It’s no secret that these days, a savings account no longer yields much. Worse! The record low - sometimes even negative - interest rates and inflation could cause you to lose money. So to make a profit on your savings, it is often advisable to invest in rental property. To convince you of this, BuyerSide sets out 10 advantages of such an investment.
Why are interest rates so low?
Following the 2008 banking crisis, the European Central Bank decided to reduce the interest rate until it reached 0% in March 2016. The aim was to give the economy a new boost by encouraging savers to invest more. Over the past few years, the banks have provided a minimum interest rate of 0.11% per annum on savings accounts for private individuals. Based on monthly forecasts, inflation in Belgium is expected to amount to 1.4% in 2021. In these conditions, this means that EUR 100 deposited in the bank for 10 years at an interest rate of 0% will in reality only be worth EUR 87. Extending this reasoning over 20 years, you would be left with just EUR 75.5.
In short, this means that all the Belgians who have saved the traditional way have lost purchasing power with the money in their savings account. And this trend is not likely to be reversed, because further to the COVID-19 health crisis, the European Central Bank has announced that the zero rate is to be continued.
Investing in rental property has numerous advantages
Given this situation, many savers are deciding to invest in rental property, which makes real economic sense. In fact, housing is the most fundamental need for everyone and as the population is rising all the time, demand for housing remains strong. Investing in real estate has many advantages:
1. It is resistant to inflation
As rents are indexed annually on the basis of the health index, the revenue collected from rented property will increase in line with inflation.
2. It can be bought on credit
Barring exceptions, rental property is one of the rare forms of investment that can be undertaken on credit. This enables you to benefit from the leverage effect and therefore limit your investment using your own capital while benefiting from record low interest rates. In this respect, the ECB requires banks to finance no more than 80% of the amount excluding costs. Investors therefore have to disburse 20% of the amount of the investment excluding costs + around 15% in costs (registration duties + credit deed costs + notarial fees).
In total, an investor will have to provide own capital amounting to around 35% of the purchase price, including all costs (‘Deed in Hand’).
3. The rents can be used to reimburse your loan
Your real-estate loan can be entirely or largely reimbursed using the rents that you receive, depending on the amount of own capital that you invest in the transaction. The aim is usually for the rents to cover the full monthly amount of the loan, or even exceed this.
4. Real rental revenue from unfurnished residential property is not currently subject to personal income tax
Apart from the advance property tax that you will have to pay every year, you will no doubt not be liable for any other taxes if you rent an unfurnished housing unit to a private individual. The tax base generated by the indexed cadastral income of the building that you have to declare in your personal income tax return can be fully or partly reduced by the interest that you pay on your bank loan. This will depend on the amount and the type of loan (depreciable, bullet, etc.).
5. It offers an attractive level of profitability
Dividing the annual rents received by the total investment gives the gross return on the investment. In Brussels, for example, this usually varies between 3.5 and 4.5% depending on the district, the quality of the building, the renovations made, etc.
The net return is calculated in the same way, but after deduction of the annual rents received, the charges borne by the lessor (such as the advance property tax, the owner’s insurance, etc.).
The return on own capital, meanwhile, determines the return generated by the capital you invest alone, thanks to the bank leverage. This is usually between 8 and 10%, depending on the amount of your own capital invested in the transaction.
6. It involves little risk
As real estate is a tangible asset with a physical reality, it will always retain a very stable value. This has been demonstrated through the various crises we have experienced (2008, Covid). During the latter crisis, real estate has even grown substantially as it is considered a safe haven. So it is a secure investment. Not forgetting the rental guarantees, which also partly protect you against nasty surprises.
7. It enables control
If you wish, you can manage your rental property yourself. Regular visits will enable you to check on your investment. Or you may decide to delegate the management of your asset to a specialised company which will usually charge 8% of the annual rental collected, excluding VAT.
8. It represents an additional source of revenue
Once the real-estate loan has been reimbursed in full, for example after 20 years, the rents from your property can represent an additional source of revenue. This may enable you, for example, to maintain your standard of living when you have retired. Once the loan has been reimbursed, rental property enables you to improve your pension without having to touch your capital.
9. It represents added value over time
Your capital does not decline… It even tends rather to increase from year to year. But take care to make the investments necessary to preserve it.
Buildings suitable for letting purchased as a block (less expensive than the sum of the apartments taken individually) can often be resold unit by unit (apartment by apartment). This possibility increases the liquidity of your investment and in many cases will represent a substantial potential added value.
10. It is a tool of choice when planning your succession
When kept in the long term, rental property is an attractive asset to pass on to your children. Thinking carefully about the acquisition structure when buying the property will make it possible to reduce or avoid any tax effects in the event of future donation or succession. For example, real estate bought in bare ownership/usufruct can be passed on to the next generation while retaining the revenue during your lifetime.