My yield is 11.88%! What about you? Obtaining the best possible real estate yield is of course the Holy Grail of every multi-owner. Real estate is like soccer: everyone has an opinion, everyone thinks they know better, but in the end, very few are right. What is good property profitability? In any case, you’ll earn more by investing in real estate than by letting your money sit in a bank account. That’s what I’m going to break down for you in this article.
WHAT IS REAL ESTATE PROFITABILITY?
Real estate profitability, also known as rental profitability, is the ratio of the income generated by a rental property to its purchase price. In Belgium, the average rate of return for a property is 5.9%, but there are huge variations depending on the type of property and its location.
GROSS PROFITABILITY
Gross profitability is calculated as follows: (rental income x 12) / (purchase price + registration fees) x 100.
This is the classic formula for comparing apples with apples. Before buying an investment property, it’s very difficult to know what budget will be needed to renovate it. Net profitability can be calculated very quickly using the data provided by the real estate agent. To calculate the budget for the work, you’ll often need to consult an architect or contractor. This guarantees an objective budget. If you draw up the budget yourself, you’ll tend to underestimate the cost of the work involved.
NET PROFITABILITY
Net profitability is calculated as follows: (rental income x 10) / (purchase price + registration fees + works) x 100.
In this formula, rental income is reduced to 10 months. It is generally considered that the rental void, property tax and maintenance costs will consume +/-17% of your income. We also add the cost of the work. You can only calculate net profitability once the property has been rented out and the work completed. This is the value to be compared with the return on your bank account.
A YIELD OF 11.88%? I’LL LET YOU IN ON MY SECRET
As you know, real estate agents never lie. Sometimes he omits certain details… the gross yield, of course. But first, a word about this investment. This is not a classic investment in a housing unit. I invested in a 315 m2 office building which I transformed into a coworking space.
What is coworking? It’s a shared workspace model where individuals or companies work in a common environment, promoting collaboration, flexibility and resource sharing.
There are two main advantages for an investor in converting an office space into a coworking space:
- You rent out smaller areas, whose rents are significantly higher than those of larger areas.
- Instead of one tenant, you have several. The rental void is reduced to a minimum.
But there are drawbacks too. The main disadvantage is that management costs are much higher than when investing in a single-family home. Compare a coworking space with a shared apartment. It will be up to you to manage the tenants, the upkeep of the common and private areas, the more frequent arrivals and departures of tenants, etc. A better real estate return therefore implies a greater investment of time. You don’t get something for nothing.
PLASKY COWORKING IN FIGURES
My coworking space is Coworking Plasky in Schaerbeek.
- It has ten private offices and a meeting room.
- Tenants pay a monthly fee that includes everything, including unlimited use of the meeting room.
- I bought a 315 m2 former office plateau for €438,000 in 2017.
- I invested €225,000 in work.
- It brings me a monthly income of €4,880 excluding VAT.
- Gross yield is 11.88%, net yield 6.80%.
REAL ESTATE CAPITAL GAINS
Let’s not forget this one. To calculate the true profitability of your investment, you can also take into account capital gains. It is estimated that real estate in Belgium increases by an average of 3.5% each year. This means that, on average, the value of a property doubles over twenty years. Taking this parameter into account, the return on investment for my coworking space in 2023 is 10.30%. Huge when compared with today’s savings account yield of 1.50%.
RENTAL PROFITABILITY INCREASES OVER TIME
Profitability increases in proportion to rental income. Rents are indexed each year, automatically increasing rental profitability. It’s mathematical. Let’s do the exercise. Let’s say that by 2040 rents will have doubled. My return will rise from 6.80% net today to 13.60% net in 17 years. Or 23.77% gross ;-). In real estate, time is always on your side. And I’m not talking about the building, bought with money from the banks and tenants, which will belong entirely to me and will probably have doubled in value.
THE RENTAL VOID, THE OGRE THAT DEVOURS YOUR MARGINS
Time flies and the rental void can quickly become your No. 1 enemy. Do the math: it’s better to rent a property for €20 below the market price and rent it right away than to wait several months to find a tenant willing to pay a higher price than the market price. Use a real estate agent to quickly find you the best candidate.
SHOULD YOU INVEST IN A COWORKING SPACE?
Choosing the type of real estate project to invest in for the best return depends on many factors, including your financial situation, risk tolerance, investment horizon, geographic location, and the current state of the real estate market.
Whether you take the industry behemoths or the small coworking spaces, none of them are profitable. My coworking space is no exception. Every month I have to invest €1,250 to keep it afloat. It’s a long-term investment. In any case, I need an office where I can work and welcome my colleagues. So I consider it like rent, except that it’s not lost.
And if you ever decide to take the plunge, remember that, as with any other real estate project, location is the number one criterion. My space is located in 1030 Schaerbeek. It’s a bad choice, even if the neighborhood is top-notch and the Schuman traffic circle is only 4 bus stops away. I don’t know how to ask for the same rents as in Etterbeek or Ixelles. Don’t stray too far from the European Quarter and Avenue Louise.
DIVERSIFY YOUR PORTFOLIO
In any case, a word of advice: manage your assets prudently and sensibly. Diversify your investments: invest partly in real estate, partly in the stock market. Always keep a portion of your savings available: in real estate, good opportunities almost always present themselves when you least expect them.
CONCLUSION
- The example of my coworking space shows that the difference between gross and net returns can be significant. You should always be cautious and take the time to make your calculations before taking the plunge.
- A traditional investment in housing yields less than a more original but also riskier investment.
- Minimize the rental void.
- Diversify your portfolio.
- A good net rental return is between 3% and 6%. Beyond 6% net, you can say that’s fine.
- Over time, profitability increases. In twenty years, rental profitability doubles.
- If you’re not a real estate professional, invest in safe projects. Accommodation.
If you have a real estate project in mind, call me to discuss it. I’d be delighted to share my experience with you.
