Pros and cons of tying money up in a property
There are two reasons for buying an investment property. One of these is the assumption it will make a premium over time, and the other is the income to be obtained from this property.
When the return period is predetermined, the value of the property and the annual rent on the date of purchase are known variables. In other words, the moment is photographed.
If you get TRY 2,000 rent per month for a property purchased for TRY 500,000, the rental income will be TRY 24,000 per year and the return period of this house will about 21 years (500,000/24,000.) But in reality, the TRY 2,000 per month and TRY 24,000 net annual income are misleading. Annually, about one month’s rent will be taxed for the income generated from the rent and another half-month’s rent for property tax. Take another half-month’s rent as the fixed costs of the house and you will get a net rental income of TRY 20,000. According to this, the return period is 25 years.
So, if you make a TRY 500,000 investment in property, you will tie up half a million liras without any returns for a quarter century. Can this be called a reasonable investment?
As we said, the number of years it takes for this TRY 500,000 to produce returns is the photograph of the moment when the purchase is made. But over time, will this house not gain value? Of course it will. Then the accounting will change completely. If the property you buy for TRY 500,000 appreciates rapidly and if you sell it for say TRY 600,000 then, along with the net TRY 20,000 of rental income, you will cash in a serious amount of money if, for instance, one-year inflation is 15 percent. Your TRY 500,000 will have increased by 24 percent to TRY 620,000, well above the inflation rate.
But if the value of your property does not increase as much as inflation – say by only 10 percent to TRY 550,000 - your total asset, including rental income, will be TRY 570,000. If inflation is 15 percent, your asset needs to reach TRY 575,000 so that it does not fall behind inflation. You are not even on par.
Is th s example real st c?
House prices are rising by around 10 percent, depending on location, the quality of the property and whether it is new or not. This is an average rate; there are also lower and higher rates.
Is it rational to tie your money up in a property that shows a 10 percent increase per year? In order to answer this question, we need to look at other investment opportunities.
Apart from housing, there are a number of non-fixed investment vehicles. Foreign exchange, for example – i.e. stock or gold. Let’s not take these into account and just look at deposits.
The interest rate on deposits is increasing day by day and has gone up to 20 percent; it is on target for 25 percent. Let’s take the interest rate at 20 percent and take the withholding rate as 15 percent: the net interest rate will be 17 percent. According to this, TRY 500,000 will make a net interest of TRY 85,000.
The rent to be obtained from property in our example is TRY 20,000, the interest is TRY 85,000. That’s a big difference. But immediately, people will say: “TRY 500,000 will remain as it is in the bank as the principal, but the price of the property is constantly increasing.” Of course, if the value of the property really increases, and if there is a level of interest above the interest rate, that is true. But in the period we are in, housing prices are declining in some places in real terms - values are not increasing as much as inflation.