For many people, investing in real estate is a guarantee that they will not lose the money stored in real estate.
The truth is a little different. If real estate is used for housing, it is in most cases a good investment. But everything has its but.
Claims that real estate can hold its value despite inflation are exaggerated. There are few real-estate properties that can bring in rent money while growing in value. If a person acquires the reality in which he wants to live, he will not be fooled.
It will be problematic with the wish to buy a house or apartment in which the person will live until old age. Two important facts speak against it. The first is the fact that no one knows how the price of real estate will develop in the future, and secondly, one does not predict the state of the property’s surroundings and it may happen that in a few decades, a nice suburb will become a displaced neighborhood.
Declining birth rates
Natality statistics are an important factor in estimating future housing development. If a lot of children are born, it is certain that when they grow up, they will want to live somewhere.
Crowding with parents in a regular block of flats is not a real nut for young people. Although more children are being born in the last few years than die, the difference is still small. According to CIA data, the current ratio in the Czech Republic is 8.76 births and 10.79 deaths per the same number. For the trend to be positive, more children would have to be born than people die. This confirms the longer-term trend and the fact that we are dying out.
The population boom after World War II and the second in the 1970s will not be repeated. In addition, people born after 1945 are retiring. On the contrary, “Husák’s children” start families and buy their first home. Thanks to them, housing construction has been growing since the beginning of the millennium. However, it stopped after 2008 with the advent of the economic recession, which affected the whole world.
Another blow to the acquisition of real estate as an investment is the fact that the rent does not have to be lower in annual terms than, for example, the yield on the term account.
Apartment as an investment – calculation of rental income
For a model example, it is appropriate to choose the current prices of real estate and their rental in one place. An apartment in a panel house 3 + 1 in Prague 4 was chosen. The average price of the property is 2.5 million crowns. In the case of rent, the monthly cold rent (ie without energy, services and other fees) is 10 thousand crowns. The annual rent will cost 120 thousand crowns. In percentage terms, the yield is 4.8 percent.
If we assume that even if the value of the apartment grows over time, the rent will still be around five percent. At present, credit unions in particular offer interest rates of six percent when depositing one or more million crowns.
The apartment or house must be maintained. The average time before reality becomes obsolete is about 30 years. After this time, major or minor building modifications are required to meet the growing demands for quality housing. In practice, additional costs are, for example, the replacement of windows, insulation or rebuilding the core. The property owner can create a reserve fund, in which he will defer, for example, two monthly rents. After ten years, he manages to accumulate money for the above modernization.
While when holding money on term deposits, one hardly has to think.
Taxation of rental income and savings
Another key element is the taxation of money resulting from rentals. Renters can apply a 30% flat rate to rental income. However, the remaining money must be taxed. Deposits are taxed once a year with a withholding tax of 15 percent, made on behalf of the bank or credit union itself.
Interest will no longer be deducted from taxes
Another strong factor why not buy an apartment as an investment is, above all, the fact that the current government wants to abolish tax benefits for people who repay a mortgage or a loan from a building society. With the combination of rent, which covered part of the installments, and the reduction of income taxes compared to the interest already paid, the investment in the apartment could still be justified.
It may happen that the value of real estate will continue to decline. The vision of a good investment will gradually fade when the owner of the property has a cheap toy bought at a high price.