Investing in Real Estate
Where should I invest in real estate? Is it worth buying an investment apartment with a mortgage? How has COVID-19 affected property prices?
Reading Time: 10 minutesReal estate preserves the value of money for decades, protects it from inflation, and also provides potential housing for future generations. That is why the majority of Czechs consider the purchase of real estate as their primary investment instrument (according to a survey conducted by Expobank CZ, more than 60% of Czechs think this way). Additionally, roughly 30% of all real estate is bought for investment purposes.
However, one should expect profitability only after decades, and not every property is suitable for investment. Let’s take a look at how the Czech real estate market stands and under what conditions investing pays off.
Demand for real estate has long outstripped supply.
As in previous years, mortgages and loans from building savings were in huge demand in 2021. In Prague alone, developers sold the highest number of flats to date, a total of 7,450 units.
Jan Martina, regional manager of M&M Reality, believes that there is still a shortage of about 150,000 flats in the Czech Republic, and about 50,000 should be built every year to bring demand and supply into line.
The increase in demand for property and a further jump in prices last year can be attributed not only to the desire to own a home but also to the threat of an economic crisis and the need to safely store one’s finances, low mortgage interest rates, and restrictions on free movement and travel bans.
Development of Real Estate Prices
From the beginning of the pandemic (spring 2020 – winter 2021), property prices in the Czech Republic have risen by 25 – 30%.
An apartment or a house that you could buy for an average of CZK 5,000,000 before COVID-19 can now be purchased for CZK 6,500,000. Due to high demand, many properties have been selling within days of the offer being published, becoming the new normal in the market, and driving prices up significantly, often by several times the announced quarter of the price. In 2021, Czechs borrowed a record amount of over 500 billion crowns from banks for housing.
Looking ahead, the year 2022 is expected to bring a renewed increase in interest rates on mortgage loans and further tightening of mortgage conditions. This will likely lead to a larger number of people looking to buy property, following the long-standing Western European trend.
“Many people rushed to buy property while mortgage rates were affordable, which partially exhausted future demand. On the other hand, the Czech market has long been struggling with an overhang of demand over supply and very slow approval processes. These factors, combined with the still significantly rising prices of construction materials, labor, and labor shortages, will likely cause residential property prices in the Czech Republic to continue to rise, although probably not at the same rapid pace as in previous years,” estimates analyst Petr Golka in a commentary for penize.cz.
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Robert Novoměstský, an investment analyst at Freedom Financial Services, predicts the same on finance.cz: “The increase in interest rates could hypothetically cause a slight decline in real estate prices. However, given the situation in the Czech economy, we believe that a significant decline is unlikely, rather we expect only a reduction in the dynamics of price growth.”
How Does Real Estate Investing Work?
You can invest in real estate with amounts ranging from billions to millions, and hundreds of thousands all the way to thousands. The right investment is the one that returns a profit. As a general rule, the more money you invest in real estate, the longer you may have to wait for the returns.
Let’s take a closer look at the different options:
Investing in Millions of Crowns:
- Buying your own home
- Renting an investment apartment
- Building/renovating an apartment building
- Investment in a property abroad
Investments in Thousands to Hundreds of Thousands of Crowns:
- Purchase of a non-building plot or ownership share
- Real estate funds
- Crowdfunding and loans secured by real estate
How to start investing in real estate?
- Calculate your yield: Determine how much and when you will get back your investment compared to the amount you invest. Specific instructions for calculating yields will be provided later in the article.
- Choose the right location: Avoid the common beginner’s mistake of focusing solely on price. Take the time to thoroughly assess the property’s surroundings. For instance, an active quarry within earshot or the smell of a cowshed can significantly reduce its attractiveness, which might not be apparent during your first two viewings.
- Plans for future development: Study any potential future development projects in the area. The construction of a large company’s headquarters, a new university, or the revitalization of an urban area can lead to a substantial increase in property values and rental prices. On the other hand, be aware that a change in the neighborhood might occur, which could drive property values down.
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Let’s take a closer look at the different real estate investment options:
1. Buying your own home
From a financial market perspective, buying your own home is not considered a real estate investment.
When considering buying a home, it’s essential to assess whether the mortgage payments and property maintenance costs are justified compared to renting. In the Czech Republic and Eastern Europe, property ownership is often viewed as means of providing a sense of security through “owning something.”
However, if you’re considering taking on a mortgage solely because of attractive interest rates and low initial repayments that barely fit within your budget, exercise caution. Over time, your repayments are likely to increase, and unforeseen expenses, additional costs, or fluctuations in income could arise at any moment. Pursuing homeownership at any cost may lead to financial distress.
Buying a home can be considered an investment if you plan to live in it for the short term and intend to rent it out in the future, rent out a portion of it (e.g., a room or a floor), or sell it at the right opportunity.
2. Investment apartment for rent
One of the most common considerations individuals have regarding real estate investment is, “I’m going to buy an apartment and rent it out.”
Let’s acknowledge from the outset that investing in an apartment is primarily a long-term endeavor. Yields typically materialize after 20 to 30 years, and you can’t avoid the management hassles and occasional unexpected expenses.
So, how much will an investment apartment cost you? Where should you buy it? And in what case is it not worth investing at all?
Buying an investment apartment? Yes, but without a mortgage
Currently, a small apartment of up to 40 m2 represents the best investment option. However, profitability sharply declines if we renovate the property or obtain a mortgage.
While there is a shortage of flats available for sale in the market, there is sometimes an excess supply of flats for rent. It’s worth noting that every third or fourth apartment sold on the market is already being used as an investment by its buyer. As the supply overhang increases, the pressure on landlords to reduce rents also rises.
In more and more Czech towns, today’s rents do not even cover the mortgage payments. For instance, in Brno, the average rent for a 40-square-meter flat is CZK 10,840, but the loan repayment for the same flat at current prices is CZK 12,943. Bezrealitka’s CEO, Hendrik Meyer, states, “Buying an apartment in Prague or Brno today means paying several thousand crowns every month on top of the rent collected to cover the mortgage.” Consequently, he advises against taking out a mortgage to invest in real estate.
The only potentially profitable investment, even with a mortgage burden, is an apartment in a cheap region or catchment area, not in the city. However, this introduces new variables with a negative impact on profitability, such as the difficulty in finding tenants.
It is true that for a property to be a worthwhile investment, it should have a yield of at least 5% per annum. But how is it calculated when the property has no set rate or yield?
Let’s consider an example: You buy an apartment for CZK 4.8 million, and the monthly rent is CZK 20,000, excluding utilities. To calculate the annual rental income, which is CZK 240,000, divide it by the property’s price, i.e., 240,000 : 4,800,000 = 0.05. Multiply the result by 100 to get the percentage, i.e., 0.05 × 100, and we arrive at exactly a 5% yield.
But also consider in the cost of maintenance and equipment, mortgage interest, renovation costs, and take into account inflation and the risk of damage or loss of rent payments.
“Buying investment apartments with the assumption that all tenants will pay properly and that the property will automatically be a gold mine without the need for further investment or additional work is not in line with reality,” explains analyst Robert Novoměstský on finance.cz.
Where to invest in real estate? Choosing a location for an investment apartment
According to Valuo’s analysis, buying an apartment for rent is most profitable in Most, Chomutov, Ústí nad Labem, and Přerov. These locations offer a yield of up to 10%, which is the maximum in the whole Czech Republic, based on average purchase and rental prices. The Moravian-Silesian region ranks as the second most favorable location.
Nevertheless, the profitability of an investment apartment is decreasing year by year, as mentioned earlier. This is mainly due to the fact that rental prices are rising significantly slower than sales prices. Additionally, investors must consider the socio-economic challenges in these regions, including high unemployment rates and a substantial number of people in foreclosure. These factors may lead to a higher likelihood of tenants facing difficulties in paying the rent properly. Moreover, investors should take into account the costs of property management and the potential impact of higher repair expenses.
On the other hand, yields are lower in large cities, especially in Prague and Brno. The return on investment for purchasing a flat in Prague is currently over 30 years, even without factoring in mortgage charges, and the yield is likely to be only around 3%. Consequently, buying property in these cities is primarily a way to save money in the long term while benefiting from an attractive location, rather than a lucrative investment opportunity.
Short-term rentals, Airbnb, room rental
Just 3 years ago, no one would have imagined that the free movement of people could be massively restricted on a global scale from one day to the next. As a result, many investors had to release investment apartments in historic city centers from short-term rentals and put them back on the market for long-term rentals under undervalued terms.
However, in a stable situation, short-term rentals can be a very profitable way to increase the profitability of city center apartments.
If you own a larger apartment or house and have unused space, renting out the empty areas can be an interesting financial addition to your family budget, despite some smaller constraints. For example, the price of renting a room in Prague with shared bathroom facilities is around CZK 10,000 per month.
3. Construction / reconstruction of an apartment house
Are you worried about the high initial costs of tens of millions of crowns? Buying a multi-unit apartment building in North Bohemia can be comparable in purchase price to a large apartment in the center of Prague. You can rent out or sell off the individual units. Although it will involve more work, time, and complicated administration, especially during the initial reconstruction, the return will be significantly higher. You can also obtain a loan for this investment, and with good preparation, the interest will be paid back quickly.
Another separate chapter is the actual construction of housing units, a house, or a holiday home for sale.
4. Investing in property abroad
Overseas, people most often acquire investment properties for recreational purposes (flats, apartments) in attractive tourist areas, such as by the sea and in the mountains. Among Czech investors, Croatia, Italy, Spain, Austria, and Slovakia are the most popular destinations for real estate investments.
Financing the purchase of a foreign property can be done with a mortgage from a Czech bank, but some may require a guarantee of the property in the Czech Republic. To finance a property abroad with a mortgage, you must be a citizen of an EU Member State, as this applies to buying a property within the EU.
The advantage of investing in real estate abroad is usually a higher rental profit and a higher increase in the property’s price compared to investments made in the Czech Republic. However, a common disadvantage is the lack of knowledge about local regulations, including laws, taxes, and fees. Moreover, the process of selling a property abroad is often different from the customs followed in the Czech Republic.
5. Purchase of a non-building plot or ownership share
Are you interested in investing in real estate, but you don’t have millions in your account and don’t want to burden yourself with a loan?
In the Czech Republic, it is possible to buy various types of land for tens of thousands to hundreds of thousands of Czech crowns, such as garages, cellars, and other properties in less desirable locations, as well as forest, agricultural, and other types of land.
You can earn money by renting or selling these properties later. However, there are specific legal obligations and costs associated with ownership that need to be studied and taken into account when calculating the return on investment.
The highest profitability can be achieved by purchasing a non-building plot that the zoning plan will convert into a building plot in the future. Generally, buying a non-building plot is more of a long-term money-saving strategy.
Another option for investing in real estate with lower amounts is to purchase a share in a property.
A shared ownership scheme allows you to acquire a share in a property that you may not be able to afford on your own. Additionally, you can potentially benefit from the management and decisions made for the property as a whole by the majority owners. However, minority shareholders may find it challenging to advance their shares or effectively defend themselves against inappropriate decisions due to their ownership of a small share.
In the case of a co-ownership scheme, the property can only be sold or guaranteed with the consent of the other shareholders. All co-owners, regardless of the size of their share, bear joint and several liability for dealing with the property, legal actions, or non-performance of obligations related to the possession of the property.
In general, becoming a property owner with a lower amount is possible, but there will always be additional costs and obligations.
6. Real estate funds
If you want to invest smaller amounts in real estate without the burden of owner obligations, real estate funds offer a suitable option.
What does it mean to invest in a fund?
You entrust your money to a fund that invests it in real estate and pays you yield on the principal. The significant advantage is that you can invest smaller amounts, collect the returns, and not worry too much. Real estate funds typically focus on commercial real estate, such as office buildings, hotels, shopping malls, warehouses, medical centers, and more. As an investor, if you need to get your money back, most funds take a few weeks to pay out the principal (money invested). This is a significant advantage compared to owning physical real estate.
The yield varies from one fund to another, and it will usually be in the lower single digits of one per cent. However, the disadvantage is that the yield is unknown in advance and is usually paid out once a year. Additionally, once you have chosen the appropriate fund, you have no control over how and where your money is invested.
Another disadvantage of funds is the fees; usually, they charge an initial fee that will start your investment in the negative. Terms and fees vary from fund to fund.
7. Crowdfunding and loan secured by real estate:
Crowdfunding is an even more profitable way to invest in real estate projects. With investments starting from hundreds of crowns, the yields are usually paid monthly, and unlike funds, you don’t have to pay any fees. Additionally, you know the yield in advance.
As an exemplary model, consider the RONDA INVEST P2B platform, which allows you to invest from CZK 1,000 in business loans secured by real estate. You have the freedom to choose which project to invest in, such as the renovation of an apartment building, and then you receive a yield of up to 7-9% every month in your investor account until the selected project is completed.
