Stone is a long-lasting, reassuring investment that performs well and has limited risks. No wonder individuals, investors and companies invest in brick rather than the stock market. Yet, succeeding your real estate investment project is not so simple. The type of financing, tax optimization, laws and practices in force … so many topics to master and understand to ensure the success of the project! Hence the importance of relying on the experience of an expert.
Based on my experience and as the founder of the agency Nexvia, here are my 10 tips and pitfalls to avoid to make your rental investment prosper!
1. Rent your own property or not
Sentimental attachment, ease of operation, heritage strategy; There are many reasons why a homeowner may leave their main home to lease it rather than sell it.
This is not necessarily a good choice when you know that the capital gain on the principal residence is not taxable. If you rent your property, it will be considered as a rental investment and, the day of the sale, the capital gain will be taxed at half overall rate (quarter of the overall rate until 31/12/2018). Financially, it is often more interesting to resell the property and reinvest the capital gain in another property with a more favorable tax rate.
2. Choose the nature of the property
Which types of property are the most tax-friendly? In Luxembourg, it is necessary to distinguish four natures of real estate: the VEFA (off plan), the nine, the older than 6 years, and the old over 60 years.
The applicable tax depends on the type of property. For example, registration fees on a VEFA only apply to the land quota, which considerably reduces the amount to be disbursed (+/- 65% less). Another notable example is the annual depreciation. Indeed, the latter which is 6% on the first 6 years of the property, is reduced to 2% until 60 years of good. The difference is substantial. Goods over 60 years are depreciable at 3%.
The three types of property that we advise are VEFA, new property up to 6 years, and property over 60 years requiring major renovations, tax deductible or depreciable.
(…) if the prices per square meter fall more away from the city, it must be borne in mind that the rental demand and especially the prospects for revaluation and resale are also lower.
3. Choose the location and size of the property
Localization directly impacts profitability but also the liquidity of the property. Indeed, if prices per square meter fall further away from the city, it must be borne in mind that the rental demand and especially the prospects for revaluation and resale are also lower.
Always in this idea of revaluation, it is advisable to aim for the purchase of liquid goods. Aim for 1 or 2 bedroom apartments near the city, taking the time to choose the best opportunities (exhibition, floor in the building, etc.). If you can, think about the longer term: the efforts made now will be rewarded in a few years!
4. Find the right financing
Good financing is financing that reduces your cost while limiting your risk. The best formula will therefore depend on your objectives (speculation, yield over a given period, creation of wealth) and the nature of the property financed. A mix of different loan formulas (fixed, variable, revisable) is often the winning solution.
With the potential tax savings, the actual cost of borrowing is often close to 1% right now. It is therefore best to keep your funds available and invest them in other investment products, as long as the bank allows it and the return you can reasonably expect for your savings is above 1%.
5. Furnished or unfurnished
In a rental investment project, the furniture issue is almost always a problem. Here, you should know that if the furnished are more liquid, with a very strong demand, you must also be ready to accept a larger turnover of tenants. The advantage, of course, is that you will be able to apply for a higher rent, and this can be fixed in a less restrictive way (see point 6).
Whatever the case, have an inventory of the places of entry and exit, to make sure that your furniture and your housing can be restored in the initial state. The rental guarantee (corresponding to two months rent on average) serves as insurance against possible damage.
For an apartment to qualify as furnished, it must be fully equipped. It is not enough that the dwelling in question vaguely has a bed, a table and a chair.
To know: for a dwelling to qualify as furnished, it must be fully equipped. It is not enough that the dwelling in question vaguely has a bed, a table and a chair.
6. Fix the right rent
Setting the price is a balance game. Too low and you will not optimize your investment at best, too high and you may have months of vacation (ie months without a tenant, which would then negatively impact your performance). One solution: study the rents requested for goods and very similar areas and set its price based. Today, the yield in Luxembourg is between 3 and 4%. Note that in Luxembourg, renting a home can not bring back to the lessor an annual income exceeding 5% of the capital invested in housing (10% in the case of a furnished apartment).
7. Change your rent?
Legally, it is possible to change rents in Luxembourg every two years. This rehabilitation is not free; you have to respect a coefficient and apply a discount. Concretely, this allows you to increase your rent between 1 and 2% every two years. In use, and in view of the limited room for maneuver, it is however rather unusual to introduce a rent re-adaptation clause in the lease contract. It is easier to change the rent more significantly between each tenant.
To find tenants, we advise without hesitation to call a professional. (…) Indeed, unless otherwise agreed, the agency fees in Luxembourg are borne by the tenant.
8. Agency or not
Should we go through an agency? To find tenants, we advise without hesitation to call a professional. The advantages are many: it facilitates the process, avoids the organization of visits, and allows you to have support and real expertise. And above all, it will not cost you anything! Indeed, unless otherwise agreed, the agency fees in Luxembourg are borne by the tenant.
What about rental management? Here too, an agency can take care of all the tasks related to your rental investment: collect and monitor rents, intervene for necessary repairs, manage administration etc. This service usually costs 1 month of rent. It’s up to you to decide if you want to give yourself that comfort. And for this price, make sure to choose your agency!
9. Give leave to his tenant
Apart from the case of default for which legal proceedings can easily evict a tenant, there are two specific situations to recover his property:
for a member of his family or himself to live there;
in the case of a resale of the property to an owner wishing to live there.
In other cases, it is important to know that it is not possible to impose the exit of the tenant, even if the lease is for a fixed term. It will then negotiate with his tenant and find a solution amicably.
10. Know when to sell
Above all, it is important to know that the gain from a sale before 2 years of holding will be qualified as profit from speculation. This is the progressive scale that will apply (maximum 47.18%). For a sale after 2 years, this is known as a transfer profit that will be taxed at half global rate (quarter of the overall rate until 31/12/2018), to which is also added temperament measures. Our advice: absolutely keep your investment at least 2 years!
When to sell? From a purely financial point of view, it is better to sell one’s property when he is over 6 years old. Indeed, as explained in point 2, the annual depreciation goes from 6% to 2% between the 6th and 7th year. It is therefore financially more interesting to arbitrate for a new property to enjoy again this accelerated depreciation rate of 6%. But that means finding a good alternative in a location with high potential. Here, as in all areas, “the art of success is knowing how to surround yourself with the best.”
Author: Pierre-Clement – founder of Nexvia