Investing in residential real estate in 2024: stricter rules

Falling – and in some cases negative – interest rates led many savers to look for other ways to make their money work for them. While many invested in shares, many also purchased buy-to-let properties.

The return from investing in real estate can be broken down into two elements: the indexed, ‘inflation-proof’ rent and any increases to the value of the investment real estate. Over the past years, real estate prices have risen exponentially thanks to increasing demand and other factors like tax breaks and lower borrowing costs.

However, conditions in the real estate market can rapidly shift. For instance, there has been a huge rise in borrowing costs in recent years. If higher mortgage rates aren’t compensated by higher rents, investors get lower returns. This can cause the real estate to fall in value.

Renting out residential real estate involves risk. You might be faced with the following:

• Unoccupied real estate and tenants not paying rent on time or at all. You’ve probably also seen reports of cannabis farms being set up in rental real estate.
• A market slump. Mid-2022 saw a break in the Dutch real estate market, with Statistics Netherlands reporting that prices of owner-occupied homes in February 2023 were lower than the previous month. This was the first time that had happened since April 2014. The market has since recovered, and house prices are almost as high as the record set in July 2022. You can read more on this topic in the 2024 Housing Market Monitor by ABN AMRO Group Economics.
• Changes to legislation and regulations. On 1 July 2024, the Dutch government introduced a modernised version of its real estate valuation system, creating a new ‘mid-segment’ for the rental sector. Rents are now established on the basis of a points system for both housing in the 'low segment’ (former social housing) and the 'mid-segment’. This previously only applied to housing in the low segment.
  
  This means that the maximum rent for mid-segment real estate with up to 186 points is €1,157.95. You can use a tool to calculate rent according to the points system. Only landlords in the ‘high segment’ have the freedom to set their own rent. However, this segment is subject to a limit on annual rent increases until 1 May 2029.

Lastly, the ‘Wet vaste huurcontracten’ (Periodic Tenancy Agreements Act) came into force on 1 July. Not counting exceptions, a landlord may now only rent out their real estate on permanent tenancy agreements. If the rental yield (net rental income) is too far below the invested capital, this may negatively affect the value of the real estate. After all, renting real estate permanently makes it hard to predict or plan when you can release its equity.

Tax laws change all the time. For instance, since 2021, the Dutch government has raised property transfer tax in two stages from 2% to 10.4%. Box 3 tax on real estate is also steadily increasing. If you’re a private real estate investor, you’ll usually be liable to pay Box 3 tax on this real estate in your income tax return. This is a tax on your wealth based on a fictitious return (assumed return) rather than the actual return.

However, in June of this year, the Supreme Court of the Netherlands (once again) ruled that the design of this tax is unfair. Taxpayers may now choose to apply the actual return if this is lower than the assumed rate. However, you must be able to prove this is the case according to the rules set by the Supreme Court. For instance, you must also include any unrealised gains or losses on the real estate. The Dutch Tax and Customs Administration will send a letter to taxpayers affected by this change. Alongside further information, this letter will include an ‘actual return declaration’ form (‘opgaaf werkelijk rendement’).

Efforts are being made to design a brand-new Box 3 tax regime. As it stands, taxes will be levied on rental income from real estate as well as on any realised gains or loss. The tax rate will be set at 36% (the same rate as 2024).

Investing in real estate was very popular for a long time. However, rental yields have been squeezed by rising borrowing costs over recent years and tightening legislation. If you're a real estate investor, make sure you know how these rules affect you and whether it makes sense to continue investing in real estate.