Real estate is considered by many as the best and most lucrative way to invest your money and make it work for you: who buys a house, without it afterwards itself to inhabit, invests into a net yield object. Purchase and ancillary costs are to be amortized in the long term by the expected rental income, and eventually even profit is to be generated from the property. What you should consider when choosing and buying investment properties, you will learn in the following paragraphs.
The yield designates the relationship between invested capital and incomes and can be indicated both as absolute number and as percentage value – the latter is clearly more usual. We explain how to calculate returns in a separate guidebook.
Why real estate is a good investment
Real estate is particularly interesting as an investment object because it has always been considered stable in value – on the one hand, it is a material asset, and on the other hand, inflation cannot affect the value of the object.
And since the housing market is becoming increasingly tight, especially in metropolitan areas, as a property owner you can count on rising rental income in the long term. Since rental contracts are usually concluded over a long period of time, the expected return can be calculated well in advance.
If you want an investment property, you don't necessarily have to buy a single-family or multi-family house: commercial properties, individual apartments and any other form of property that is rented or leased are also suitable for this purpose.
Which yield property do you want to buy?
When you start looking at income property, you should first narrow down what type of property it should be: on the one hand, the available capital determines your options, on the other hand, you should consider that, for example, a single-family house usually causes higher running costs than a single apartment. With a commercial property the target group is clearly smaller. Multi-family houses mean higher management costs (or additional costs to hire someone to do it), but also usually a higher return. Thus, each investment property has its own characteristics, which primarily affect the costs and the amount of the actual return, but also the time required for support.
Before buying: evaluate investment property
If you have decided on a type of real estate and it comes to the more concrete selection, the following points are important before you buy an investment property:
The location of investment properties
The location is the key point that distinguishes good from bad real estate as an investment property. An apartment or commercial space can be as attractively designed as you like: if the surrounding infrastructure is not suitable, this will reduce the yield – or at least increase the risk of (temporary) vacancies.
In principle, you should apply similar standards when evaluating the location of residential properties as if you were planning to move in there yourself: what is important to you – what would be a criterion for exclusion if you were to live there yourself?? For commercial real estate, on the other hand, it is primarily the infrastructure that you should examine closely. Is everything available that is needed for operational use: transport connections, utility connections, purchasing power in the immediate vicinity, etc.?.
Attention: buying investment properties in sought-after areas is of course more expensive than buying a property in somewhat more remote regions. Here it is worthwhile to calculate and compare exactly. Foresight also plays a role: make inquiries whether there are any projects (public or private) planned for the future that could positively develop an area that is currently not in such high demand – and vice versa.
Inspect the actual investment property
Visit interesting properties and let yourself be accompanied or at least advised by a real estate appraiser. In addition to checking whether the information in the expose corresponds to reality, check the building fabric and the condition of the entire house – even if you only want to buy a single apartment.
Ask to see all documents on past renovation and modernization measures and, with the help of the expert, determine whether and which defects can possibly be expected in the future. From this you can determine the future maintenance costs, which would reduce your return on investment.
The occupants are at least as important as the income property: if the property is already rented out, check the existing rental agreements, the agreed rents and deposits. Also take into account if and when contracts and conditions might change or expire. If the property is not (yet) rented out, you should take a closer look at why and how long the property has been vacant. In order to get a feeling for the expected rental income, official rent indexes can often be viewed at the municipalities.
Correctly calculate the costs associated with the purchase of investment property
If the location, condition of the property and tenants make a good impression, there is a lot to be said for buying the investment property. But first, put all the costs together and put them into perspective. You will incur the following costs:
- Purchase price of the property
- Additional costs for the notary, a broker, land registry costs and the land transfer tax
- Costs for possible alterations or renovations directly after purchase
- Financing costs if you finance the purchase with a (partial) loan
All these expenses added together are opposed to the rental income and possibly at some point the sale price of the property.
When calculating your costs, also consider unforeseen expenses: these can be repair expenses, but also loss of rent. Calculate here with a generous buffer, so that sudden additional expenses do not bring you easily into financial difficulties.
Things to know about taxes around the investment property
Real estate transfer tax is always due on the purchase of an investment property. Independently of this, there are also the following tax aspects to consider for you as the owner or landlord of a property: