Time and again I’m asked the same question: “In this day and age is it still profitable to buy a property to let?”
It’s a question that’s easier to ask than to answer. In this blog I’ll explain why the answer is both yes and no. One important starting point is to establish your personal definition of ‘profitable’. Because it’s possible to view return in a variety of different ways. On the one hand, you can look at the expected net rental income versus the amount invested, on the other you can examine the potential increase (or decrease) in value in the long term. Both calculations involve hidden expenses, sometimes unforeseen costs and corrections to the future value of money. As a result, your actual return may turn out to be lower than you’d calculated.
What matters much more though are the higher goal you aim to achieve via your investment and the planned horizon. Because I can guarantee you one thing: everything you calculate today will change at some point in the future. Rents fluctuate, house prices rise and fall, legislation is constantly evolving and an (economic) crisis may even lead to your target group changing. As a general rule the longer the horizon, the more secure your investment. More time gives you more opportunity to adjust your strategy if necessary. If you ask me, the get-rich-quick schemes promising freedom from financial obligations within eighteen months are one of the biggest scams currently being sold online.
Statistics don’t lie. House prices have continued to rise over the past few years. Statistics from Kadaster (Dutch land registry office) show that house prices have climbed by an average of 63.5% since the low reached during the financial crisis (2013). Rents have also risen but at a much slower rate. Research by Pararius tells us that rents are actually coming down in the five big cities at the moment.
In addition to the higher house prices, investors now also need to pay more transfer tax. So you need to invest an increasing amount of money and be satisfied with a dwindling amount of rental income. It’s therefore perfectly logical to ask whether buy to let is still profitable.
Anyone who doesn’t know what’s involved in buying and letting residential properties is taking a serious risk in the current climate. The same goes for investors who aren’t prepared to do their homework properly (or to get someone else to do it) and end up buying a property they’re not legally allowed to let. There may be regulations that affect the amount of rent or that either prohibit or require owner-occupancy or the letting of individual rooms or multiple tenants.
On the flipside, however, well-informed investors are still able to earn a return. Purchase and rental prices per square metre give an idea of the average gross initial yields for each town or city. Those who are willing to do their research often do much better than the market averages. Investors with a long horizon, such as for their retirement or even the next generation, have the biggest chance of success. And of course these days we need to ask ourselves what our ‘best alternative’ is.
With interest rates low and house prices rising, a growing number of people are converting the equity in their own homes into loans and buying investment properties. This is enormously risky. When interest rates climb and house prices fall, home owners could be forced to pay off more of their mortgages on both properties. If they’re unable to pay up, the properties will be repossessed.
It’s precisely now that the outlook is changing so radically that investment in residential properties is increasingly suited to investors with substantial financial means and a long investment horizon.
In all the major financial decisions I make as an investor and businessman, I make sure I have people in my team who already have experience of what I’m planning to do. A good letting agent will be able to set out all the potential risks in advance.
If you’d like to learn more about my experiences as an investor and former letting agent, why not sign up to one of the free Interhouse information sessions?