Belgians have always been fans of real estate. Since childhood, they have been told that real estate is the best investment for their money. Information or speculation? Here are our findings.
To make an informed choice, it is necessary to evaluate the expected return on your investment. However, in terms of real estate, the parameters that affect the return are numerous: purchase price, location, cost of credit if there is one, the condition of the building, the type of tenants, the occupancy rate… The yield therefore depends heavily on the property you buy. By adopting a passive investment strategy based on a global equity ETF, the long-term return an investor can reasonably expect is 7% per annum, net of fees.
Non-recoverable charges weigh quite heavily in the annual return of a property: rental, withholding tax, possible external management and above all, exceptional charges such as small works and repairs. These costs can quickly eat into the rental yield of the building and can occur in an unpredictable manner. In the case of a passive investment in a portfolio of trackers, the costs are limited due to the low ongoing costs of the funds and the reduced number of transactions required for occasional rebalancing. Management fees are also quite low, around 0,5% to 1% per year.
Let us take as a reference the investment in a one-bedroom apartment of 70m2 located in Brussels, considering the following hypotheses:
|Investments and rental income|
|Annual rental income||9.720€|
|Indexed cadastral income||1.718€|
|Personal income tax||1.203€|
|Total annual charges||2.912€|
|Net rental return||2,15%|
The table above reflects the rental yield of a property purchased with equity, without taking into account any mortgage loan and the resale value of the property. This rental income can be compared to the dividends received on a share. Dividends vary from one company to another but have averaged 2,1% gross per year for 10 years worldwide, i.e. 1,47% net for the investor after deduction of withholding tax. The recurring income that can result from a self-financed real estate investment is therefore higher than that of an index portfolio.
To assess the total return of an investment, one must take into account the expected long-term capital gain on the underlying asset. This appreciation in value is difficult to estimate for real estate because it depends on the property and its location. However, it is much less volatile than the capital gain of a stock portfolio, which is likely to reassure the real estate investor. From 2011 to 2021, the capital gain realized on an apartment in Brussels averaged 2,6% per year (source: Statbel). Over the same period, the global equity market grew by 11,1% per year excluding dividends (MSCI ACWI IMI Index). In both cases, this capital gain is not currently taxed in Belgium.
It is common to use a loan to limit the capital contribution of a real estate investment. If the expected return on the property acquired is higher than the interest paid on credit, the latter has a multiplier effect on the return on the investment. This is called the leverage effect, a “magic formula” that has its limits. On the one hand, for the loan to be fully financed, the monthly payment of the loan cannot exceed the net rental income, which limits the portion that can be borrowed. On the other hand, the repayment of the credit must be ensured whatever happens, it is necessary to keep some reserves to be able to deal with unforeseen events, such as a rental vacancy or bad payers.
Two types of real estate investment should be considered in the comparison with passive investing: equity investment and mortgage investment. If we take into account an average expected return of 7% per year for passive investment over a 20-year horizon, real estate investment on equity is much less profitable, with an expected return of 4,06%. Taking the leverage effect into account, the difference is slightly reduced since the return on real estate then amounts to 4,53% (assuming a total borrowing rate of 2%, interest rate, insurance and booking fees included). A somewhat OK profitability… but not as high as that observed in the long term on financial markets.
The results presented here depend on assumptions – rates, rents, charges… – that we deem reasonable and which are detailed in the Excel spreadsheet available here. Feel free to play with it in order to simulate your personal investment case !
But beware: to guarantee positive cash flows throughout the investment period, i.e. full financing of monthly payments by rents, recourse to mortgage loan will only be possible with a colossal initial contribution: in in this case, 65% of the total amount to be invested (purchase price + costs and works), i.e. more than 200.000 euros! And this is not so much attributable to the rate assumptions used, which nevertheless remain very low: the repayment of capital weighs heavily in the equation. To make a profitable real estate investment, it will therefore be necessary to have accumulated a nice little sum... which is not the case with passive investment, accessible at easyvest from 5000 euros.
To reduce the necessary cash contribution, some might be tempted by what is called “bullet” credit, which allows only the interest to be repaid during the period of ownership of the property and therefore substantially improves cash flows. But beware: on the one hand this formula is not without risk, since no one is safe from a market downturn which would make it impossible to repay the debt at the end of the period, and on the other hand, access to this type of credit is generally limited to borrowers who can offer additional guarantees to their banker (such as, for example, a mortgage on another property). In some cases, the “bullet” credit can only be granted on part of the amount borrowed.
In addition, the time to devote to a real estate investment is certainly a parameter to be taken into account. Taken together, the time spent managing contracts, paying bills, co-ownership meetings or even coordinating trades can easily take up a few hours a month. Unless you outsource everything... Which obviously has a cost and will weigh on the total return. Conversely, as its name suggests, passive investing requires almost no personal involvement.
Similarly, as explained above, the total return on a real estate investment only materializes at the time of resale, i.e., in our assumptions, 20 years after the purchase. If the property is resold before, the annualized return obtained will probably be lower. Given the importance of the entry costs constituted by registration fees and notary fees in Belgium, there is a minimum number of years below which the resale of the property will almost certainly be at a loss. To bear full fruit, index investing also requires a long-term approach, but it is not excluded that the liquidation after only a few years will give rise to a positive return.
The index portfolio has another advantage: it can be subject to partial liquidation. If for some reason you need cash during the period, you can easily liquidate part of your portfolio, which is impossible with real estate.
Even if real estate in Belgium generally presents an acceptable profitability, it is often overrepresented in the portfolio of Belgians. Already in many cases owning their own home, many are considering buying an investment property close to home... which goes against the principle of diversification.
Conversely, passive investing allows, even with only a few thousand euros invested, to greatly diversify your portfolio. Because by investing in a global equity ETF, you are automatically exposed to all companies listed worldwide, regardless of their sector of activity, their size or their geographical location.
Given the long-term market returns and the relatively low minimum amounts to invest, passive investing seems to be a must for a prudent investor. It can be an excellent complement to a first real estate purchase... Or a simple way to finance it. Because if you passively invest 15.000 euros today, adding 200 euros in savings per month, you should have accumulated in 10 years from now a capital of around 60.000 euros. A good starting point for a real estate purchase!
In order to simulate your personal investment case, you can access the Excel spreadsheet available here.
This article was written when easyvest was authorized and regulated by the FSMA as an agent in banking and investment services. Today, easyvest is a brand of EASYVEST NV/SA, authorized and regulated by the Belgian Financial Services and Markets Authority, with company number BE0631.809.696, as a portfolio management company and as a broker in insurances, with its registered office in Rue Gachard 59, 1050 Brussels, Belgium. Copyright 2023 EASYVEST NV/SA.