Real estate is a reassuring and durable investment, that has a good return and has a limited risk. It’s not surprising that both private individuals and professional investors sometimes invest in real estate rather than on the stock market. However, a guaranteed success in your real estate investment is not that simple. Different types of financing, fiscal optimization, applicable laws… many different subjects you should know and understand in order to succeed! Hence the importance of relying on the experience of an expert.
On the basis of my experience and as the founder of the Nexvia agency, here are my top 10 tips and tricks to ensure the prosperity of your rental investment.
1. Renting your own property or not
Sentimental attachment, ease of the operation, patrimonial strategy; many reasons can encourage a property owner to rent out instead of selling the property he is moving out from.
It is not necessarily the right choice since the capital gain on your primary residence is tax exempt. If you rent out your property, it will therefore be considered a rental investment and, on the day of the sale, the capital gain will be taxed at half the global income tax rate (a quarter for a sale before the 31/12/2018). Financially, it is often better to sell the property and invest the proceeds into another more fiscally advantageous property type.
2. Choosing the nature of the property
What are the types of property that are more fiscally advantageous? In Luxembourg, we can distinguish four different types of real estate property: off-plan, existing below 6 years, existing over 6 years, and existing over 60 years.
The applicable taxation varies according to the type of property. For example, stamp duty on an off-plan project is only calculated on the land part, strongly decreasing the payable amount (+/-65% less). Another notable example is the yearly depreciation. The rate, which is 6% during the 6 first years of the property, is then lowered to 2% between the 7th and 60th year of the property. The difference is substantial. The depreciation rate for property over 60 years is 3%.
The three types of property that we advise to buy are off-plan, existing up until 6 years, and existing over 60 years requiring heavy renovations, since they are also fiscally deductible.
Even though the price per square meter is lower as you move away from the city, you should know that the rental demand and the revaluation perspectives are also lower.
3. Choosing the localization and the size of the property
The localization will directly impact the return but also the liquidity of the property. Even though the price per square meter is lower as you move away from the city, you should know that the rental demand and the revaluation perspectives are also lower.
With revaluation in mind, we recommend to buy very liquid property. Target 1 or 2 bedroom apartments close to the city, while taking the time to choose the best opportunities (exposition, floor in the residence, etc.) If you can, think about the long-term: the efforts made today will be rewarded in a few years!
4. Finding the right financing
The right financing is a financing that allows you to reduce your cost while limiting your risk. The best formula will depending on your objectives (speculation, return on a given period, asset creation) and on the nature of the property. A mix between different mortgage types (fixed, variable, revisable) is often the best solution.
With the various tax savings, the actual cost of the mortgage is often close to 1%. You should keep your available funds and invest them in other investment products, as long as the bank allows it and that you can reasonably expect a return over 1% from your investment.
5. Furnished or unfurnished
In an investment project, you are faced with the question of furnishing the property. You should know that furnished property has a higher demand, but that the turnover is also much higher. The clear advantage is that you will be able to ask for a higher rent, and that it can be fixed in a less constraining way (see point 6).
Whatever the case, you should do an inventory of the property whenever a new tenant moves in. This ensures that your property and furniture can be returned in their initial state. The rental guarantee (usually two months of rent) is used as insurance against possible damages.
(…) in order for a property to be qualified as furnished, it needs to be completely equipped. A simple bed, table and a few chairs will not be sufficient.
You should know that in order for a property to be qualified as furnished, it needs to be completely equipped. A simple bed, table and a few chairs will not be sufficient.
6. Fixing rent
Fixing rent is delicate balancing act. Too low and your investment won’t be optimal. Too high and you will risk vacancy (i.e. a period without a tenant, which will negatively impact your return). The solution: look at the rent for similar property in very similar areas. Today, the return in Luxembourg is usually between 3 and 4%. Legally however, your investment cannot exceed a 5% yearly return
7. Increasing rent?
In Luxembourg, it is legally possible to increase rent every two years. This cannot be done freely; a coefficient and a discount need to be applied. In real terms, this allows you to increase your rent between 1 and 2% every two years. In practice, and considering this limited margin, it is quite rare to introduce a rent readjustment clause in the contract. It is easier to change rent in a more significant manner in between two tenants.
To find your tenant, we advise you to call an agency. Except if specified otherwise, agency fees in Luxembourg are paid by the tenant.
8. Agency or not
Should you go through an agency? To find your tenant, we advise you to call an agency. There are many advantages: this makes the whole process easier, takes the responsibility of visits away, and allows you to benefit from professional advice. Also, it will not cost you anything! Except if specified otherwise, agency fees in Luxembourg are paid by the tenant.
How about rental management? An agency can also take care of all the tasks linked to your rental investment: receiving and following payments, taking care of repairs, doing administrative tasks etc. This service generally costs 1 month of rent. You should decide if you want that comfort. And considering the price, it’s important you choose your agency well.
9. Discharging your tenant
Apart from a payment default, in which a judicial procedure allows you to easily evict the tenant, there are two specific situations in which you can retrieve your property:
- If a member of your family or yourself will live in it;
- If you are selling the property to a buyer wanting to live in it.
In the other cases, it is not possible to evict the tenant, even if the rent contract has a determined period. You will therefore need to negotiate with your tenant and try to find an amicable agreement.
10. Knowing when to sell
First of all, it is important to know that the capital gain will be speculative on a sale up to 2 years after the acquisition. This means that it will be taxed at the marginal income tax (maximum 47,18%). For a sale more than 2 years after the acquisition, the capital gain will be taxed as a long-term gain, at half the global income tax rate (quarter of the global income tax rate for a sale before the 31/12/2018), to which are also added deferral measures. Our definite advice: keep your investment at least 2 years!
So when should you sell? On a financial point of view, it is better to sell your property once it is over 6 years old. As explained in the second point, the yearly depreciation drops from 6% to 2% between the 6th and 7th year. It is financially more sound to arbitrate for a new property, allowing you to take advantage of this accelerated depreciation rate. But this also means finding a property in a high potential area. And here, just as with anywhere, “the key to success is to be advised by the best”.