Buying and renting out an apartment is a popular way to invest your money because it provides you with a passive income that continues for the rest of your life. And there are many other advantages to investing in a rental property.
However, buying an apartment to rent out is not that simple or accessible. It can take quite a lot of time and hard work, and in many cases, you need a significant amount of money. In this blog, we delve deeper into the most important things to look out for before investing.
That’s why we started BRXS: a platform where you can directly invest in investment properties of your choice starting from €100 and build your real estate portfolio. You earn rental income and also benefit from long-term appreciation. This way, you can learn by doing, gain experience, and perhaps apply it later if you want to go completely independent. Read more here about investing in real estate via BRXS.
1. Calculate the return
The most important thing is, of course, the return, because why would you start if it yields nothing? You can count on two different forms of return: 1) The rent you receive monthly and 2) the potential appreciation of your property.
The net rental income can be seen as passive income, a fixed amount deposited into your account each month, while the appreciation is a “potential” profit that you only realize when you sell your investment property. Future price increases are impossible to determine with certainty, but you can estimate rental income fairly accurately.
So, do a rent calculation beforehand to see if you can get a good return from the apartment you are interested in.
→ Calculate the net rental income by subtracting all estimated costs (building insurance, city taxes, mortgage payments, maintenance, VvE contributions…) from the annual rent. Divide this net rental income by the equity you invested in the property, and then you have the net return. You definitely want this to be above 3%, and preferably even achieve 4-6%.
2. Return-enhancing factors
With high property prices and rising mortgage rates, it is becoming more difficult to achieve a good return. There are still opportunities in specific segments such as room rentals, co-living, and student rooms, which often offer higher returns. Room rental properties are not easy to find, but on our platform, we have a few available. ## 3. Free sector vs Social housing
Your rental property can fall into either the social or the free sector. For social housing, you cannot set the rent yourself, and the maximum rent in 2022 is €763.47; whereas in the free sector, you can determine the rent yourself.
Which sector your property falls into depends on a legally established points system based on factors like surface area, WOZ value, and a few other criteria. Check and confirm that the apartment you are interested in scores above 142 points so you can set the rent yourself, otherwise, it might not end up being a profitable investment.
4. Financing with an investment mortgage
If you buy an apartment to rent out, you don’t use a regular mortgage, but a specific investment mortgage (buy-to-let mortgage). This has a higher interest rate than a regular mortgage, and the bank looks not only at your salary or equity but primarily at the income the property can generate.
5. How much equity do you need?
The maximum financing with an investment mortgage is 70% of the market value of the property in rented condition (sometimes you can go up to 90% - beware of higher costs), and this market value (determined by an appraisal) is often lower than the purchase price.
Suppose you buy an apartment for €400,000, and the appraiser values the property at €350,000 in rented condition. With a 70% mortgage, you still need to contribute at least €187,000 of your own money for the remaining amount and the transfer tax.
So, you need relatively large equity to purchase an investment property. There are several other ways to invest in real estate with little money.
6. What taxes do you pay?
The transfer tax for an investment property is 8%, which is much higher than when you buy a home to live in yourself. You do not pay tax on the rental of a second home, and your rental income does not need to be declared. However, your apartment does belong to your box 3 assets, on which you pay wealth tax.
7. Owner-occupancy obligation
Many cities have recently introduced an owner-occupancy obligation, meaning that as a buyer, you are required to live in the property yourself for several years. This prevents purchase for rental purposes. So, carefully check the rules in the city where you might want to buy an investment property: for example, in Amsterdam, this obligation currently does not apply to homes with a WOZ value above €512,000, and in Rotterdam above €355,000.
8. Manage yourself or outsource?
Property managers seem expensive at first glance (7-10% of gross rental income), so doing everything yourself seems smart. But they can save you a lot of time, effort, and often money. They know the local market very well, can determine the right rental price, and also help you select reliable tenants. The last thing you want is non-payers.
9. Think long term
Real estate is not suitable for short-term speculation. If you go for it, do it with a long-term perspective; this will benefit your returns, and your investment will be much less sensitive if the housing market experiences a few bad years.
10. How to start?
Buying and renting out an apartment is a great way to make your money work for you and earn passive income. It’s quite an undertaking to start on your own, so always get well informed. If you want to enjoy the results but don’t feel like dealing with all the work involved, BRXS might be a good solution for you. You can start from €100, and every three months, you receive your share of the rental income and a detailed overview.