Why investing in real estate is highly profitable!
Article updated in 2021
Historically, property has a positive image in Luxembourg, especially among investors for whom it represents a secure capital, with a solid return and with a high revaluation potential. But is it really the case? We will analyse the arguments that prove that a buy-to-let investment is truly profitable!
With the instability of the financial markets and the low interest rates, many are considering this opportunity to build real estate assets and to generate additional income. However, due to the large sums involved, few actually go through with the investment. Not necessarily due to a lack of funding capacity, but rather because of the misunderstanding of the four financial levers that make investing so worthwhile in Luxembourg: gross yield, debt, property revaluation of the property and a favourable taxation.
Although the yield has tended to decrease, the rates still lie between 3 and 5%. For a 600 000€ property, a reasonable asking rent could therefore be between 1 500€ and 2 500€, depending on the property location.
Areas that are more in demand will have a lower yield, reflecting the security and the liquidity of the investment.
The investor should therefore not limit his analysis to this single financial component, and take in account the three other levers that make buy-to-let investments truly profitable.
For most financial products (stocks, bonds), the investment must come from your own funds. Taking on debt is usually not an option, though some specific options are aimed at well-informed investors like the Lombard loan. One of the major advantages of real estate is precisely the fact that you can use your available income – including your salary - to fund your investment through debt. This leverage effect - allows you to invest larger amounts with little or no capital.
Taking in account the no-limit deductibility of the net rental income, contracting a debt to finance your buy-to-let investment is much more profitable than using your own funds. Through a fixed rate loan and taking in account the current market situation, you can take advantage of a close to 1% mortgage interest cost on your whole investment period.
However, since the CSSF directives of 2020, the borrowed amount may not exceed 80% of the property price.
Although it is difficult to predict the long-term evolution of any market, real estate in Luxembourg has historically been increasing year after year. On average, the real estate market has increased 4,5% per year on average, reaching up to 6% in 2016. The property revaluation is therefore an important component of the investment. Moreover, Luxembourg has remained resilient to the 2008 crisis – setting the most cautious investors’ minds at ease.
Is this price increase durable? In our article “Is real estate too expensive in Luxembourg?”, we did an in-depth analysis of the price increase and the causes behind it. We notably state that “if a weakening of the market is always possible, it remains very unlikely as it is supported by economic, demographic and fiscal elements”.
To compensate the housing shortage due to the country’s population growth, the Luxembourgish government has taken several measures to incentivise property investment. Three main measures exist, and will vary depending on the specific investor situation and the property type.
- The fiscal depreciation on the property cost. Depending on the age and the state of the property, the depreciation rate will vary significantly. We generally advise our clients to invest in off-plan projects, or in property that is older than 60 years and needs significant renovation work. This allows investors to take advantage of a fiscal depreciation rate of up to 5% in the case of an off-plan property.
- The deductibility of the various costs bared by the owner. Bank interests and charges linked to the property financing, rental management costs, property tax, maintenance and repairs, insurance premiums are all examples of deductible costs. When paired with the fiscal depreciation, the taxable rental income is often very low, and can even generate a fiscal deficit. These savings can be transferred onto other taxable incomes.
- A favourable taxation on the capital gain. Two deferral measures can lower your capital gain tax when selling your property. The first is the 50 000€ decennial tax cut (100 000€ for a couple). Additionally, a taxation cap is set to half of the global income tax rate (meaning 22,89% in the worst case). The capital gain tool helps to determine the taxation applicable to your specific situation.
So should you invest?
We are convinced that investing in real estate is a secure and profitable, both on a fiscal and financial point of view. Very few other financial products allows you to take advantage of the debt lever, all while offering such secure and high profitability rates.
Of course, it is essential that to optimise your investment, and strategies may radically change according to the situations and objectives of each individual. It is therefore strongly recommended not to invest without seeking professional fiscal, financial and real estate advice.