Buying and renting out a house. Is it lucrative?
Savings interest has reached a historically low point and your money does not yield anything if you just leave it in the bank. In fact, when you compare interest rates with inflation, your money is becoming less and less valuable.
Doing nothing with your money, costs you money. That is why many people with money look for other options.
Investing in Bitcoins or other Cryptocurrency? It has turned out that these investments are very unstable.
Investing in shares or bonds is of course also an option. Why investing in real estate can be very lucrative, I will explain further below.
The knife cuts on three sides
When you buy a house to rent out, which is partly financed, the knife cuts three ways.
- The tenant pays for your financing
- You benefit from the value development of your house
- You create a return on investment.
The tenant pays the financing
When you purchase a property and partly finance it, you do not make much return on the financed part, but the tenant pays the interest and the repayment. You can consider it a piggy bank that you let the tenant fill up.
In the meantime, you benefit from the value development of the home.
Benefit from value development of your home
House prices rise fast. Issued forecasts include the NVM and the banks indicate that the growth continues in the coming years because there is a shortage of housing.
Several governments encourage the construction of new homes and offer opportunities to convert vacant stores into apartments. Investors, project developers and construction companies work hard to create new homes, but this is not nearly enough to meet the expected demand.
The average value of residential development in the Netherlands was no less than 6.5% in 2018.
You make a return on investment.
You make a return on the part that you invest in the home yourself. These returns can go up to 10% depending on the finish, size, facilities and location of the property.
Add the value development to this return and compare it again to whatever investment you would have taken in the bank.
Now you know why investing in real estate can be lucrative.
But ... the purchase prices of homes have become so high
The property prices have indeed risen sharply. Nevertheless, it is expected that housing prices will continue to rise. There are big plans for new construction in the years to come, but it will not solve housing shortage over the next decade. As a result, prices will continue to rise in the coming years.
As supply and demand become more and more balanced, prices will stabilize but a drop in house prices is not yet in sight.
What if the house prices fall?
Fewer houses were sold during the crisis, causing the prices of the houses to drop. But if you look at the value development of homes over the past 20 to 50 years, it appears that the rise has continued, and the crisis was just a dip.
When the property is rented out, and the equity and debt capital in balance, the risk remains within limits.
How do I finance an investment property?
Not all banks finance investment properties, but there are definitely possibilities. Your bank can advise on this.
In 2019 we see that banks provide 70% financing at the liquidation value of the house value in rented state. Which means that you pay at least 50% of the purchase with your own resources.
Discuss the options with your financial adviser
What should I look out for when buying an investment property?
There is no manual that describes what a good investment property must meet. This depends on various factors. Think of the following.
- Size of the home
- Finishing level
- Distance to (international) schools, shops, companies, train stations and the city center
- Facilities that the home (or apartment complex) offers
- Parking space
A small home often has a higher rent per square meter than a larger home. And because the rental price of the property is lower than that of a larger property, the target group is larger, which means that the property is likely to be rented out faster and the chance of vacancy is much smaller. In this way you achieve a good return.
When purchasing a house, pay attention to how much you pay per square meter of living space.
More information about renting out your property?
We have carefully compiled this informative blog to advise you on what to look for if you are considering investing in an investment property. Or if you still have doubts, what to do with your money. However, this blog is not an advice on how to invest.
If you would like to receive more information about investing in an investment property, then we are happy to help. Please contact us.