5 tips for buying a house to rent it out
9 January 2024 - Insights

5 tips for buying a house to rent it out

Buying a house to rent it out remains a highly appealing investment for those seeking additional income. Yet, when you opt to turn a property into a source of revenue, several factors come into play and understanding them can significantly impact the success of your investment venture.

Investing in real estate has long been a favored method for growing one's wealth, particularly through buying houses to rent them out. Indeed, renting properties - whether apartments or detached homes - can be an exceptionally lucrative investment strategy, offering the potential for substantial income.

In light of the current historical context, defined by challenges in securing mortgages and a growing preference for renting, it is advisable for those with the means to seriously consider investing in a house for rental purposes Such an investment could capitalize on a rental market that’s experiencing a notable surge in demand for rental properties and a parallel rise in rental rates.

Deciding who to rent to

When planning to purchase a property for generating rental income, a key initial decision involves identifying your target tenant. This choice will greatly influence the type of property you choose, its location, and the marketing strategies you will need to implement.

Professionals, for example, prioritize comfort and connectivity. They travel for both business and pleasure, often juggling remote work with long days at the office. As a result, they prefer properties that are modern, comfortable, and located in well-connected areas. Typically, they are reliable tenants with long-term leases.

Then there are couples and families, whose desire for stability is reflected in their search for comfortable and safe spaces, preferably with outdoor areas and abundant storage. These tenants often opt for long-term leases, providing a stable income stream, although the profitability may be slightly lower compared to other types of tenants.

Students, on the other hand, tend to prefer practical, budget-friendly housing options. The demand is high, as evidenced by recent debates on student housing. The demand is high, as evidenced by recent debates on student housing. Savvy investors know that renting to students can be very profitable, especially as rooms are rented out individually.However, this option may require more frequent maintenance as student homes may be subject to more wear and tear.

Finally, renting properties short-term to tourists, especially through online platforms, can offer high returns.However, these rentals require more active management and involve greater uncertainties due to seasonal fluctuations. Moreover, this strategy requires a significant initial investment for acquiring properties in tourist-friendly or culturally significant locations.

Selecting the right location

After defining the profile of your ideal tenant, it's crucial to choose a location that aligns with their specific requirements For instance, students typically prioritize locations with robust public transportation access and proximity to university campuses. In contrast, families often seek out neighborhoods that are not only safe and serene but also enriched with green spaces and amenities like schools and kindergartens

More generally, the rental market shows remarkable resilience in areas of touristic interest and strategic importance, such as those near hospitals, exhibition centers, and major corporations, which consistently experience high demand. Additionally, it's wise to monitor areas undergoing redevelopment or those slated for future enhancements in public transport connectivity. Investing in peripheral neighborhoods poised for substantial development can be a particularly savvy move: initial costs tend to be lower, and as they develop, the value of the property is likely to appreciate significantly, ensuring long-term rental yields but also positioning the investor advantageously for potential future sales.

What kind of house should you buy?

When deciding on the type of house to purchase for rental purposes, again it's crucial to consider the specific needs of the target tenants. Generally, smaller apartments like studios and one-bedrooms tend to yield higher rental returns, particularly in central locations, with the added advantage of lower fixed costs and maintenance expenses. Two-bedroom apartments, on the other hand, appeal greatly to families due to their comfort and functionality, making them a highly desirable product in the residential real estate market.

If your budget permits, investing in luxury properties in major cities can be another lucrative option. This approach is particularly promising in Milan, where there is a growing demand for high-end, temporary accommodations favored by affluent clients and corporate executives.

As for the choice between new construction or older buildings, both options have pros and cons. . New properties typically demand a higher initial investment but can justify higher rental prices. Plus, they often feature modern amenities, leading to reduced maintenance costs over time. Older buildings, on the other hand, may exude a unique historical charm that can attract a niche tenant market. However, they may necessitate lower rental fees to compensate for the likely more frequent maintenance needs.

Costs to consider before buying a house to rent it out

Investing in a property for rental purposes is typically a sound investment decision. However, it's essential to meticulously evaluate all associated costs to ensure the investment is economically beneficial and able to generate positive cash flow.

The financial commitment extends beyond the property's purchase price and any mortgage. It's essential to consider also expenses such as notary fees, real estate agency commissions, and the taxes for buying a house, from the legal transcription fee to the cadastral tax. For those purchasing an apartment, additional considerations include covering condominium fees during periods when the property is vacant as well as extraordinary maintenance costs. Then there are other taxes to consider, like the IMU, a municipal tax on second homes and other property types. Notably, a 25% tax reduction, is granted when renting the property under a rent-regulated scheme.

… and taxes on rental income!!

Rental income accumulated over the year is considered taxable income. As such, being aware of the tax obligations associated with rental income is crucial for deciding whether purchasing a property for rental purposes is a financially viable option.

In the standard taxation system, there are three main types of taxes that apply to rental income:

  • - A registration tax to be paid upon registering the lease agreement, calculated as 2% of the annual rent multiplied by the number of years covered in the contract;
  • - A stamp duty required for the registration of every copy of the lease agreement (at least two copies). The cost is 16 euros for every 100 lines of text in the contract;
  • - An annual tax on rental earnings, which is integrated into the owner's overall taxable income and taxed according to the corresponding income bracket in the standard tax system. Notably, only 95% of the annual rent received is subject to this taxation

Alternatively, property owners can opt for a flat-rate tax regime known as "cedolare secca." This scheme involves a fixed tax rate of 21% for short-term rentals and open-market contracts (increased to 26% for leasing multiple properties), or a lower rate of 10% for rent-regulated agreements and contracts for university students. Opting for this flat-rate tax means the rental income is not combined with other sources of income for tax purposes, plus the payment of the registration and stamp duty is not required. However, this option also means forfeiting the ability to adjust the rental price annually in accordance with the ISTAT (Italian National Statistics Institute) index.