What is a good return for real estate?

What a good return is for real estate depends on a number of factors such as how much a property is worth, what type of rental income it has. In addition, it also greatly depends on the interest rate you have to pay for financing to the bank.

In general, investing in real estate gives a stable, and higher return than if you put it in a savings account. In addition to the annual rental income, you can also enjoy the increase in value. Something that is almost self-evident based on the past 30 years, as long as you hold onto the property long enough should an unexpected downturn occur.

Different rental types

With regular rentals, you rent out your property for a longer period of time, usually one or more years. This means that you receive a fixed amount of rental income each month, so you know exactly what your return will be. The biggest advantage of residential leasing is the stability and predictability of the income. In addition, tenants often stay in the property for longer periods of time, which minimizes the risk of vacancy.

Vacation rentals, on the other hand, focus on short-term stays. Tenants typically stay for several days, weeks or months, leading to a highly variable monthly occupancy rate. While this type of rental involves more administrative work, such as regular cleaning and maintenance, it also offers significant advantages. Namely, you can charge a higher rent per night or week compared to regular rentals. Moreover, you have the flexibility to use your property yourself when it is not rented out, which can be ideal for your own vacations.

Calculating returns with regular rentals

Investing in residential real estate can yield attractive returns, typically between 4 and 5% per year. Moreover, the risk is relatively low, as tenants often stay in the property for a longer period of time. However, should a tenant leave unexpectedly, it may take some time to find a new tenant. This vacancy can temporarily have a negative effect on your returns.

To give you an idea, we have prepared an example calculation for you. Suppose you buy a property for €300,000 and rent it for** €1,500 per month**. This means a *grossannual rent of €18,000*, which amounts to an *annualreturn of 6% (€18,000 / €300,000)*. For many private investors, this is an attractive return.

If you finance this with €210,000 from the bank and invest €90,000 yourself, the return on your own investment becomes more interesting. The bank charges an interest rate of 5%, which amounts to €10,500 in interest per year. As you repay the loan, the interest rate will naturally decrease.

In this scenario, the net rental income is €18,000 - €10,500 = €7,500 per year. On your own investment of €90,000, this means a return of about 8.33%. The advantage of this is that you can purchase multiple properties with a smaller equity stake, which can increase your overall return. However, you do have a risk that interest rates on your mortgages will rise.

Calculating returns on vacation rentals

With vacation rentals, returns can vary significantly depending on occupancy rates. We have prepared a calculation example for this as well. Suppose you buy a vacation home for €300,000 and rent it out for €150 per night with an occupancy rate of 80%, which amounts to 292 nights per year. Then this results in a gross rental income of €43,800 per year, representing an annual return of 14.6% on the purchase price.

In many cases, it is difficult to finance properties for vacation rentals through the bank. This is because banks see too much risk in the constant changing of tenants and the uncertainty around achieving the annual return. This makes it a significant investment to purchase a single apartment or house for vacation rentals. Moreover, you have no spreading of your risk because everything is in 1 project.

Fortunately, there are platforms like Valvest that remove this barrier. Valvest offers access to these attractive vacation rental returns without you having to be involved yourself. You can often invest as little as €100 and receive collateral such as the property as collateral, similar to taking out a mortgage with the bank.

This makes vacation rentals accessible to both novice and experienced investors who want to take advantage of the high returns that vacation rentals have to offer.

Conclusion

Whether you are a novice investor with modest budget or already an experienced investor looking for higher returns, Valvest offers the best solution for vacation rental investing. With a focus on fixed, attractive returns, we make real estate investing accessible and worthwhile for everyone.