This post is part of a series, check out the last posts if you want to know more about my search:
- Hunting for a house part 1: why do I need a change of scenery
- Hunting for a house part 2: what you need to pay attention to when searching for a house
- Hunting for a house part 3: will housing prices in Belgium drop for the first time since 1983?
Effect of corona on the housing prices
The situation for buying a house hasn’t improved. The amounts of houses on the Belgian markets have increased only after the first wave passed, around September there was quite a large offer. The government created a lot of restrictions of house viewing in October, making it very hard to visit houses that are for sale.
As a result the amount of houses on the market plummeted in October and there is no end in sight.
So the government actually made sure the housing prices went trough the strongest rise in 15 years in Belgium despite a huge loss of jobs. The question is of course what will happen when the economy wakes up after Corona and house viewings are allowed again and we actually start seeing an actual job loss. I could not predict it last year and I still cannot.
I also have to admit I did come across a few houses that I almost accepted to be fine, so then I need to ask myself if I am not just to demanding?
The reason I am so demanding is the large amount of taxes paid on houses. A 6% minimum, but it could go up to about 12% if it is auctioned. Now if its your only house you can substract these taxes when you sell the house later on and buy a new one.
I don’t like to pay taxes.
The catch? There is a limit of about 12500 EUR to that. That means a house price of about 208000 EUR you can buy just fine and if you just live there for at least 5 years you will get all these taxes back if you decide to upgrade. As this is already an upgrade for me (my second home), that means that anything over that I will have just waisted on taxes.
But what can you get for 208000 EUR in Belgium right now? I did had a quick look at the market right now, and it is possible to find older 2 bedroom apartments with even a bit of outside space outside the city center. I would think this should be enough for any starter. Of course if you want to move closer to the city center you might look at a 1-bedroom flat, like the one I live in now.
Rent or buy?
So I re-read a blog of fightofire.com who was in a similar situation and eventually decides to buy after carefully examining the pros and cons. Since its his first home I absolutely agree with him that this was the best decision. He can still upgrade later on and he shouldn’t worry if its not perfect since it probably won’t be his final home.
And normally I would be in favor of buying again. Either a new bigger home, or a second home depending of your situation.
At the same time is the rise in housing prices really so big compared to the stock market? Say if you put 200k in the stock market right now or 200k in a house (that you live in yourself), would there be such a big difference in profit after 10 years? There actually wouldn’t be, given of course that you can put down 200k in cash for the house, which of course is unlikely.
The rise in housing prices (biggest in 15 years) was about 5.93%. This was the biggest in a long time. The stock market goes up about 7% per year on average. Of course you do have tax benefits from your own house, but at the same time you also have costs that can run up highly.
It was not an equal rise either. Houses at the sea had a much higher rise, most likely related to city’s at the beach closing down the beaches for non-residents. Obviously people bought out of fear that they would lose access to the sea. In the city “Nieuwpoort” right at the sea houses went up with up to 42%! And the coastal cities are probably the main reason for “the biggest rise in 15 years”.
Historical earnings are not necessarily a good reference to future earnings
Again this is for personal use as a rental property will also give you rent in addition to the rise, but it does show that from a financial perspective there is not that much difference in Belgium if you take up a safe, constant, passive investment strategy.
There is in any case no doubt that doing nothing will cause you to lose money as the only certainty in life is that the value of money steadily drops.
Buying your second house
- Instead of paying rent I would be paying off principal, meaning I would be building up capital, and additionally I could leverage the unpaid principal when the value of the house goes up
- I do believe the value of houses will keep going up, at the very least in the mid term and long term
- When I moved into my apartment I kicked out the people that were currently renting the place. Don’t worry it were young people and they said they found something bigger for the same price, however when you are 70 and you get kicked out of your house I can imagine its a terrible experience, having your own house will make sure nobody can evict you
- If you are confident of what you buy and you can live there long term, without a huge loan that will kill your saving rate, it is for sure the best choice
- You need to keep a large amount of money in the money market as I should be ready to buy “now”, so while you search your money is not working
Renting your second home
- Renting contract is usually about 3 years, and you can even get out of it (for a fee) even right after you sign the rental contract (the fee can be up to 6 months of rent but drops -1 month every year), so you are flexible
- I only need to rent what I need right now, not what I might need in 3 years, since I can upgrade in 3 years if need be
- I can still decide to buy in a few years if I come across a good bargain
- You can invest all of your money currently in the money market in the stock market without having to worry the stock market will crash in 1 year. The money you have right now can work for you right now.
- As its your second home you can rent out your first getting a rather cheap upgrade
- If you bought a modest home for your first home, with a 10 year loan, after 10 years your loan is paid off and this gives you very little risk for renting, as you can keep the difference between rent and income from rent low
What is best for my situation
As you can see I have been hunting for a house for quite long, my first blog about it is already 2 years old. I am frustrated of the amount of money in the money market that is not working for me. At the same time I do believe I am way overdue for an upgrade. My apartment is a one-bedroom apartment in the city, which is great for starters, but in my current situation I am missing:
- Preferably a garden, or otherwise a big terrace
- A place to wash my mountainbike and a warm (or at least not to cold) indoor garage to work on it
- A second room that I can use as office
- Big living room to receive guests
I do like the location really. I love living in the city, but it doesn’t fit with the other requirements I have. So I would want to live outside the city, but I have no idea if I could get accustomed to the country life. Renting would be a much cheaper test to see if I could then buying. Additionally I am currently single and I would hate to buy something and find out my future partner doesn’t like to live there.
Additionally I can invest my money in the stock market, or perhaps even buy a second rental property where I can look more at rental value rather then emotional value.
Lets run the numbers on renting
How much can I rent my current apartment for?
Beforehand I never considered this idea, but right now I actually want to give this a chance. I currently have three loans as you can see in my yearly update (updated yearly in May) and two of these will be paid back by September, including my morgage on my apartment and one renovation loan. The third will be paid back by February 2023.
So that will give me the financial space that I need to decide on rental. My apartment building contains 4 other apartments similar in size. I happen to know one is rented out for 650 EUR and one for 630 EUR. Both are all in, so I would think 550 EUR is a realistic number I could ask plus another 60 EUR for a garage I have, who are scar and popular in the neighborhood. So that leaves me at about 600 EUR in rental revenue per month or 7200 EUR per year.
How is it taxed?
Taxes in Belgium are pretty special for rental properties. Rent is actually a lot lower then in other West European countries, maybe partly because taxes are low as well.
Every home has something what they call “KI” (=Kadastral Income), this is a fictional rental value you can get for your property. Generally it is believed that it is lower then the actual rental value.
This number is increased with the index since it was created, and then you add another 40% to get the amount you will be taxed.
In my case that would mean (KI apartment + KI garage)* index * multiplier
This multiplier is 40%
Or (583 + 60) * 1,7 * 1,4 = 1530 EUR
Now this is the part you need to pay taxes on. This depends of your taxes. Generally people in Belgium pay 50% taxes + your local taxable amount: taxable amount * tax percentage * local tax percentage
So in my case this would be 1530*0.5*1.067=816 EUR
Complex right? But at the same time 816 EUR per year or 68 EUR per month is quite modest.
But Belgium wouldn’t be Belgium if there was not another loophole. Namely if you move for work related or social reasons from your one and only home you will pay 0% tax.
I have actually used this loophole in the past when I moved abroad for work. This was actually much easier to argue since my work was in another country and I couldn’t possibly drive there every day from Belgium.
Now I went a bit more creative. I live in a one-bedroom apartment so I don’t really have an office space. Since working from home is not going anywhere, I felt moving because I needed a separate office space might be considered a valid excuse for moving. I have asked them this question directly and expect to get an answer within the next days. I would say there is a 50/50 chance they will accept this but it is hard to tell. I will update this blog when I have this answer.
What about insurance?
There is a limited offer of rental insurances in Belgium. Immoweb for example will give a rental insurance, just like Axa bank. Generally they charge about 5% of the rent. Most likely I will be getting this rental insurance just to feel more comfortable.
So what budget would I foresee for rent?
So with a 600 EUR – hopefully tax free – rental income, I would say that if I can find something for 850 EUR I would say that’s ok. Then I only pay 250 EUR every month on living then I would if I would not move and I would feel very comfortable to put 100% of my saved income into the stock market.
I realize its still more then just staying where I am and I could invest even more if I didn’t change, but this would not make me happy. Living now is just as important as living when I am 60. I don’t want to sacrifice my current self for my future self and I will still live bellow my means.
I never considered rental before, but now it actually makes a lot of sense. I want to give myself a few more months to find a house to buy and at the same time I want to have a look at the rental market and see what I could get for my budget to see if this is feasible.
And please let me know what you think. What do you think of this plan? Do you prefer to rent or buy?
Interested to see where I end up? For sure I will be sharing this in one of my next blogs. The goal is really to move this year, so sign up to stay tuned!