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Currently, rent gains for those who invest in the real estate market exceed investments in fixed income. This could be the investment you've been looking for.
Estimated reading time: 5 minutes
Buying an investment property is one of the ways to make money for those who invest in the real estate market. Since November 2019, buying a property to rent in Brazil is something that brings more return than investing the same amount in a basic fixed income application, such as the CDI (Interbank Deposit Certificate), for example. But how do you calculate and, above all, improve your income with this type of investment?
In this article, we answer all these questions. And for you to have an idea of what rent profitability represents, there's nothing better than having an indicator as a reference for a comparison. We chose the aforementioned CDI, so you can be sure that, when buying a property as an investment, especially with the goal to profit from renting, you are stepping into safe territory.
What is rent profitability?
It is the calculation that considers the ratio between the monthly rental value of a property and the amount paid for its purchase. It is also known as the rate of return on real estate investment, which has a calculation both for those who invest thinking about rent and those who aim to profit from resale.
How do you calculate rent profitability?
In the case of rent profitability, which is the focus here, the calculation is quite simple to do. All you have to do is divide the monthly rent you are charging for your property by the price you paid for the purchase. In other words, the “initial capital” of the investment. Then, multiply by 100 and you will have the percentage of monthly income from renting your property.
In this hypothetical example, therefore, we arrive at a rental return of around 0.5% per month. Which, according to real estate market experts, is something of a magic number for the sector. Anything equal to or greater than that is already considered a very advantageous profit.
What is the profitability of rent today?
A real estate investor can already see in the chart (above) an estimate of how much that house or apartment will generate in rent.
According to most digital real estate agencies, the average return on properties advertised online is 0.4% per month, which may vary slightly more or less. Which, as we will see below, is much more than the current yield of the CDI.
Using artificial intelligence, vitual income tools consider the characteristics of thousands of properties to calculate fair rental and sale prices for properties seem on most real estate platforms.
What is the yield of the CDI?
As we said at the beginning, in this article we chose the CDI for a comparison with rental profitability.
Historically, CDI yields have been around 0.10 percentage points of the Selic, which is Brazil's basic interest rate, set every 45 days by the Central Bank's Monetary Policy Committee (Copom).
In May 2021, the Selic rate was 3.5% p.a. The CDI yield followed, rising to 3.4% p.a., or 0.29% a month.
By way of comparison, between August 2020 and February 2021, the Selic was at its lowest historical level (2.0% p.a.), while the CDI yield was around 1.90% p.a., or 0.16 % per month.
Rental profitability v. CDI profitability in 2023
With a scenario of 0.40%, which is the average rent profitability among the properties advertised on most sites, the owner of a house worth R$500,000 (US$100,268, or €93,605) could have a monthly rental income of a total of R$2,000 (US$401 or €374). The same value of the property invested in the CDI, within the 0.28% in May 2023, would yield only R$1,400 (US$280 or €262) to the investor.
How to increase rental profitability?
According to real estate specialists, the investor can bargain hard in the negotiation at the time of purchase driving up profitability potential of his property.
Getting the maximum possible discount on the purchase of a property can mean, up front, up to 40% higher rental profitability.
And here, again, the calculation is simple: the more you get a discount on the final price of the property, the lower the amount that will enter the rent price division, which means an increase in your profitability.
See in the comparative tables the same simulation that we already did here, but with a more timid discount, the property costing 20% less.
What would 20% off purchase price do for profitablility?
Rental profitability x CDI profitability in 2020
According to a report by CNN Brasil, published in November 2020, rental profitability became more advantageous than fixed income in November 2019, as we said at the beginning of this article.
At the time of publication of the CNN article, the Selic was at 2.00%, its lowest historical level. At the time, the CDI yielded 0.16% per month, while rent profitability was already around the same current 0.40%.
In other words, the owner of a house worth R$ 500,000 could have a total monthly rental income of R$ 2,000. The same value of the property invested in the CDI, within that 0.16%, would yield only R$ 800 to the investor.
According to the CNN article, in November 2019, when the turnaround happened, the CDI yield had fallen to 0.38% per month, while the profitability of property leasing registered 0.39%.
This means that a person who owned a property worth R$500,000 could receive R$1,950 in rent. While the same R$500,000 invested in the CDI would yield a little less: BRL 1,900.
Is it worth buying a property now?
As highlighted by CNN, fixed income has already reached a level of yielding more than triple the real estate market in the not too distant past. Currently, the Selic rate is 13.25% to 13.75% per year. In the early 2000s, it reached over 20%. In August 2016, for example, the Selic reached 14.25% per annum.
At that time, in 2000, rent profitability was already at a level similar to that of today, at 0.37%, which meant a monthly rental income in the house of R$ 1,842 for a property worth R$ 500,000 . That same amount invested in the CDI, at the time at 1.2%, would yield no less than R$6,050 per month for the investor.
Even with Selic rising again, the moment is still favorable for those who want to buy real estate, either to invest or to live. Values remain relatively low and low interest rates make financing cheaper and more advantageous. Not by chance, as the CNN article highlighted, the real estate market was one of the sectors of the economy that reacted most quickly after the initial impact of the Covid-19 pandemic.
Will this avantage last?
But will this rental scenario yielding more than fixed income, which has been established since November 2019, be maintained?
According to the Chief Economist at Necton Investimentos, André Perfeito, the possibility of a reversal may happen not because of the increase in interest rates, but because of the drop in rent profitability.
“Even if the government makes a fiscal adjustment and interest rates remain low, these same low interest rates can lead to a rise in property prices, which can make the rental rate lower,” André Perfect told CNN.
It seems counterintuitive at first, but it happens, because very low interest rates are an injection of stimulus to the purchase of properties, which tends to increase the sale prices of residential units. If rents do not rise in the same proportion, the owner sees his monthly income getting smaller in relation to the value of the good he owns.
Anyway, when buying a property, either for an investment or to live in,
you will have solid investment for life.
Learn more about the real estate purchasing process for foreigners in Brazil
Right now, in 2023, it's a buyer's market in Brazil, especially if you are converting dollars and
euros. Brazil is a strong, developing nation with favorable ties to the US, Canada and Western Europe. It may be worth your time and effort to learn more about the real estate purchasing process for foreigners.
Click here to request our free PDF:
How to Buy Real Estate in Rio de Janeiro as a Foreigner: A Guide to Buying Property in Brazil
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