Investment in real estate for rent
If we were to estimate the average annual profits from the rental apartments on our market, our profits would be between 3.5 and 5 percent. So, therefore we can conclude that the investment in properties for rent is growing, even among micro investors. You should know or remember that the potential of the Polish market is large, because only 4 percent of Poles rents an apartment, but we know that in some countries this figure reaches even 50 percent.
Of course, there are more and more investors buying apartments for rent to make money from them. Profits from such activities can greatly exceed what the banks offer investors and therefore, real estate investments are now so important to many of us. If we compare earnings on investments and on hiring, we will quickly become aware that the current interest rates of the Polish National Bank are the lowest in history and as a result of this the same is the interest rate of bank deposits. So, today you can earn on them about 2 percent per year. On the other hand, buying an apartment for rent gives you more than twice. The average percentage for the largest Polish cities is at over 4.3 percent per year.
So, you can guess that our real estate market is a local market, therefore many factors and variables affect the profitability that we can get. When it comes to investment in apartments for rent, the best cities are as follows: Warsaw, Gdańsk and Wrocław. This is where you can get one of the greatest profitability. What it comes from? First of all, there is the greatest demand for apartments for rent, and therefore what is important you can instantly get a much higher rental rates.
Investing money for the renting of an apartment may at the expense of costs incurred to earn such income.
Sometimes it happens that an entrepreneur in his business activity, rents his apartment in another town than his place of residence in order to provide services. In such a situation, this type of spending that must be borne by the lease and use of this apartment may be the costs incurred to earn such income during the provision of these services. Thus, the Act on PIT does not contain any statement of expenditure, which would classify them as tax deductible expenses, therefore tax deductible costs are all reasonable expenses related to the business, which goal is to achieve the protection and preservation of sources of income, so that this source also brought revenue in the near future. Thus, we get financial freedom.
Will the creation of the maze of apartments for rent be profitable?
For many businessmen, providing services relating to the renting of apartments is understandable. It’s a real business and here we must agree with the statement that in the context of building financial freedom, you need to take the perspective of 15-20 years. Only then we can build a true financial freedom, that is, to achieve a state in which our passive monthly cash flow is higher than the level of expenses associated with the maintenance of our desired standard of living. Therefore, we should look at the investments of this kind to the long term.
The investment in real estate for rent, i.e. the correct concept of Cash Flow
The most effective and simple way of obtaining a clear picture of our profitability is to present the effects of the investment in the form of cash flow, which are available to the investor during the implementation of investment and after the start-up the investment. Here, the main subject of the investor’s decision is only the cost remaining after payment of all liabilities to subcontractors (costs) and to the state (taxes).
When calculating the annual, you need to consider:
- The increase in income, which is achieved by implementation of the project
- The amount available to the company. It determines the relationship:
CF = S – K – P – I
where S means the annual revenues, K – incurred operating expenses (excluding depreciation and amortization), P – value tax, I – the amount of involvement in investment projects
The total tax amount is calculated as a percentage and is calculated from the tax base by the formula P = sp*(S – K – A)
where A is the depreciation charge for the year, sp – the rate of income tax.
Important fact – financial expenses are primarily costs incurred through the use of foreign capital resources and they include:
- interest on borrowings
- costs of credit.
VAT, i.e. costs.
Entities which are VAT payers discharge difference between the tax due for provided services or products and accrued tax, which is responsible for purchased goods and services needed for production purposes. So, taking into account the possibility of a tax refund in the amount not greater than the VAT, in the case when the accured tax is less than the input tax, it can be said that the „VAT payers do not pay VAT.”
The investment in real estate for rent and the risk from external sources
This type of investment risk on the real estate market is associated with bankruptcy in the economy. These types of effects were seen on the US market. There was a regress on the real estate market and the widespread availability of credit led to an increase in demand for the US real estate market.
Therefore, not all owners of houses coped with the repayment of loans and there was a wave of bankruptcies of borrowers and sale of houses. However, you should always have in mind that after a period of recession there always economic recovery comes.
NOTE: I present private opinions and I am not responsible for the readers' decisions. I always try to present current information but may no longer be up to date. Therefore, before making a decision, please verify them and consult a licensed financial adviser.