Real Estate: How to Make Rental Income

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ECONOMY MONEY

Our real estate expert Yannick Callens crunches the numbers on how to make rental income.

Investing in real estate combines security and insured benefits. By calculating the return on your real estate investments beforehand, you know what you can expect. But how exactly is the real estate yield calculated?

Before investing in real estate, you obviously want to know how much
your investment will earn you. Investors often use attractive rates of return. However, they often forget to say that the return they are talking about is a gross return. They simply deduct the purchase price and notary fees from the monthly rental income. In reality, the net real estate return is a few percent lower, so it is certainly necessary to take into account the various additional costs.

How to calculate the gross rent performance of a piece of real estate The gross yield of your property is easily calculated: Simply divide the annual rental income by the total purchase price (excluding fees). Then multiply the result by one hundred to get the gross yield.

Example: Purchase price: €150,000 excluding fees Rental income: €600 per month. Gross yield: (600 x 12)/150,000 = 4.8%

This rate does not correspond to actual performance. In order to get a good idea of the return on your investment, it is better to calculate the net return. The net return takes into account the purchase price as well as all additional costs. Indeed, when buying a property, you must pay several unique fees:

– Registration Fees / T.V.A.
– Notaries’ fees (also taken into account in the calculation of the gross yield)
– Deed fees
– Costs for any renovations or refurbishment

There are also various recurring annual (or monthly) fees:
– Real estate tax
– Interest on borrowed capital – Possible maintenance costs

When calculating the yield, it is necessary to take into account all the expenses of purchase, as well as expenses equivalent to 2 months of rent per year.

Example: Purchase price: €175,000, fees included. Rental income: €600 per month. Net return: (600 x 10) / 175,000 = 3.43%

Optimize your rental income: limit inoccupation.  A vacancy is the number-one enemy of your performance. A frequent tenant change increases the risk of vacancy. Similarly, when you want to rent your
property as a vacation home, monthly fixed rental income is not guaranteed. To enjoy optimal rental income, choose an investment in a new or renovated building with a good location. If, in addition, you apply for a market- based rent, you will likely get the best return on your investment.

Real estate value continues to rise

House prices continue to grow each year. So, you will do a great job if you later decide to resell your property. This aspect obviously has a positive effect on the long-term return on your investment.

Rental income up

Not only does the value of your property increase, but your monthly rental income also rises every year. Indeed, the rent can be indexed once a year on the basis of the current health index rising. As a result, the return on your investment will increase each year.

The leverage effect increases your return on capital invested
Mortgage interest rates remain relatively low. Therefore, for your real estate investment, it is beneficial to take advantage of financial leverage in the form of mortgage or bullet credit. Thus, a small contribution of €75,000, for example, will allow you to invest in real estate. In addition, the financing also has a positive impact on your return, thanks to its leverage effect. Low current borrowing rates allow you to maximize your return by financing a small portion of your investment with equity and borrowing the rest.

Real estate is a safe investment. Limited capital, an attractive loan and the tax benefits of buying real estate help ensure good returns. In order to make the most of your property, opt for a highly sought-after building on the rental market.