Despite the many highs and lows of the market, good real estate as a long-term investment has proved itself and is still one of the most popular types of investment when it comes to family wealth or retirement. Edgars Indrāns, Nordea Real Estate Expert, offers some advice to be considered before buying real estate and assessing whether the big purchase would be a good investment.
Before you buy real estate, pay attention to several aspects that may have the most important role in ensuring permanent income and profit in a long-term. First, consider the price which shouldn't be higher than the market value. Second, examine your financial sustainability and anticipated expenses, since often we only consider the purchase price and tend to forget about the additional future costs. Hence, here are 5 tips that would help to make an informed decision when buying real estate as investment:
1. The overall market situation and assessment of one’s capabilities
Back in 2007, the property prices had reached an all-time high. Market boom was followed by a crisis, with real estate prices falling by half, or even more, all over the world. Over the last five years, price levels have remained unaffected, showing just a slight increase. Although the global political and economic developments require even more caution, the current real estate offers are in concert with the market and economic situation that creates good pre-conditions for investment. Financial situation in the household segment is also good at the moment — savings exceed the loans that ensures favourable environment for investment in real estate.
Even if we have a decent life at the moment, it is important to assess your own or the family's financial possibilities in the long-term (children, retired people, pets etc.). Existing loans, lease or any other financial liabilities affect our capacity and stability. Those are monthly instalments that must be paid regardless of increase or decrease in our income. When buying real estate, you should keep in mind that most often it is a long-term investment of at least 10 to 30 years. For this reason, don't forget to ask yourself if you would be able to cover all payment liabilities even if you lost your permanent income for a while.
2. Valuation and status of the desired property
Property valuation is one of the most important and prudent steps to be taken by the potential buyer of the property. It provides complete information about the real value of the property and allows to understand whether the purchase is overestimated or, vice versa, underestimated comparing to the average market price. When granting loans, banks would also consider property valuations. Valuation for a flat costs around EUR 100, whereas for land and residential houses – up to EUR 350.
It is also important to find out the status of real estate, e.g. whether it is listed in the register of national cultural heritage. That may affect such conditions as the quality of façade and windows, interior reconstruction, e.g. renovation of a historical furnace. Finally, you should check the status of a land parcel. If land underneath the building does not belong to this property, you will have to pay rent for it.
3. Infrastructure in the neighbourhood, number of rooms and daily maintenance costs
The number of rooms is paramount. That’s why it is important to consider how many people will live in the property in the nearest time and in the future (in case of family planning), as well as who your tenants would be if the real estate is being purchased with a purpose to let. In terms of infrastructure, pay attention to availability of shops, schools, nurseries and public transport. Knowing that today there is at least one car in almost every household, parking options would add to the overall attractiveness and cost-efficiency of the property.
It is also advisable to carry out technical inspection together with the market valuation because the technical condition of a flat or building may ask for additional investments in the future. It applies, for example, to reconstruction of a roof, façade or elevator. Daily maintenance costs would include utility bills and property management expenses, as well as property insurance that in case of a bank loan will be mandatory.
4. Payments to public authorities
When buying real estate, the buyer is required to pay a stamp duty of 2% of the purchase price set in the purchase agreement. Registration of a mortgage or right of pledge in the Land Register would cost 0.1% of the loan agreement amount but no more than EUR 1422.87. On top of it, there will be also some minor administrative expenses.
If the property is let, the economic operator has a duty to inform the State Revenue Service so that they can agree on the tax payment scheme. Should you wish to sell your property before 5 years have passed, you may be required to pay a capital gains tax.
5. Bank loan and notary fees
If property purchase is financed by a bank loan, there will be a loan administration fee that varies between 0.5% to 1% of the purchase price. The Bank financing depends on the type of property, whereas the monthly instalment — on the loan maturity date and interest rate. Make sure you count in also potential expenses for notary services. Legal fees for a property registration request are around EUR 90, but for a registration request of the right of pledge in favour of the bank — between EUR 25 and EUR 40.
Before you make a decision to assume long-term liabilities, make sure that you will be able to finance the new house even if your income goes down or you move. Once again, we would like to remind you — borrow responsibly and assess your capability to repay the loan.
Real estate as investment
In a long-term, high-quality real estate with a perfect location will always be a good investment. The best way is to finance property purchase from your savings. In such case, whenever the real estate value rises, your return on investment will increase accordingly. If you consider bank loan as the means of finance for your property purchase, the difference from increase in value will go towards interest payments and other loan-related expenses, so ROI will be lower than for a privately financed property.
Bank loan, however, is definitely an option. For instance, if you let your property for the entire period of loan, monthly rent payments from tenants may also cover extra costs such as interest payments.
Regardless of the long-term profits, bank loans for acquisition of real estate give an opportunity to live in your own flat or house which, by itself, is a fantastic investment in raising your quality of life today and in future.
For additional information contact:
Edgars Žilde, Nordea Communications Project Manager, tel. 6 700 5434, mob. 28 452 975, edgars.zilde@nordea.com