Four tips to boost your real estate returns

Do you own rental properties? Here are some ways to improve your return on investment.

1. Rent indexation

When renting out your property, it often means doing it for a long period of time. It is, therefore, important that the rent you charge reflects the increase in the cost of living. Rent indexation can be done once a year, provided that you inform the tenant in writing. This is compulsory, even if the contract mentions automatic indexation. In the case of a delayed notification by the landlord, the rent can only be indexed in arrears up to three months prior to that written notification.

Rent indexation is determined by using a formula based on the health index. Since 2022, the health index has risen sharply, resulting in a significant increase in rent (+ 7%-8%). The formula for calculating the indexed rent on the anniversary date of the lease, is as follows:

(original rent ✕ new index) ÷ original index.

The original index is the health index of the month preceding the month in which the lease was signed.

The new index is the health index of the month preceding the leaseanniversary date.

Real estate being inherently a safe haven against inflation due to the possibility of rent indexation, it is essential to apply it in order to follow the evolution of the cost of living and to avoid losing purchasing power.

Nevertheless, in the current context of high inflation (which may only be temporary) the landlord can decide to limit the indexation to 5%, for instance, as was recently done by the Housing Management Service (Régie Foncière) of the City of Brussels, which has a portfolio of more than 3,500 properties. The Housing management service of Saint-Gilles has limited the indexation to 4% for 2022.

2. Optimizing your tax bill

Owning a residential property that you do not rent out for professional purposes also means being subject to two additional taxes: the property tax and the Personal Income Tax (PIT) (indexed cadastral income ✕ 1.4, taxed as professional income). To lower your tax bill, it is possible to reduce or even eliminate your PIT. If you repay a loan taken out to finance the renovation, construction or purchase of a property, the interest on the loan will reduce or completely eliminate the tax burden.

It doesn't matter what type of loan you negotiated, you just need to be able to prove that it is related to your property. You can do this whether it is an amortizing loan, a bullet loan, or an instalment loan.


3. Consider house-sharing or furnishing your property

House-sharing is trending nowadays. Students, as well as urban workers, are looking for available flats or houses to live closer to their university/workplace. Turning your property into shared accommodation increases your rental income, especially if it is located in a highly sought-after urban area.

By offering several bedrooms, bathrooms and the like, you can potentially increase your rental income and, therefore,generate capital gains. The tenant's rent is lowered, resulting in greater liquidity of the property, as well as a greater diversification of the risk of non-payment spread over more people. This is in addition to the new shared accommodation leases that introduce a solidarity clause between the housemates.

Managing a shared accommodation can even be easier than managing a standard lease, as when one housemate leaves, the others can take care of finding someone else. This means that the accommodation can continue for years with the same lease, even though all original housemates have moved out one after the other.

Furnishing a property where there is high demand for furnished accommodation can increase the rental price and,therefore, the ROI. However, it also requires more work (a more detailed inventory, maintenance and replacement of furniture) and leases are often shorter (more turnover). Please note that when calculating your returns, you should also take into account the amount invested in furniture.


4. Negotiating your loan and insurance

After several years of historically low interest rates, we have seen a sharp rise since the start of the year (+1.5% on average) with a peak in mid-June. Rates have been falling since the summer due to fears of a cooling economy and an imminent recession. However, the drop in interest rates has not yet translated into a drop in mortgage rates. Banks are currently taking advantage of the situation to secure their margins and to see if the interest rate trend will last. Previously, when rates were rising, they also waited a long time before raising their own rates.

For people who borrowed at the highest rate this year, and in the event that rates continue to fall until the end of the year, consider meeting your banker to renegotiate your mortgage and possibly benefit from lower rates. This will allow you to shorten the term of your loan or reduce the amount of your monthly payments.

You should also consider negotiating expenses that cannot be passed on to tenants, such as landlord's insurance. It is always a good idea to take out insurance that includes a waiver of subrogation. This means, for instance, that your tenant does not have to take out tenant's liability insurance, unless he/she wishes to do so for his/her contents only. The waiver of subrogation part of the premium is an expense that can be passed on to the tenant and is normally less expensive than if they had to take out insurance for damage to the building themselves.

Are you looking for an investment property? Contact us for the best advice !

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