The fact that money in a savings account no longer yields much is nothing new. On top of this comes the negative interest rate that is increasingly being charged and persistent inflation. Those who wish to retain their purchasing power must therefore look for another investment, real estate for example. But what type of real estate is the best investment and what returns can you expect?
Why invest in real estate?
The basic objective of the European Central Bank (ECB) is to maintain price stability, which means an inflation rate of about 2%. When inflation is too high, money loses its value and less can be spent. Too low an inflation rate can turn into deflation, or a fall in prices. Consumers will then postpone purchases because they expect prices to fall further.
In recent years, inflation has been consistently lower than 2%. Since the start of the economic recovery after the corona crisis and the problems in the supply of raw materials, inflation has again been higher than 2% for the first time. This increase is reinforced by the rising unrest between Russia and Ukraine. As a result, consumption is once again becoming more expensive. Investing in real estate can therefore be a solution to avoid declining purchasing power. An investment in real estate (directly or indirectly) is less sensitive to inflation. The reason for this is that real estate has a double return. On the one hand, the value of the property rises with inflation and you realize a capital gain over time. On the other hand, if included in the lease, the rental income can be indexed annually in accordance with the health index.
What type of real estate to invest in?
This question is related to your investor profile. A defensive investor will mainly lean towards residential real estate. If you prefer to receive a higher return, you must take into account more risk. At present, this risk can mainly be found in the hospitality sector.
In addition, the lifetime of the property must also be taken into account. When purchasing a new building, replacement investments will not be necessary in the first few years. When purchasing an existing building, short-term replacement investments should be considered. Also consider bank financing when choosing the type of property. The higher the risk, the more equity the bank will want.
Finally, you also have the choice between direct or indirect investment in real estate. With a direct investment you purchase the real estate yourself. With an indirect investment you invest in shares of (listed) real estate companies such as SICAVs. The advantage of an indirect investment in real estate is that you do not have to worry about the management of the property yourself. In addition, you can spread your resources over different real estate projects, which results in a better risk spread.
The return on investment property is linked to several factors. To calculate the return correctly, it is important to take into account all costs. Both the one-time costs paid at the start of the investment and the annual costs paid by the landlord. In addition to the purchase price, the acquisition costs are also part of the initial investment. Additional costs associated with bank financing and any brokerage fees are also factored in. The total investment forms the basis for the return calculation. This sum is compared to the annual net income. The net income is determined by reducing the rent (gross income) by the costs.
These costs may include repair work, syndic, property tax, etc. In order to make a correct calculation, there must be sufficient reinvestment in the property so that its value does not decrease during the "payback period" of the investment.
Private or through the company?
Always think carefully about how you wish to purchase the property: privately or through the company. This choice has an impact on the tax consequences (deductibility of VAT in the case of new buildings, rental with or without VAT, etc.), and is therefore the ideal time to check the pros and cons with an expert before making your choice!
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