Secrets to success

Banks play an important role when it comes to letting property and generating passive income. This is because banks provide financing for property at extremely favourable interest rates, as property represents sound security for banks and is a conservative investment. With a loan, you need less equity and can utilise the leverage provided by the financing. Experts refer to this as the leverage effect. This means you can actually make money from the loan. For example, if you arrange financing for a let property at an interest rate of 5%, you will – depending on your personal tax rate – pay just over half of the interest yourself after tax relief. You’ll then be borrowing the money at a net cost of perhaps 2.7%, as the tax office contributes 2.3% towards the interest. However, the banks want the loan repaid without any adjustment for inflation. For a loan of EUR 200,000, you will repay exactly EUR 200,000 in principal over the years. This means you stand to gain from inflation. Because if, in this example, you borrow the money at a net rate of 2.7%, but repay the bank, for example, 6% inflation over the years, you repay the principal each year with a purchasing power and value that is 6% lower, you have effectively borrowed the money at a real interest rate of plus 3.3%. You earn 3.3% per year from the loan. The key point, of course, is that you can claim the loan as a tax-deductible expense (this is possible with a let property) and that you invest the loan in a sound, high-value tangible asset. After all, the tenant will also pay you an increasing, attractive rent, and you’ll benefit further from an increase in the property’s value.

Choosing the right location is crucial for success with passive income. Who doesn't know the saying "What are the three most important things in property? Location, location, location!"?
The location must be so good that when tenants change, immediate and seamless re-letting is possible and the new tenants are also happy to accept rising rents in the process. In addition, the property's value appreciation is important.
What is the use of a cheap purchase price if the property is in the wrong location and the population there is set to decline sharply in the future? With a long-term drop in population numbers – for instance, because hardly any new jobs are being created in the region or well-paid jobs in well-paid sectors are relocating to other regions – property rents and purchase prices are also likely to fall significantly in the medium to long term as a result. An investment property should therefore be located in a future-oriented growth region with a rising population, resulting in increasing demand for housing and, consequently, rising rents. The volume of new construction in the region must also be taken into account. It is important that flats remain in demand in the long term and that there is a lower supply of properties than there is demand for them. Rents and prices will then rise. In addition, the property should be in a good micro-location. For example, in a quiet area with a 20 mph speed limit, home zone (woonerf) or cul-de-sac. Not far from a forest, lake or park, so that tenants live centrally yet can quickly be out in the greenery with their "running shoes on". Choosing the right location requires good technical expertise and outstanding research work. It is worth looking out for off-market properties here, because properties that everyone knows and locations that are the focus of attention for everyone are usually properties with which you can no longer make good money.

Profit is made on the purchase. This applies particularly to real estate. A favourable purchase price is important and helps enormously. However, a favourable purchase price is very different from a cheap purchase price. A cheap property is cheap because it is in the wrong location, because it has defects, because it is not ecological and could therefore be exposed to significant losses in value in the medium term, because it has the wrong tenant clientele, because it has unfavourable floor plans, or because the fittings and quality of the apartments are not significantly above average. In order to be able to acquire a very good property at a favourable price, a certain kind of relationship is required. Good properties are rarely found on the internet or through an average estate agent. If you buy investment properties through market-leading specialists, you have a great opportunity to get hold of properties that they have on their books due to their market power and sales strength. A leading provider is more likely to be able to enforce more favourable prices, leverage greater purchasing power or provide access to attractive off-market properties. Making properties available to private investors that are otherwise only accessible to large-scale investors – properties that are otherwise bought by parishes, foundations, family offices or investment funds – clearly helps to secure more favourable and better properties.