Developers who sell the property for rental more often offer an annual ROR of over 7%; some even promise a “guaranteed return”. Ads of such apartments feature eye-catching visualisations, promise prestigious locations and money “that works for you 24/7.” The investor can simply sit back and start counting income, while the property is taken care of by the operator.
Luring as such an offer may seem, a potential investor should beware of red flags. First of all, it needs to be kept in mind that investing inherently means risk-taking, and putting money in property is no exception. Plus, buying a property for rental requires large capital that is invested into a relatively small market and for a long period of time, which carries a risk of economic and legal changes. Even if today the seaside property owners can generate a satisfactory return on investment from their apartments, that situation may not last forever. In the recent years, the salaries have been increasing, unemployment rate has been historically low, and positive consumer sentiments have boosted the tourism. On the other hand, extremely low interest rates prevailing on the market for the last four years have increased accessibility of credits and decreased monthly instalments. But, we cannot expect such a trend to be long-lasting. Higher interest rates will mean increased investor’s costs, while economic downturn and as a result limited spendings can result in a lower demand for rental services. In such a case, it will be more difficult – or even impossible – to generate income from the property.
One of the risk factors associated with property investments is of a regulatory nature. There are still many legal doubts when it comes to short-term lease. Premises under short-term lease are not treated as tourist accommodation, are subject to other fees than hotels, and it is not clear what tax rate should be applied to such a lease. How was this problem solved in other countries? In Berlin, short-term lease of apartments was banned in May 2016; in Barcelona owners of flats for rent need a licence, while in Paris one can rent an apartment under such a scheme only for 120 days a year. The Polish Ministry of Sports and Tourism has been working on a “white book”, i.e. regulations for short-term lease, in cooperation with representatives of Sopot and Cracow, that is main tourist destinations in Poland. The final result will surely affect the situation of property owners.
Investments in apartments involve also a number of other risk factors, such as time risk (long realization process), growing competition risk, quality risk related to ensuring an adequate level of investment realization and management. Due to its popularity, capital investments in properties for rental attract many inexperienced buyers who lack the expertise required to successfully operate in this difficult sector.
So, once the decision has been made to allocate our savings on the property market, it is worth to thoroughly check who is responsible for the design and construction process of the investment of choice. We should investigate if the project we are interested in is a residential or commercial building – because the latter is not subject to the provision of the Developer Act. Therefore, in such a case the customers are not protected by means of allocating their funds on a special-purpose escrow account.
