What income would someone with a €200,000 bank deposit make in a year? Any income would basically come from interest. The €200,000 deposit would actually earn €4,000 based on a 2% interest rate. One has to deduct €1,200 in a 30% defence levy bringing the net amount down to €2,800. The annual yield after deducting taxes rises then to 1.4% (i.e. €2.800/€200.000).
If the same depositor decides instead to invest the money from the deposit to buy a flat at €200,000 (total cost including fees etc.) what should the rent be to yield a satisfactory return? It is a fact of life that a landlord is taking a higher risk than someone who has the money deposited in a bank, (we do take into account the potential for deposits haircut such as that of 2013). Why is the risk higher?
These are the most serious reasons why a landlord must take into account all these risks to balance the rent return in comparison to the return of a bank deposit.
The property may periodically require maintenance that reduces income from rent.
Bearing in mind that a depositor enjoys a safe 1.4% annual return, a landlord, must require at least a net yield 3% higher than the risk free deposit rate i.e. in this case an annual net return of 4.4%.
Using the specific example of the €200,000 flat, a 4.4% rate amounts to net incomes of €8,800 annually. This should be the landlord’s profit after deducting taxes. For taxation purposes, if the buyer is an individual (not a company) and his total annual earnings including rents are between €28,000 and €36,000 then he falls in the 25% income tax bracket. Unfortunately, rents are taxed twice, income tax and defense levy. Therefore, the owner will also pay a defense levy of 3% on 75% of total rent income (or differently stated a net of 2.25% on gross rents).
So how high should the rent be to properly remunerate the landlord? In this case taking into account taxes etc, the annual gross rent, must be €11,318. If that is divided by 12 months we reach a monthly rent of €943/month or a gross return of 5.66% on the original purchase cost of €200,000.
A €943 monthly rent seems a bit high for a nice 2-bedroom flat.
This is because rents in Cyprus do not reflect the cost of buying a property and the risks assumed by landlords. Rent yields in Cyprus do not compare favourably with similar foreign markets.
When foreign investors study potential real estate investments in Cyprus they are usually puzzled by the lower rental yields that our real estate market supports. The ones that buy a property to get the Cyprus passport may not mind it as their real motive is different. Foreign investors looking for strong rental yields usually leave Cyprus unsatisfied.
A positive factor for property owners is that real estate prices (until 2008) rose fast, thus supplementing their rental income with capital gains, upon disposing of the investment. Rents also rise from the day of purchase onwards, (usually every 2 years) increasing yields on the initial cost of purchase.
Clearly landlords take on many more risks than depositors and should consequently be rewarded with significantly higher rental returns.
Concluding, a rental yield for newish flats of about 5.5% - 6% is what landlords should aim for, instead of the current 4% that the market currently dictates.
General Manager, FOX Smart Estate Agency
Chairman Cyprus Property Owners Association (ΚΣΙΑ)
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