Rental property: What is it and how does it work?

What is an investment property?

An investment property is a property that generates income. It is therefore not a home you live in yourself, but a house or apartment that is rented out. When the tenant pays monthly rent, you receive a steady income. You use part of this income to cover the mortgage and maintenance costs of the investment property, while keeping the rest as extra income.

Different types of investment properties

Investment properties come in countless forms. The most well-known type is a rental house or apartment. You rent these out to tenants who live in the property either permanently or for a fixed term. A vacation home is also suitable as an investment property. This is especially true for vacation homes in popular locations, such as along the coast or in the Ardennes. Would you like to generate multiple rental incomes at once? Then you can also invest in an apartment complex, such as student housing.

There are also properties other than residential homes that you can use as income-generating assets. For example, you can invest in a parking lot or parking garage. This is a particularly lucrative option in busy cities with limited parking. In rural areas, leasing pasture land is particularly popular. This allows farmers to raise livestock or grow crops. With a lease agreement, you are guaranteed a steady rental income for at least nine years.

What are the pros and cons of investing in an income property?

Investing in an income property has its pros and cons. What makes it worthwhile, what should you look out for, and what exactly are the pitfalls? Here is an overview of the key pros and cons.

Benefits

The main advantage of investing in an income property is that it offers a relatively high return on investment. This means you’ll earn more than if you left your money in a savings account. It’s also a relatively stable market. The income is consistent, and there are always tenants looking for a place to rent at a reasonable price. You also generate passive income. After purchasing and renting out the property, you have virtually nothing else to manage, except for periodic maintenance.

Disadvantages

No investment is without its drawbacks. With an income property, you must first make a substantial investment before you start generating income. This makes this scenario less appealing to smaller investors. In addition, the income must exceed the fixed expenses. Be sure to factor in not only any mortgage payments but also maintenance costs and insurance. Furthermore, managing an income property is very time-consuming. To relieve yourself of this burden, you can hire a property manager. They will take full responsibility for managing your properties. A final point to consider is that you need to know in advance whether your intended property, parking space, or pasture is in demand. If there is little interest in the property, you run the risk of it standing vacant for an extended period.

What costs should you expect?

Obviously, you’ll need to pay the purchase price of the property. You can pay this in a lump sum or finance it with a mortgage. Are there any other costs to consider? Yes, with any investment property, you’ll have to deal with a number of variable costs.

Registration fees

You must pay registration fees for every property you purchase, whether you plan to live in it yourself or rent it out. For investment properties, you must pay a higher registration fee rate, specifically 10%. This means you must pay 10% of the purchase price in addition to the purchase price itself.

Taxes

For investment properties, you must also pay property tax each year, also known as land tax. To do this, you must report the assessed value to the tax authorities. This amount is indexed and increased by 40%. The final amount is added to your regular income, on which you ultimately pay tax. Do you rent your investment property to a company or business owner? In that case, you report the net rental income. Also, keep in mind that some municipalities still levy municipal taxes on second homes.

Other costs

This last category is often overlooked when calculating the costs of an investment property. Other costs are variable and depend largely on the condition of the property. For example, an older property will require more maintenance than a new construction project. In addition, you must take into account necessary insurance, setting aside funds for renovations, and periodic repair costs.

Would you like to learn more about investing in real estate? If so, we highly recommend this book, “Investing in Real Estate: The Complete Beginner’s Guide,” written by our CEO, Thomas Valkeniers.