A house to live or to surrender?

A house to live or to surrender?

Much has been said about the impact that a high demand for houses has had in the residential market in Portugal. I’ve also written about it here and about the effect it has had on a price increasewhich is already well dilated in time.

A way as if look at a house moved. Whether for those who buy to live, or for those who buy to invest. THE housing has become an investment assetmanageable and adaptable to the needs of those who need to occupy them.

Investment in housing is today a clear alternative for many of those who do not find it in the most usual or classic places. Invest in renovations and rentals. Much of the demand comes from investors.

buy to render

Many are those who have recently bought a house as a clear investment alternative. Whether with the objective of generating future added value in the short term (the case of house flipping, for example), or in a logic of income generation.

Faced with an economic and financial context where investment alternatives with minimally attractive returns and some sense of security are scarce, many were those who turned to real estate investing.

In this context, investment in leasing becomes a valid alternative, but above all known and understood by many. However, looking at the potential for generating profitability of a buy-to-let (ie, yield), the question of why such an investment option should be asked.

In 2020, housing yields in Lisbon reached 4.07%. It was a historic minimum. In other words, investing in a buy-to-let in Lisbon yielded 4.07% gross of costs and taxes. After all, an investor would withdraw just over 2% net return on your investment. In 2021, the scenario has not changed.

At the same time, the income of the Portuguese has not followed this appreciation of the real estate market. Rents go up, prices go up, accessibility in housing becomes more and more complicated.

In this context, demand and supply try to come together.

Also read Real Estate: What is a yield anyway and how is it calculated?

The adaptation and financialization of the asset

Investing in a house for rent does not seem, therefore, very interesting from the point of view of profitability. Even in a context of rising rents as we have seen in the market, the yields remain low due to the effect of price increases.

Therefore, it is necessary to adapt the product (read, home). Adapt it according to the desire to generate more profitability, but also according to the income of those looking for a home.

A house has become an investment asset. For many, of course, it is a good of use because it is the house where they live. But for others, increasingly, it is clearly an investment good, from which one can (and should) derive profitability.

But this profitability, due to yield generation, is low, as we have seen. The way you look at a residential asset today has a lot of this perspective:

  • The quest for higher profitability
  • The suitability of the product to the availability and demand needs.

Many of those who are looking for a home today are unable to obtain it. The asking prices and rents charged are beyond your reach. The alternative is to share a house with someone else or simply rent a room.

On the side of those who invest, and naturally, work on the suitability of the product looking for. Apartments are transformed into micro-pensions; where there was once a room, there is now an additional four. Instead of charging one rent, they charge several for each occupied room. Thus, the yield is increased..

On the side of those who invest, the product fits into a financial logic. On the side of those looking to live, what they can afford is taken care of.

On the side of those looking for, houses are now to be occupied, not to be lived in. On the other hand, houses are now to be invested in, not to be used.

Good deals (real estate)!

Also read “Real estate: rents or capital gains?”

Gonçalo Nascimento Rodrigues is a Real Estate Finance Consultant, having worked in companies such as Ernst & Young, Colliers International and Essentia. He is Coordinator and Lecturer in a Postgraduate Program in Real Estate Investments at ISCTE Executive Education. Additionally, he performs consultancy activities, providing advisory services to real estate investment. He holds a master’s degree in Real Estate Management and Finance and a master’s degree in Finance, both from ISCTE Business School, as well as a degree in Business Management from Universidade Católica Portuguesa. He is the author of the Out of the Box blog.

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