Flat to rent as an investment. What should you know?
Poles have fallen in love with real estate investments. According to the data presented by the Chamber of Fund and Asset Management, in 2016, 51 % of Polish investors decided to invest their money in real estate.
An alternative to bank deposits
As to the rental, an average return on investment in Poland is around 5.3%, whereas deposit interest rate is 1.5%, due to record low interest rates. No wonder that flats to rent are gaining popularity. It shows from the data presented by the National Bank of Poland that as much as a third of all property purchases in 2016 was for investment purposes.
How much profit can I make?
When buying a flat for investment purposes, one should act as a real investor and make relevant calculations that would help to determine earning capacity of a property being bought. To this end one may make use of the ROI index, i.e. return on an investment, the investment profitability. How to calculate it? We need two basic values – a total purchase cost of the property (the purchase price of the flat, increased by notary fees and other purchase-related costs) and a monthly net rental income, i.e. rental fees paid by a tenant, decreased by operating costs, current fees, taxes, etc. The said values will help us to calculate an annual return on investment, by means of the following equation:
ROI is a proper index when we are paying for the flat in cash. However, when we are having recourse to loans, the ROE index, i.e. return on equity, return on invested capital, would be a better solution. How to calculate it? Alike the ROI, but the monthly net revenues from the rented flat, shown in the numerator of the above-mentioned equation, should be reduced by the amount of loan instalments, whereas the denominator shows the amount of our own contribution
Let’s calculate ROI – example:
• Every month our tenant will transfer PLN 2,500 to our bank account
• Operating expenses and other costs related to the use of the flat amount, on average, to PLN 500 per month.
• We paid for the flat in cash. The total purchase costs were PLN 450,000.
To sum up, the return on our investment is 5.33% a year. The index helps us to calculate when we are to get the entire invested amount back (PLN 450,000 in our case). We will calculate it as follows:
We will get the invested amount back after 18 years and 9 months.
Other issues to consider when buying a flat to rent?
IMPORTANCE OF GOOD LOCATION When buying a flat to rent, one needs to focus, in particular, on the flat location. Underground stations or tram stops nearby would be of great importance for the people who highly appreciate convenient commutes to work or university. In Warsaw, model examples of that trend are found in districts of Wola and Mokotów. The return on renting in those districts may, in some cases, amount up to 10% per year.
THE SIZE DOES MATTER A flat to rent should not be too big. It is much easier to find a tenant for a one-room flat or a small two- or three-room flat. Moreover, a smaller flat is easier to be sold in case you might need a sudden injection of cash.
DO NOT BE TAKEN BY SURPISE Having found a tenant, it would be a good idea to protect ourselves from possible problems. Needless to say, one should conclude an agreement stipulating rent terms and conditions. Nonetheless, it may be reasonable to draw up a hand-over report, insure the property and verify the tenant’s ID.
PROFESSIONAL SUPPORT The flat to rent is a profitable opportunity even for the people who are too busy to deal with rent-related bureaucratic procedures. There are now companies in the market whose offer includes property management services. Moreover, some of the companies guarantee a fixed profit, hence the landlords do not have to worry when their tenants withdraw from the contract.