Index
Buying a house to rent it out: best practices for maximizing your investment
If you've ever wanted to have an extra income, you've probably thought about various solutions, from stock market investments to small jobs. One of the options often considered is real estate investments: buying a house with excellent potential and renting it out.
But are the earnings potential real? And above all, how can you maximize your returns?
Renting, yes, but to whom?
The first question you need to ask yourself is: who do I want to rent to? This is the basis for choosing both the type of property and the area where you want to buy it. Typically, those who choose to buy a house to rent it out have three different targets:
- Tourists
- Students
- Young workers or business travelers
What type of house should I rent out?
If the idea is to rent to students, you can think about an apartment, perhaps a three- or four-room apartment, from which you can create single or double rooms. On the contrary, if you imagine a young worker or a couple as the tenant, it's better to focus on a studio, a loft, or a one-bedroom apartment. Keep in mind that students tend to have a smaller budget than workers, but they also tend to look at fewer potential comforts such as a terrace, garden, quality of furniture, air conditioning, etc.
As for tourist rentals, the choice is wider and ranges from studios to very large apartments or independent houses, designed for large families or groups of friends. In these cases, comforts such as open spaces, a barbecue, or a swimming pool are certainly a plus, but location often plays a more important role in the choice.
With a view to establishing a good rent rate, many choose to buy recently built or newly built houses, or to renovate the property purchased: this undoubtedly requires a higher initial investment, but at the same time, allows for a higher profit, as well as a likely higher number of requests.
Choosing the city and location
The choice of the city or town in which to buy a house to rent must vary based on the target you want to address. If you want to rent to students, it will be advisable to choose cities with a large influx of university students such as Milan, Turin, Bologna, Florence or Rome; Here the price per square meter of houses will tend to be higher – especially in Milan and Bologna – but demand is much higher and rents commensurate with the purchase cost. Even smaller cities, but still frequented by university students such as Pisa or Ferrara, can be a good option and require a smaller initial investment. In these cities, the most attractive areas are those close to the university campuses, but also to the center and the nightlife.
If the idea is to rent to young workers or business travelers, even in this case the big cities and their surroundings are a safe choice: in fact, new workers tend to move to the provinces where there are more employment opportunities. This doesn't mean, however, that there may not be a good clientele even in smaller towns, but the lower demand makes the process more risky.
Finally, if you want to rent to tourists, the best thing to do is choose particularly popular destinations. Whether seaside or mountain resorts, or even art cities, the safest choice is to focus on more well-known and sought-after destinations. Obviously, the more touristy the area, the higher the purchase and rental prices will be, so you'll have to weigh the various factors.
When choosing where to buy a house, you must take another factor into consideration: distance. If, for example, you live in Venice and buy a house in Naples, you have to plan on traveling there several times, both for purchasing and renting—or relying on third parties, which, however, requires additional expenses. It's always best, therefore, to choose a city that's as convenient for you as possible.
The type of rental
If you choose to rent your house to tourists, you need to keep in mind that it will be a short-term rental, which can last from a single weekend to a whole season. This allows you to take advantage of periods of high demand, varying the rental price, but it requires a lot of commitment.
If you rent to young workers, on the other hand, it is more likely that the contract will have longer terms, from a year up to a 4+4.
Student accommodation falls somewhere in between, because although contracts are usually annual, it is possible that there are early cancellations and a higher turnover, especially if you consider renting the house to more than two people; even in this case, therefore, the management effort could be high.
Pros and cons of buying a house to rent it
Buying a house to rent it is a form of investment that has its advantages, but also its risks.
- It is necessary to have an initial capital available or open a mortgage; on the other hand, however, it is possible to take advantage of incentives and bonuses to maximize the return.
- The second critical element is that it requires time and commitment, which varies depending on the type of rental you choose to pursue.
- The macroeconomic situation strongly influences earnings, both positively and negatively; in particular, it is important to choose an advantageous mortgage tax rate.
- The choice of target, location and property are crucial to obtaining a profit.
Ultimately, to make this process advantageous, you need to be familiar with the purchasing process and understand the rental dynamics to maximize the return, but it is also important to know how to identify the right opportunity.
For example, when Matera won the As a city of culture, demand for tourist rentals has grown. Similarly, if a branch of the University of Milan were to open in Bergamo, the demand for student accommodation in this second area would increase dramatically. Or, again, if one of Turin's peripheral neighborhoods—like Barriera di Milano—were to see the opening of offices, restaurants, and bars, we could probably imagine that interest in the area would increase.
Costs and earnings
Thinking more concretely about the economic implications, a rental property must offer an annual gross return of no less than 3-5% of the property's value. In this sense, additional area and amenities can help you rent at a higher price, but you will also have to take into account a series of expenses to be covered, such as:
- Purchase taxes for the first or second home;
- Notary or brokerage costs for the purchase of the house;
- Interest on the mortgage;
- Registration tax and stamp duty to register the rental contract;
- Taxation on rent (ordinary regime or flat-rate tax);
- Maintenance costs of the house.
And to better understand all the costs you can encounter when buying a house, read our guide on costs and taxes for buying a first home