The recent surge in interest rates for property loans has raised concerns that real estate investments may no longer be profitable. However, in reality, very little has changed! However, in reality, very little has changed!
Various alarming messages are being circulated on the internet, suggesting that high interest rates are negatively affecting the real estate market and making investments in houses and apartments less lucrative. At first glance, this might seem reasonable, especially considering that ten-year property loans have increased by an average of around 2.8% since the beginning of the year. The high inflation and changes in central banks’ strategies only add fuel to the fire.
Despite all this, nothing has actually changed for real estate investors – assuming that other market conditions remain the same. The financial burden that the investor ultimately bears remains
unchanged from before the interest rate hike. The reason for this is primarily related to taxes, which is also why little changes for real estate investors. For individuals looking to purchase a primary residence, the increased interest rates pose a significant burden, as they cannot be tax-deductible unlike investments.
Why does nothing change for private investors?
For private investors who have made real estate investments, they could do so at an interest rate of around 2% until recently. While this rate may be higher than the industry average, it is still beneficial for investors, as a high proportion of the loan can be tax-deductible. Simultaneously, the high loan proportion reduces the amount of tied-up equity, making the real estate investment even more profitable, as only the acquisition costs need to be paid out of pocket.
In addition to interest expenses, depreciation, administration costs, and expenses for maintenance can also be tax-deductible. The interest expenses and other costs are offset against rental income. This approach often results in a tax loss, which does not indicate a bad investment but is the intended outcome. This reduces the taxable income, resulting in a tax advantage and reducing the monthly burden for private investors by around €200.
Assuming that mortgage rates double from 2% to 4%, the initial effect would be an increase in interest expenses. However, this can be offset by reducing the monthly principal payment. Ultimately, the increase in interest rates would lead to higher rental and lease losses, but this would also increase the tax advantage. As a result, the monthly burden remains unchanged, as the factors neutralize each other.
Things are not as dire as they may seem! This proverb also applies here! The increase in interest rates is not the doomsday scenario it is believed to be, provided that other factors remain unchanged. However, if property prices change, recalculations may be necessary.
Additionally, it is essential that the property generates rental income from day one, as estimated in the calculation. Choosing the right property is the key to success here. Our properties are often already rented out at the time of purchase, generating income from the very beginning. Get free advice now, and together, we will find the property that suits your investment strategy.