Catchy title, eh? But it is true! Today an short assessment why real estate Investing is under attack in the Netherlands. Why it is happening, why it is (partially) a good thing and why it is a sign to run for the hills.
Dutch Real Estate Market
The Dutch Real Estate market was red hot until about early 2022. Cheap mortages and high demand made for an explosion in housing prices. Pretty much the same as what happened in most of the world during the period 2017-2021.
Now, real estate investors obviously made use of this (as did we, albeit we have only bought and not sold any real estate). Some also took advantage of this and might have helped in jacking up prices even higher in certain areas. Perhaps even pushed first time home buyers out op their opportunities. Where the average joe (“Jan Modaal“) used to be able to afford a house with his/her €38.000/year gross income, these days he (or she) only seem to be able to rent as buying is too expensive in most places. That’s not a good sign. Heck, it is a sign of a broken housing market.
Investing in Real Estate in the Netherlands
Investing in the Netherlands is not much different than in many other countries, in practical terms. You can buy a home, and rent it out to another individual or individuals. Simple as that. If you want to have more people (students, temporary workers, etc.) in one house, it was sometimes possible without permits, sometimes you needed them. But generally still easy to do.
There was one thing to keep in mind, which is the point system. Each rental unit needs to be assessed to see what the maximum rental rate would be. There are generally two classes of rental properties, there are the ones that are in the “social class” (limited to about €752/month in basic rent), and the ones that are not (you can ask what you want, pretty much).
The problem with this system is that it was rarely enforced by the government. Hence, moronic landlords could easily screw over tenants and ask ridiculous rental rates. Only if tenants would go to the rental commission and start a case, was there a chance to lower the rent to the maximum allowable (and more reasonable) value. But this only happens in very few cases (and in most causes the landlords would just forced out the tenant(s) = illegal). In short, a win (or low risk) for the evil landlord.
These practices and developments did not help the public perception of the average landlord, most of whom are people like us that just want to create their own pension plan. But most people (and the government) now see landlords as the evil in the real estate market. And this evil must be eradicated!
Taxes & Real Estate
Up to this year, the Netherlands was a decent place to invest in Real Estate. Primarily because of taxation rules for private individuals. Why was this the case? In one word Box 3. This is the third tax category that taxes (net) wealth. This is done by the government assuming a certain return return on investment (ROI) (a general ROI up to 2017, and split ROI for savings and investments from 2018 onwards). This assumed ROI is then taxed at 31% (for 2022, for 2017-2020 it was 30%).
This assumed ROI was generally lower than the actual ROI (in most instances). For years, up to 2017, this ROI was assumed at 4% (it as been calculated differently and going up since, albeit not by much). Therefore taxation was an effective 1,2% on one’s net wealth (based on on government calculation rules). This has slowly been going up to about 1,7%, but is depending on the amount of net wealth you have (more wealth, means a higher assumed ROI = higher taxation basis).
You win some, and some more!
Now for real estate in particular, this was a great tool to limit one’s tax burden. Why, first of because the value of a property was taxed at WOZ value (a local government assessed value of a property). This WOZ has been lower than actual market values for years now (for most houses). Win one.
Secondly, when you rented out a property, you could also get a discount on this value (see Leegwaarderatio). If you rent out a property for a normal amount of money (generating a gross 7% or more ROI), the value of your property is set at 85% of the WOZ value. Win 2.
Now, you probably still have a mortgage. The net wealth you are taxed on is the property value as noted above, minus the amount of your mortgage. In some cases (high leverage scenarios), this led to no net wealth at all! Win 3, because no net wealth = no taxation!
Having mortgage debt was therefore a great way to have leverage and secondly limiting one’s tax burden. A clear win-win (albeit risky)
Land transfer Tax
For years we paid 6% in “overdrachtbelasting” or freely translated “Land transfer taxes”. This was lowered to 2% (Commercial real estate always stayed at 6%) a few years after the financial crisis to help the housing market and make it more affordable for home buyers. This is still the case for when you buy a home to live in. But due to investors buying many properties and turn them into rental units, first time home buyers were having trouble to find homes (amounts other reasons) in some areas.
Hence, buying a second home or investment property is being discouraged by making it more expensive. The land transfer tax was increased to 8% in per 2021. Per 2023 this is going to be further increased to 10,4% for rental properties! Ouch.
(Proposed) Changes in Taxes & Point System
Because real estate investors are evil, the government is now in full attack mode. As the land transfer taxes are already increased/increasing, they decided to make things worse, much worse. First off, the point system is bound to be expanded (it’s not law yet, but it likely will be). This will lead to more properties being affected by maximum rental rates (about 300.000 units supposedly – likely including 3 of ours). The expectation is that many will come down, by as much as €190/month. And if they are finally going to enforce these point assessments (and associated fines for ignoring them), it may be waaaaay more in some cases (this does assume you are an actual evil landlord).
Next, the leegwaarderatio benefit in Box 3 is proposed to be modified. Hence, you will likely need to use the full WOZ value of the property in the tax assessment. Or perhaps not, if your income declines due to above noted changes. Anyhow, the next upcoming blow (2024?) is one’s debt (mortage/loan), you can no longer correct your wealth by using the full mortgage debt. You are going to be assessed based on assumed percentages for both (ROI and debt).
An example (from the Tax man website) is shown in the next paragraph. Please note that this is taken from the calculation aid on the Tax Man website (2021 numbers and rates) to roughly show the difference for the old and new calculations methods.
This if for tax year 2021 only! When you have no financial partner, you have property that is assessed to be worth €500.000 in total (still assuming 85% of WOZ value! NOT the full WOZ value, which would be €588.235). Your mortgage is €400.000. This what you get:
For 2021, fortunately, the lowest of the two is still used. You will pay 31% tax on that amount (€948 * 31% = €293,88). In the proposed change to the tax system, the second will be used. Hence you will be €9.305 *0,31 = €2.884,55. Ouch…and actually too low, as in the proposed system, you would likely also be assessed on the full 100% of the WOZ value.
If you would take the full WOZ value, you get this:
Hence, assuming the same percentages and full 100% of WOZ Value, you’d be paying €17.348 * 31% = €5.377,88. This is, ahum, 18,3X as much as in the old system. Now the old system was too low, it was almost a tax loophole, but the new system is an 180 degree turn for the worst.
Real Estate Investing is under attack in the Netherlands!
In short, taxes are going up, land transfer taxes are (going) up, rental income is likely going down for certain rental properties, interest rates are up and property prices are bound to go down. This is going to hurt! Run for the hills! Being a landlord sucks! Invest in Index Funds!
Yes, it will not be a pretty time to invest in Dutch real estate. It likely won’t be for quite some time. That being said, there is still some money to be made. Short term rentals might still be interesting. Higher end places might also still be interesting, to a degree. But it won’t be as nice as it once was. The Box 3 party is definitely over. Perhaps it is time to switch to Box 2 or even Box 1 (assuming you have no other income).
If you want to invest in real estate (or stay invested), you really have to do your homework. There is a good change that there will be lots of rental properties coming onto the market in the coming years, as rental contract lap and tenants move out. But they will likely be sold to home buyers, as renting them out might not be a financially sound idea anymore.
We are debating what to do. The effects will certainly be there. Albeit we have 2 rental properties that are in the “social class” and one commercial property, which won’t be directly affected. But our taxes are going to go up, big time. The other ones are in the danger zone of being forced to lower rental rates in the future. Fortunately, we have invested in insulation (a lot) and these places are well maintained, no mold, everything works. So that should help too with the point system. Albeit there is always room for improvement. But additional investments in insulation are expensive at the moment (if you can even find a contractor). And for an investment it has to make financial sense too. Lot’s to think about!
Time for an honest discussion about these changes. First off, as I already hinted on earlier. The tax system was rigged in favor of the real estate investor for years. We ourselves also benefitted from this system. But it is time for this system to change. Tax on income is far higher than tax on income from investments. This is bound to lead to more inequality in a society. A change is therefore necessary and not even such a bad idea. I have no issues paying a bit more taxes if this make for a fairer tax system.
However, this change is now coinciding for a slew of other measures that seem to be a bit too much. I can understand why this is done, and in all fairness there are too many rotten apples in among real estate investors. But this is not the way to address these issues, I think. The really bad apples are either going to continue ignoring the rules and make the life of tenants hell, while the ones that stick to the rules and want their tenants to have a good home get screwed.
It is a far better idea to hunt down the bad apples and force them out of business. For example home inspections to affirm healthy living conditions for tenants and enforcement of the point system I would highly applaud. But this seems to be too difficult for our government (this is a general trend in politics by the way. I mean, how man cops do you see on the streets these days?) Policies are useless if you don’t enforce them!
Looking for a scapegoat
Another point that I would like to make is that the crisis in the housing market today is not solely caused by real estate investors. Yes, they are a problem in certain cities and areas. But they are not the root cause, they are a symptom.
The housing market crisis seems more a problem of an endless money supply (hence low interest rates) and a lack of steering in development in the housing market of the Netherlands. We have too few houses at the moment, and need newbuilds in many parts of the country. We are clearly not the only country were house prices went through the roof in the last decade. But the government actually abolished the ministry that was dealing with the housing market a few years back, because it had done it’s job. Right. Look how that turned out…
It feels like the government is looking for a scapegoat for their own mismanagement of the housing market and monetary policies and found it in the form of the small independent real estate investor. We are one of them, and it feels wrong. Just to reiterate, we are okay with some (combination) of the measures, just not all of them at the same time. We are also for enforcement of the existing systems, as the chance of evil landlords getting caught is way too low.
After more than 2300 words, what do you think?
P.s. I’m going to try and do another Box 1, 2 or 3 post in the future to see if moving our real estate from a tax perspective is useful.