How do I start investing in Real estate?

23-12-2022

Real estate has become increasingly popular these past few years. Two reasons for this growth in popularity are that saving your money has become less profitable and taking out loans has become cheaper due to low-interest rates. These two factors combined with the growing market demand, have resulted in major increases in real estate value. Because of this increase in value, investors had a great return on investment on their investment properties.

Different possibilities

Investing in property can go two ways: direct and indirect. Direct investment means that you, yourself purchase a property. Indirect investment means that you invest in a real estate fund.

Direct investment

You can purchase a property via an online platform, broker or own network. This purchase can be in multiple markets, for example, a house, rooms, retail premises, business premises, recreational homes, garages, a strip of land or real estate development.

Most beginning investors purchase an investment property to rent out in box 3.

Box 3 or box 1?

When we talk about normal active asset management, the investment property will fall in box 3. Suppose an owner is actively trying to increase return by renovating, managing or selling with profit. Then there is a change that the income from rent or sales falls in box 1 against 49,5%.

Indirect investment

You can also choose to invest a low amount of money into a real estate fund. This is already a possibility starting at a few hundred euros. The money the real estate fund makes from participation, shares or obligations is used to invest in the construction or purchase of a property. An example of such properties are houses, retail premises, business premises or a mix of these. The fund will calculate the costs of the purchasing, acquirement of the financing and the management of the wallet. The goal here is to exploit and eventually sell the property and make a profit. This profit is paid out afterwards to the investors.

Why is investing in real estate interesting?

Low and sometimes even negative interest rates have made saving uninteresting. This has had the effect that many individuals choose to start investing in shares, cryptocurrency, bonds and real estate.

Investing in real estate is interesting because:

It is less affected by inflation;
It is tangible and less abstract than, for example, shares or cryptocurrency;
The value is less fluctuating than other investment categories;
The option to divide investment is possible, in the type of property, property location and purchase price;
You can earn direct and indirect returns on investment;
Leverage can be realized by re-financing;

Inflation

The rental income can be increased each year according to standard rental agreements. This is to compensate for inflation.

Value

Looking at historical data, we can see that the value of real estate property keeps growing. Furthermore, the value is not fluctuating as much as the other investment categories. Properties will always maintain value as it is a hard asset, something uncommon for the alternative investment categories.

Dispersion

Capital advisors advise their clients to spread their risks by investing in different categories. This spread risk is possible in real estate by investing in different locations, types, and values. For example, if one of the properties becomes vacant, you would still have the rental income of the other properties to pay the fixed costs.

Return on investment

Return on investment within real estate consists of direct and indirect returns. Direct return on investment consists of rental income received, minus the costs made. Indirect return on investment consists of the increase of property value between the moment of purchase and sale. An owner can actively contribute to the increase of value by, for example, renovating, splitting or very simply, changing the tenant for a higher-paying (market conform) tenant.

Financing

At this moment, many financiers offer advantageous terms. Private individuals have been using these advantageous terms to finance the surplus value of their own houses and use this money in an investment. These investors can purchase another object again at a later time by paying off and increasing the value in combination with financing.

What are the risks of investing in real estate?

Investing in real estate has many advantages but also risks. By doing proper research, creating a clear plan and correct advice, it becomes possible to reduce these risks.

Investing in real estate is risky because:

The tenant can terminate the rental agreement. This causes the property to be temporalily vacant, which results in the discontinuation of the rent income;
The tenant can stop paying its rent, but is because of the law, well-protected;
Huge unforeseen costs arise;
Laws and regulations can change, for example regarding room rental;
The value of the property can fluctuate;
You as an investor are unprepared as you only think about the return on investment;
You as a partaker of an investment fund, do not have an influence on the choices of the fund manager;

Vacancy

The biggest risk in investing in real estate is vacancy. The owner will make even more costs trying to fill the vacancy and the fixed costs will continue. If the owner does not have the money for such unforeseen costs, the investor can get into financial problems.

Unforeseen costs

Unforeseen maintenance costs are a risk and can be minimalised. This is possible by inspecting thoroughly when purchasing and during ownership. Also contributing to the minimalisation is withholding a money reserve for future expenses.

Law and regulations

A recent example of changes in law and regulation comes from the Netherlands regarding room rental. The housing shortage in the country has caused many local governments to implement new regulations regarding renting out non-self-contained housing. They do this to regulate the housing stock available for starters. For example, in multiple big cities such as Amsterdam, Rotterdam and Utrecht, it is now necessary to have a permit if you want to rent out to more than two people at one address. These cities also have special departments that regulate these new regulations. You risk a high fine when caught breaking these regulations.

Limited research

A starting inexperienced investor tends to look for the cheapest property with the highest return on investment. Return on investment is associated with risk, meaning it's wise to do some research beforehand into the entire investment so you can make a better assessment of the purchase.

What are the costs of purchasing real estate?

The costs of purchasing real estate consist as follows:

Own money: for residential properties, there is a minimum of 10%, and for commercial properties, there is a minimum of 30% of the assessed tax value.
Transfer tax (NL): 10,4% of the purchasing price.
Notery: approximately € 1.500,-
Financial mediator: approximately 0,8% of the principal amount of financing.
The difference between the assessed tax value and the purchasing price

It is possible to make additional costs by calling in a real estate agent and having certain examinations carried out. Examples of such examinations are a constructional inspection and an examination of the foundation.

Knowing this, we see that when purchasing real estate, a minimum of 20% and more often about 30% of investors their own money is needed.

Property appraisal value

There is frequently a difference in the purchase price and the appraisal value of a property. This is because an appraiser checks next to the vacant possession value also the rental value, regulations regarding renting out and the return on investment. Financing parties depend on this appraisal value while considering a financing request. The difference in the purchasing price and appraisal value needs to be settled by you, the investor. Because of this, it is possible that the amount of your own money required increases.

Starting with investing in real estate

If you want to invest in real estate, it is best to make an appointment with a financial advisor. With your advisor, you can discover how much capacity of money you have to invest. Based on this information, you start an investigation into regions you find interesting. Next, you write a plan with a budget, the type of real estate, the region and the desired return on investment. With this plan, you start searching on online platforms and broker sites in your network for offers that fit your search profile. You then read the sales file, visit the property, calculate the return on investment, write a plan for exploitation, put in an offer and proceed to purchase the property.

It is advised with your first purchase to prepare well and hire professionals for advice and guidance. Investing in real estate is quite interesting, as is described above, but it brings its share of risks. You need to make sure that your decision is well-calculated when investing in an investment property.

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