Buying a property to rent out

Investing in a Rental Property - Introduction

Investing can take many forms, and one option you might consider is buying a property to rent out. This is a relatively stable investment opportunity with relatively low risk. As with all investments, having a good understanding of the process is crucial if you want to achieve a positive return on your investment. There are several factors to consider, which can make this type of investment somewhat complex. Therefore, it’s advisable to always consult with a specialist who can help you understand whether this investment option is suitable for you.

Is Buying a Property to Rent Out Allowed?

Yes, buying a house and renting it out is permitted. However, there are specific conditions you need to meet. If you already own a home and are looking for a good investment, you may quickly encounter some rules and requirements. The rules for buying a second home differ from those for buying your first home. When buying a second home, you might not be able to get the same mortgage options. It’s advisable to consider a specific rental mortgage in such cases.

Rental Mortgage

The rental mortgage was developed a few years ago to address the growing demand for buying a house to rent out. While you can’t rent out your own home permanently, a rental mortgage allows you to do so for a second property. The rental mortgage enables you to buy a second home as an investment. However, there’s an additional cost involved due to the higher risk perceived by mortgage providers for rental mortgages. This results in an extra rental surcharge being added to the mortgage.

Maximum Loan Amount from Banks

When buying a second home, if you need a second mortgage, you’ll find that you can only finance 70-90% of the property’s value through a rental mortgage. For a regular mortgage, this figure is typically 100%. The percentage for the rental mortgage is calculated based on the market value of the property when rented out, which is usually lower than if the property were owner-occupied. This calculation is based on an appraisal.

Buying a Property to Rent - Conditions

In addition to financial conditions, there are other requirements to consider. Structural and legal conditions are crucial. A rental mortgage is generally only granted if certain structural conditions are met. The property must also be located in the Netherlands. There are additional rules regarding its use. Short-term rentals are not allowed, and the property cannot be used as a vacation home or student accommodation. In certain municipalities like Amsterdam, the municipality makes it difficult for rental properties. They ensure a sufficient number of affordable homes by enforcing self-occupancy obligations. Buying a property for rent is excluded in these municipalities.

Buying a Property to Rent - Taxation (Box-to-Box)

Translation to English:

A first home is considered an asset in Box 1 by the Tax Authorities. This gives you the right to mortgage interest deduction. However, buying a second home for rental purposes is considered an investment, which falls into Box 3. Unfortunately, there is no mortgage interest deduction available for Box 3. The property tax also becomes void.

Good to Know - No Tax on Rental Income

For a property bought to rent out, you only pay transfer tax once. To determine whether buying a property to rent out yields a positive return, you should consider annual costs such as local taxes and levies (OZB).

Buying a Property to Rent - Maintenance

Owning a house or apartment to rent out is not a hands-off investment. As the owner, you are responsible for both major and minor maintenance. Don’t delay, as this can lead to larger expenses in the future. As the owner, you are also the first point of contact for the tenants.

Is Buying a Property to Rent Profitable or Not?

Whether buying a property to rent out is profitable is a complex question. At this moment, it may well be. There is a significant shortage in the housing market, and this situation will likely persist for some time. The entire picture must make sense. One of the most important conditions is whether the right property is in the perfect location with an appropriate rental mortgage. Additionally, you should be familiar with the tax and local rules and requirements. Be aware of your responsibilities as a landlord.

Things to Consider

A rental mortgage, like all other types of mortgages, is assessed against your (joint) income. Carefully consider whether you can handle two mortgages. Rental mortgages have stricter conditions compared to regular mortgages.

Relatively Safe Investment

Investing in real estate or other assets always carries some risk. Buying a property to rent out is considered a relatively safe investment, especially when compared to investing in cryptocurrencies. Over the long term, property values have generally increased by more than 5%. However, keep in mind that there have been dips in the housing market several times over the past 70 years.

Return on a Property Bought to Rent

The main goal of buying a property to rent out is to achieve a positive return on your investment. Rental income must exceed mortgage payments and maintenance costs. For a property bought to rent out, you should aim for a return of at least 7%. It’s crucial to carefully list all costs and benefits to determine whether buying a property to rent out will indeed be profitable for you.

Costs

You likely already know the costs involved in buying your first home. When buying a house to rent out, everything seems much more expensive initially. However, on the long term, costs and mortgage debt decrease significantly.

Profitable Property to Buy

Buying a property to rent out often requires a significant amount of your own money. You cannot get a mortgage for the full amount. In most cases, you can finance up to 90% of the property’s market value for your second home. A rental mortgage or property mortgage is not offered by every insurer. Mortgage lenders consider buying a property to rent out riskier than a 'normal' property that is permanently occupied.

Taxation

As mentioned earlier, rental income from a second property is considered an investment and falls into Box 3. You must pay taxes on this income there. The maximum tax rate in Box 3 is 1.2%.

Maintenance

As a landlord, you are responsible for both major and minor maintenance. If you want to buy a property to rent out, have a technical inspection done before signing anything. This can prevent you from facing major expenses right away. Regular maintenance, such as exterior painting and upkeep of the central heating system, is also your responsibility.

Benefits

The benefits of buying a property to rent out are twofold. Monthly rental income comes in, and the total value of your property can increase. Over the last 70 years, the average property value has increased by 5.4%, which is much more than the interest on your bank savings account.

Certainty Above All - All Risks to Consider When Buying a Property to Rent

The return mentioned may seem very attractive. Only consider buying a property to rent out if the entire picture fits. Don’t ignore the downsides. Here we outline all the points to consider once again:

• The value of real estate has increased significantly in recent years. However, property prices can also decrease. If there is an economic crisis and you lose your job, a large portion of your capital is tied up in bricks. If you need that capital at any point, sometimes the only option is to sell the second property at a loss.
• Politics keeps a close eye on the housing market. They want the housing market to be accessible to everyone. While the government is generally stable, new rules and laws for the housing market may be introduced.
• For rental properties, the landlord is largely responsible for maintaining the livability of the property. Items like exterior painting will need to be done every few years.
• Be well-informed about tenant protection and other rental laws. Poorly managed rental agreements can lead to problems you really don’t want.
• Annual insurance and taxes, such as property tax (OZB), are also the landlord’s responsibility.
• It is important to prevent vacancies. If the property is vacant, you receive no rental income, but mortgage payments continue.
• There is always a risk of non-paying tenants. This may require a legal procedure to end the rental agreement and evict the tenant. This can cost a lot of time and money.

Buying a Property to Rent - Conclusion

Buying a property to rent out can be a good investment for a higher return on savings or assets. However, it is important to understand the risks. There are potential pitfalls to be aware of. Therefore, always ensure you are well informed by a real estate management specialist. Contact Manon de Lange, a real estate agent in The Hague, at tel 0621874097.