ᐅ Is real estate rental profitable?

In my opinion, there are two additional factors:

1) With very cheap external capital, you can create a relatively low-risk leverage effect. For example, using $200,000 to finance a $600,000 apartment can more than double the return on equity (in a highly simplified calculation: 3 * 3% - 2 * 1% = 7%).

2) Certain properties (historic renovations) allow for significant income tax reductions over 12 years through heritage depreciation. This only makes sense if you have sufficient taxable income.

From my own experience, I can say that renting out property involves more work than managing ETFs. Even without problematic tenants, there is always something that needs to be repaired in an apartment or a tenant change is due. Of course, you can outsource everything, but that reduces your return.

Over the years, however, capital appreciation should not be overlooked when it comes to returns. Although the conditions are different, I like to compare rent to dividends and capital appreciation to stock price increases.

RomeoZwo schrieb:

Over the years, when it comes to returns, the increase in property value shouldn’t be overlooked.

It’s similar with owner-occupied homes. Prices are currently so high... that every bad purchase from the last few years or decades has somehow still paid off, and selling brings in huge sums. However, I don’t expect prices to rise much further.

In any case, when renting out a property, you shouldn’t just focus on the numbers that look good on paper. What people often overlook: rental vacancies, repairs, renovations... all very unpredictable and can significantly impact returns. So don’t just consider purchase price and rental income alone.

Tassimat schrieb:

You definitely shouldn’t deceive yourself when it comes to rental investments. What people often overlook are vacancy periods, repairs, renovations... all very unpredictable and they heavily impact the return. So don’t just focus on purchase price and rental income.

That’s a very important point. I built an Excel tool that accounts for private reserves for repairs within individual ownership (so not the maintenance reserve of the homeowners’ association), vacancy losses, rising costs, and the individual tax rate. After deducting these factors, the apartments I manage yield around ±2.5% return. However, thanks to 75% financing and an interest rate of only 0.65%, my first rental property achieves a return on equity of 10%.

As for price development, my crystal ball is currently too unclear, but looking at historical data, while there have been periods of stagnation or slight price declines, prices have generally increased over the long term (similar to the stock market). For quick liquidity, stocks are certainly better, but their price swings are also more significant. It’s problematic if you need your capital during a -25% crash in stocks, whereas a “crash” in real estate is usually around 5%.

Even though my family has invested a lot in real estate, I don’t explicitly recommend it to anyone. Management is simply very time-consuming. For me personally, I would never invest all my assets in stocks—that’s a psychological factor—but I’m less hesitant to use leverage in real estate, which naturally improves my personal return. Because if I have 50% of my available money in stocks and 50% in a savings account, the overall return is only half the growth of the ETF.

I found renting out a residential unit to be frustrating. After having a "bad tenant," we sold the apartment. It would be worth more today, but oh well.
From a return perspective, renting out garages is interesting in many areas. There is no strong tenant protection, low administrative effort, minimal maintenance, no homeowners’ associations, and low concentration risk...
Just a thought as an additional idea.

hampshire schrieb:

An interesting option for returns in many areas is renting out garages. There is no strong tenant protection, low administrative effort, minimal maintenance, no homeowner associations, and low concentration risk…

Please note that when renting out a garage without a dwelling, value-added tax (19%) must be paid. Renting garages without residential space (ancillary business) is considered commercial property rental for tax purposes. It is certainly feasible but must be taken into account both in the return calculation and in the tax declaration.

Of course, if you are not familiar with the subject, you should avoid renting out altogether. Value-added tax applies, and there are regulations on what a tenant is allowed to store in a garage, as well as connections to fire safety liability. In some areas, however, it can still be quite profitable – hence the warning.