One year ago, Capital was describing the way a small investor can become the owner of a dwelling in Bucharest using only the down payment for a mortgage loan. At that moment, only Ferentari, Pantelimon and Berceni neighbourhoods were offering the possibility to become a homeowner with an initial capital of less than 5,000 EUR and the period of time that was necessary for the loan to be paid from renting the flat was estimated at 15-16 years.
New data pointd out an obvious improvement. Nowadays, one can become a homeowner with less than 5,000 EUR in Ferentari, Rahova, Pantelimon, Berceni and Ghencea-Drumul Taberei neighbourhoods, while the time needed for paying the loan from the rent shrank to 13 years. The average selling prices for the Bucharest flats didn’t fluctuate too much during the past year, but the interest rates for mortgage loans significantly diminished. So, it’s currently more advantageous to own than to rent, the monthly instalments being usually lower than the rental prices.
In order to make such an investment, anyone with average revenues has to spot a Bucharest neighbourhood with renting potential, contract a mortgage loan in RON (with a 15% down payment) and schedule the reimbursement period so that the monthly instalment will be equal with the potential monthly rent. This way, the flat is totally paid by rents and after the loan is paid the buyer got the dwelling for the initial down payment.
Specifically, for buying a studio in Drumul Taberei neighbourhood, which is one of the most dynamic areas in the rental sector, an investor should take a loan of about 24,000 EUR. The cheapest currently available loan is offered by ING Bank, with an effective annual interest rate of 5.22%. In this case, the initial cost (the down payment and the notary fee) is about 5,000 EUR, while the minimum requested revenue is 1,900 RON (about 430 EUR). This flat will generate a 200 EUR average monthly revenue from renting it without a rental contract and about 180 EUR with a properly registered rental agreement. This way, the loan will be paid off by the rents in about 13 years. The estimate is based on the gross rent, taking into account that over 90% of the rental agreements are not legally registered.
An initial small investment doesn’t guarantee for the best returns. Among the above mentioned neighbourhoods, only Rahova and Pantelimon are in the top 5 most recommended areas for investing in a studio. The list is completed by Victoriei, Baneasa and Romana-Universitate, where the initial investment effort climbs up to 6,000-6,500 EUR. In these neighbourhoods, with the equivalent of a down payment for a mortgage loan one can become a homeowner in 11.7 to 12.5 years. In order to separate the profitable offers from the less attractive ones in the 20 analysed neighbourhoods, we have used the rental yield indicator, which shows how much time is needed for the property’s price to be paid by the rents. According to the experts, this indicator should be about 15 years or less in order for an investment to be seen as profitable.
In case of two-room apartments, the down payment is bigger – one can become a landlord in Ferentari, Calarasilor, Romana-Universitate, Grivitei-Gara de Nord and Berceni in 13 to 15.8 years with an initial budget between 4,700 and 11,000 EUR. Even if the calculation indicates Ferentari as the best neighbourhood for such an investment, one has to take into account the area is not really suitable for tenants and the risk of having long periods without occupancy is bigger.
The right choice
The interested investors should carefully analyse the market offers, as there are areas in Bucharest where the discrepancy between the flat prices and the potential rent is so big that covering the monthly instalment from the rent is virtually impossible. In such cases, the loan reimbursement period exceeds the 30-year limit. Unlike last year, when there were ten such neighbourhoods, this year only three of the Bucharest areas make impossible for a mortgage loan to be paid off by renting the dwelling. This situation only appears in case of the legally registered rental agreements, as the gross rent is significantly diminished by paying the social contributions and the revenue tax.
The Calarasi area is the only one where the period necessary to pay the loan from rents arrives to 35 years in case of studios. As for the two-room flats, the Obor-Iancului and Victoriei neighbourhoods are those surpassing the 30-year threshold. In case one chooses these areas, it has to be said that increasing the down payment in order to pay off the loan from rent in less than 30 years makes the investment no longer profitable.
It’s also important to understand the good ratio between the dwelling’s price and the rental potential is not the sole criterion that should be taken into account for a profitable deal. A very important one is how attractive is the area for the tenants. Ferentari neighbourhood is a very good example, as it offers the best price-rent ratio for the two-room flats, but the number of tenants willing to live there is significantly limited. Analysing the rental requests dynamics for a few months period is recommended before choosing an area to invest in.
The months without tenants, when the owner has to pay the instalments from own revenues are a supplementary risk. One shouldn’t also ignore the possibility the tenant leaves without paying the rent and the utilities or that the property is deteriorated. But, even in such situations, the yield would still be attractive and for sure better than the savings accounts.
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