Is it worth owning and renting out a property?
It is generally accepted these days that rent prices are following an upward trend.
Many tenants complain that, compared to their income, they have difficulty coping with the increased prices.
But is the rise in rent prices a good enough reason for someone to invest in this sector, namely by buying or building a property with the intent of renting it out?
Here we will be presenting some information and data, and people can draw their own conclusions
Although rents have been on the rise for a while now, it should be noted that at the same time the purchase price of real estate is increasing, which reduces future yields for the landlord.
We need to note that the yield for the owner is increased when the growth rate of rents is higher than the growth rate of the purchase price of the property.
While calculating a possible yield the following should be taken into account:
1. The cost of the property which includes the cost of purchase, including transfer fees or VAT, whatever applies, and the cost of financing.
2. There will inevitably be property will remain unrented.
3. Maintenance and repair costs (paint, replacement of equipment, etc.) must be deducted from the proceeds. In cases where the apartment is rented furnished, maintenance costs are greatly increased due to wear on equipment, furniture etc.
4. As the property ages, there is an annual depreciation in buildings that reduces the apartments’ value. The positive side is that it also reduces income tax.
5. The bad tenant factor. Someone may leave without paying an amount of rent or cause serious damage to the apartment and its equipment and disappear leaving the owner exposed.
6. Rents are the only income that are taxed twice (income tax and defence). In addition, there is the municipal property
periods
during which
the tax and the sewerage cost, which usually burden the owner.
Let us give an example with numbers, based on current data, as discussed above.
You buy, for example, a two-bedroom apartment in a nice Nicosia area at a price of EUR 200,000.
And 19% VAT is added to this price, so the cost goes up to EUR 238,000. If the apartment is used, VAT is not levied but the buyer will have to pay transfer fees.
Let us say that you rent this apartment for EUR 800 per month (EUR 9,600 a year), which is a gross yield of 4% per annum (EUR 9,600 for EUR 238,000).
If the apartment is rented on an annual basis (one tenant each year), the owner will have to pay the real estate agent a commission fee of EUR 952 (VAT included).
We need to take into consideration that every year the owner will have to make some amendments to the apartment before rerenting, which with the most conservative calculations will cost at least EUR 500.
Furthermore, the owner will have to repair equipment (washing machine, kitchen, air conditioning), spending another EUR 500. Therefore, a total of EUR 1,000 per year will be spent on maintenance.
There are municipal fees which amount to EUR 270 and while the sewerage costs another EUR 200.
There is a depreciation of 3% on the EUR 200,000 which amounts to EUR 6,000 per year.
For an owner falling within the 25% income tax rate, this translates to another 420 euros a year. Plus, the sum of EUR 216 which will go in defence tax. All the different costs and taxes add up to EUR 3,058 which we then deduct from the rent income, which as we said is EUR 9,600, you will be left with an annual net profit of EUR 6,542.
Therefore, the gross yield of 4%, based on the above, reduced to a net return of 2.7% after expenses.
This is the net profit calculated, without taking into consideration the risk of investment, the bad tenant factor, personal labour, the cost of communicating with tenants, accounting / tax expenses, the cost of buying furniture and equipment, etc. In fact, the cost of the above can exceed 1% and the theoretical 2.7% can actually drop to an annual yield of 1.7%.
Having mentioned the above, we leave it up to you to decide whether rents today are high and whether it is in the best interest of someone to invest in real estate as a source of income.
is