 2005/2006.
I found properties in the same community ranging from 2700 SF to 3444 SF between the prices of 288 and 345,000 Euros.
There weren’t any over 5000 SF for sale that I could compare to. But using comparative price per SF estimates of €100 per SF the property would have been near 565,000 Euros. This previous auction it sat at 35% the market rate and still no one bought it.
So why did no one buy it?
It wasn’t because they weren’t aware. I witnessed multiple groups touring the property. The world may never know why, but I have a hypothesis. It’s based on these three things:
- Its condition
- Culture
… and…
- Vision
First off, its condition was not move in ready. You could see missing radiators and damaged paint in every room. Broken windows and fallen tiles were signs of vandalism as well. If that wasn’t enough, the current interior design is quite eccentric and to replace it entirely would be a costly ordeal. If someone was willing to keep the tile, I don’t expect that the renovation budget would be more than 20,000 to 25,000 euros, but that leads us into number 2.
Culturally, from my experience, Italian people appreciate high quality. Most of the time, someone looking to spend this amount of money wants to know that the property is in good condition. Most of them probably viewed multiple villas and marked this one off as being high maintenance due to its size and need of attention.
Lastly, I believe it was mostly based on vision or lack of. Living in a nearly 6000 SF home has it’s benefits, but it also comes with a price tag in the form of taxes and maintenance costs. When purchasing the property you can’t claim the first home (prima casa) tax benefit since it is considered a luxury property. I know that doesn’t sound like it falls under the category of vision, but what I mean is that I was potentially the only one considering dividing that space into multiple units uncovering the hidden potential. A) I could create 3 dwellings which could be sold or rented in order to gain monthly cash flow, and B) shrinking their size removes their luxury status making them more marketable to a larger number of people. when sold they could be eligible for the first home tax benefit. (Which is a pretty significant amenity here in Italy.)
That’s obviously my opinion. Take it as you will.
So what happens next now that no one bought it?
It comes down to what the bank that holds the title decides. They could choose to hold it at the same price, they could choose to cancel the auction altogether, but most likely it will descend another 25% dropping it’s price tag to nearly 150,000 euro.
The court will begin to follow their processes and within 2-4 months the property will resurface with a lower base price. I expect the auction to be in mid June. I guess that gives me time to square things off with my current refinancing options.
I’d most of me is bouncing off the walls with excitement, while a small part is disappointed I didn’t pick it up for the current price.
Why?
Obviously 150,000 is better than 200,000 euros!
True True. 50K per unit is much better than nearly €66K.
But remember this is an auction… I’ve seen countless times where this after it was deserted dropping the price, It becomes attractive to more people. People start telling themselves they’d be crazy not to try for it. Let’s say 10 people start bidding on the same property and a bid war starts that raises the price 60-75 grand which in this case would be far beyond the previous auction price. It would have been better if the winner of the auction participated in the previous auction.
Ok let’s continue.
What are my new estimates for this 5000+ SF Villa in Northern Italy?
Some of you might have seen my BRRRR calculator before when I shared it during this video. I’ve added a new column for dividing the property into 3 sections.
What I know is that if the Villa comes back on auction, it could be approximately 25% less than what it was on Tuesday.
That puts my offer at 149,765 euros.
The 9% registration tax puts me at 163,244
If I paid cash, that would be it.
I intend to use a mortgage which would be near 120,000. 80% of the bid price.
With a mortgage, I’ll need the assistance of a notary to affiliate the bank documents to the property. I estimate that will add around 4000 euros with bank fees included
Researching bank rates, can anyone guess what percentage I’ll pay on 120,000 over a 30 year period?
Write it in the comments, and be honest what you thought when you do since I’ll just go ahead and tell you.
1.06% for a payment of €388.67
Do you see why I want to get a mortgage?
5672 SF of real estate in a great neighborhood, I didn’t mention that previously, but it really is great for the low low cost of 60 euros of interest monthly over 30 years. You know when you calculate your home and it looks like you paid for two homes after 30 years.. Ya, well I’ll only have paid for a new car.
Ok ok, Moving on.
To close on this deal, I’ll need to invest 47,777 of my own cash. Unless I choose to gain additional financing in the form of a consumer loan. Without it, I’ll have leverage just over 71% of the Total Purchase price.
The point of this project is the value I see in its modification. What I’ll need to determine if the city will allow me to divide the space into 3 units. So pretty much everything hinges on their decision. Even buying it for myself and renting out my current house is a brainless endeavor at this price.
Now it isn’t move in ready, so I need to consider a renovation budget. If I put 10,000 into the property, I could move in happily. It would be a little empty without an extra sum for furniture, but It doesn’t bother me to use my current furniture temporarily or even long term.
Renting it at 1400 per month which is extremely low for its size, gives me a cash flow of 517 euros monthly and return on cash of 10.79%. That’s not really the scenario I am hoping for since I would also like to improve our current standard of living.
If the city approves the division of the space, I estimate about 30,000 euros add dividing walls upstairs and down in addition to dividing the electrical, plumbing, and HVAC systems from one another.
That puts my cash investment over 77,000 euros with a total cost of 197,289.
Now that the property is 3 units I can rent out the 2 apartments on the rear of the building for 740 euros each based on market research while living in the front half. Having a pool, garage, and open space will attract more potential renters though I haven’t budgeted the cost of the pool as of yet.
Living there takes away the cash flow potential, but allows me to rent out my current home for 650 which is more than fair for a townhome like this one.
When all is said and done, buying this property will cost me 77,477 invested cash (which can be reused in later stages of the BRRRR method) and give me a monthly cash flow increase of €893. ROC….13.83% all for the cost of €60 of interest each month.
This video is a bit longer than I hoped, but I’ve been as concise as I can be. Some of you might have noticed the row with green font labeled equity.
This is what it all boils down to.
Giving the bank €60 per month pays me back in big ways. Imagine making one decision that adds €426,000 into your (phantom income) pocket. I’m talking cash generated just from making this deal a reality. Based on market research, villas like these are sold for 300, 155, 155 thousand each respectively due to their size and age.
I don’t know if I’ll sell them tomorrow, or in 10 years, but what I do know is the next time I refinance, I just might turn it into cash and swim in it.
That’s it for this video. Please share the article and subscribe to my youtube channel if you haven’t done so already. Contact me if you’d like to do this yourself!
Later!
