It is widely accepted that rent prices have been on the rise recently.
Many tenants are complaining that rents are high compared to their income and are having difficulty making ends meet.
Are increased rents though a good enough reason for someone to buy property and rent it out?
We will try to pass on some information to help everybody reach the correct conclusions.
Despite the fact that rents have been on the rise recently so is the purchase price, something affecting the return for owners.
It must be noted that for an owner to be a benefit the rate of rent increase must be higher than that of property values.
Rent returns must take into account the following facts:
.1. The property sales price includes the purchase price, (including transfer fees and VAT or both and the funding cost.
.2. Take into account the periods that the property will be vacant.
.3. The cost of maintenance must be deducted from the income. This is especially applicable if a property is rented furnished (wear and tear cost).
.4. As a property ‘ages’ the value diminishes. Fortunately so does the income tax.
.5. Tenants who are not regular payers and cause damages is another important factor. It is not unusual for tenants to disappear leaving behind unpaid rents and damaged properties.
.6. Rent income is taxed twice (through income tax and defence levy). Furthermore, there is a municipal property tax and sewage fees which are usually paid by the owner.
Let us look at an example taking into account today’s situation.
Someone buys a new, 2-bedroom flat in Nicosia for €200.000. If you add a 19% VAT the price jumps to €238.000. If the flat is old VAT does not apply but the buyer pays transfer fees.
The flat can be rented for €800/month, (€9.600/year), a mixed return of 4% annually.
If the flat is rented annually, (one tenant every year), the estate agency fee paid by the owner will be €952, including VAT.
Bear in mind that a fresh coat of paint and replacement of some appliances will set the owner back by about €1000 per year.
There are also municipal fees at about €270 and sewage fees of about €200. There is 3% depreciation on the €200.000, that is to say €6.000/year. If an owner in the 25% tax bracket this translates to another €420/year and a €216/year tax levy.
If all the above costs are added they are in the region of€3.058. If costs are subtracted from the annual rent income (€9600), the profit is €6.542 per year.
The mixed return of 4% is reduced to net return of 2.7%
This is without taking into account the investment risk, bad payers, property damages, accounting expenses, etc. The cost for these might be 1%, further reducing the annual return to a mere 1.7%.
After presenting the cold facts it is now up to the readers to decide if rents are high and if it pays for someone to buy a property and rent it out.
ANNUAL NET RETURN
Chairman Cyprus Association of Property Owners (ΚΣΙΑ)
Honourary President Association of Property Owners (ΚΣΙΑ)