Another €75,000 Property: Changing the Assumptions

Welcome to Financial Fluency - your weekly guide to mastering financial English, learning how money works, and making confident financial choices.

In this issue:

• A Look at the Markets: EURUSD

• Another €75,000 Property: Changing the Assumptions

• Quote of the Day: John C Bogle

• We value your feedback

• Idiom of the Day: Run the Numbers

• Test Your Knowledge

• Whenever you are ready, here is how I can help you

A Look at the Markets: EURUSD

Since the beginning of the year, I have been monitoring the declining value of the dollar against the Euro and comparing it to Trump’s first presidency. So far, the trend is remarkably similar.

Another €75,000 Property: Changing the Assumptions

How location and strategy can alter the investment potential

Last week, we asked: can you use Warren Buffett's discounted cash flow (DCF) method to evaluate a property investment?

The answer was yes - and it helped us avoid overpaying for a long-term rental property in mainland Italy.

But what if we changed a few variables?

Same €75,000 price. Different location. Different strategy.

Let's examine an up-and-coming tourist spot in Sicily and explore the potential of short-term holiday rentals through Airbnb.

Why Location and Strategy Matter

Last week, we looked at a €75,000 apartment for long-term rental. I did not view the property as an interesting investment proposal because:

• Low rental yields (€2,800 net annually)

• Modest property appreciation (1.5% per year)

Let's see what happens if we were to change location and strategy.

A €75,000 Apartment in the Sicilian Sun

For simplicity, let's assume a purchase price of €75,000. However, let's consider a two-bedroom apartment in a charming Sicilian coastal town experiencing increasing tourism. The plan is to rent it out for short-term holiday lets through a popular holiday letting website such as Airbnb.

Not only should this should increase the rental income but the value of the property after 10 years.

As we did last week, we need to make some conservative assumptions:

Rental income per night: €80

Occupancy rate: 50% (on an annual basis)

Annual rental income: €14,640

Like last week, this is not just profit. We need to subtract the costs:

Property tax: €400

Insurance: €250

Utilities, Wi-Fi, maintenance (higher than last week): €1,500

Airbnb host fee (15% approximately): €2,196

Cleaning, linen, management: €2,500

Total costs:€6,846

Net income before tax: €7,794

Less 21% property tax: €1,637

Annual net income: €6,157

What might the property be worth in 10 years?

Last week, we assumed a modest 1.5% annual increase in property values. In a popular tourist area in Sicily, there is a good argument, backed up by recent data, to be able to double this to a 3% annual increase.

€75,000 × (1.03)^10 = €100,794

So after 10 years, you'd own a property worth €100,794

The Discount Rate

This is another property investment, so let's assume the same discount rate as last week i.e. 9%.

The DCF Calculation (10-Year Analysis)

Here's what our 10-year cash flow looks like:

Present value of rental income: €39,518

Present Value of final property sale: €100,794/(1.09)^10 = €42,544

Total intrinsic value: €39,518 + €42,544 = €82,062

The Verdict

The property is priced at €75,000

Our intrinsic value calculation suggests it's worth: €82,062

The property appears undervalued by approximately 9.4%.

I should be clear that buying a property for short-term rentals is like running a small business and certainly not passive income. You have to be prepared for extra work (listing, dealing with bookings etc), extra risk (for instance more damage to the property and furniture), seasonality risk (bad weather in the summer, lower tourist numbers etc), regulatory risk (restrictions on Airbnb operations) and competition.

Next Week's Preview

So far, we've looked at what you can earn with your own capital. But what if you didn't pay the full €75,000 yourself?

In our final of this series on property investment, we will examine the potential benefits and drawbacks of using leverage.

As always, none of this is financial advice. Everyone should invest according to their personal circumstances, risk tolerance and financial goals.

Quote of the Day: John C Bogle

This quote from John C. Bogle perfectly captures the importance of running the numbers before committing to this, or any, kind of investment.

We Value Your Feedback!

Your opinion helps us improve and lets you suggest topics or ask Business English questions for future issues.

Idiom of the Day: Run the Numbers

Definition

Run the Numbers - idiom - to perform calculations, analyse data, or examine the financial details of a situation to understand its viability or implications.

Origins & Context

This business and analytical expression emerged from accounting and finance but has spread throughout business, economics, and everyday decision-making. It implies a thorough, methodical approach to analysis rather than making decisions based on gut feeling or assumptions. The phrase suggests analysing data, checking calculations, and examining all relevant figures to reach an informed conclusion.

Related Expressions

• Crunch the numbers - to perform detailed calculations

• Do the maths - to calculate or figure out the logical conclusion

• Check the figures - to verify calculations or data

• Analyse the data - to examine information systematically

Modern Usage

In today's data-driven world, "running the numbers" has expanded beyond pure mathematics to include analysing metrics, statistics, and performance indicators across various fields - from sports analytics to social media engagement rates to project feasibility studies.

Practical Examples

1. The marketing team needs to run the numbers on last quarter's campaign performance.

2. Let me run the numbers and see if we can afford that new equipment.

3. After running the numbers, it became clear the merger wouldn't be profitable.

Test your knowledge

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Disclaimer:

This newsletter is for informational and educational purposes only and should not be construed as financial advice. The information contained herein is generic and does not take into account your individual financial circumstances. You should always consult with a qualified financial professional before making any investment or financial decisions.

Additionally, the authors and/or publishers of this newsletter may hold investments in securities or other financial instruments mentioned herein. These are included for illustrative purposes only and should not be taken as a recommendation to buy or sell such securities or financial instruments.