Do you own a property which was inherited or acquired with the aim to generate rental income? Are you familiar with the different tax treatments which are at your disposal?
Owning property with the intention to generate passive income has been considered by many as one of the safest types of investments time after time. Property in Malta and in many other developed countries around the world continue to register yearly increase in their market value which makes investment property even more appealing. Afterall, property investment managed to produce some of the wealthiest people around the globe which is another reason why experts consider this type of investment as a sound investment.
Banks also agree with this investment sentiment since banks provide various financial products to support the acquisition of property and typically require property as a security even in loans unrelated to property. This implies that one can own property without having to fork out immediately the entire sum required to acquire the property in the first place. The abundance of such property financing products makes property investment even more common amongst businesses and individuals who are looking at ways to investment their savings to protect them from inflation and with the aim of generating passive income.
Furthermore, for those located in countries such as Malta, where property is limited due to the island's geographical limitations and with an ever-increasing influx of foreigners relocation to the island either for retirement, to relocate their business or to find employment in Malta, property investments is even more common. Yet, as with all types of investments, it is essential to be well versed in the market and its requirements before you proceed with your investment. And as with all other investments, one has to understand that while property investment is considered safe, it still comes with a number of risks. At Borg Galea & Associates, we've compiled a list of considerations our clients share with us which we believe everyone should be aware of before venturing into property investment.
1. Finance vs outright purchase
Property is not cheap. If you are willing to invest a €1,000 you won't be able to do any investments in Malta directly related to investment where the average apartment price is in excess of €200,000. However, the majority of banks in Malta support property acquisition for rental purposes. When it comes to such financing, the banks typically ask for an upfront contribution from the investor in the form of anywhere between 20% and 30% of the property value. Upfront contribution does not always factor the correlated expenses involved such as duties which have to be paid to the government, notarial fees, bank's legal fees and other related expenses.
Financing in Malta make it possible to own property 3 to 5 the value of your down payment. For example, having €200,000 available for property investment might make it possible to own either one €200,000 apartment fully paid up or potentially owning five €200,000 which will shot your property portfolio investment to €1,000,000. Yet, one has to take into consideration that while the later sounds like a more appealing deal, it also comes with a considerable debt of €800,000.
For those who purchase the property outright, their yearly return on investment would be much bigger than those who have to pay a mortgage from the rental income which are being generated. However, those who opt to leverage their savings in the long run with positive market appreciation will see a bigger return on their investment once the mortgage is fully paid up.
2. Other medium to long term commitments
One also has to take into account other considerations when it comes to property investment. Are you considering of upgrading your home to a bigger one in the near future? Do you foresee additional expenses in the near future such as private schooling for kids which will eat away a substantial amount of your monthly income? Or do you think that you will need to buy a new car soon? Are you working in an unstable environment, and should you change your job or business, you will end up with a lower monthly disposable income?
One has to analyse his personal and business or employment situation deeply and to think of all the possible scenarios that might come their way and how such scenario will impact their monthly income. Once this is done, consider whether owning investment property would be sustainable especially if you will opt to leverage your investment and own investment property financed by mortgages.
3. Fluctuating interest rates
Another consideration which goes hand in hand with the previously mentioned point is fluctuation in interest rates. Governments around the world are renowned to apply monetary policy to influence the decisions of their population with the aim to influence savings, achieve full employment and other macroeconomics goals.
It is a country's Central Bank which manages the supply of and control of money and one of the measures at their disposal is changes in the interest rates. In times of economic depression, it is normal for governments to reduce the interest rates as low as possible with some countries even offering negative interest rates (you have to pay the bank for keeping your money). Such a measure will push people to increase their spending and to invest their money and not keep it locked at the bank. The increased in spending will generate what is called a multiplier effect and will increase the country's gross domestic product which will ultimately result in a stronger economy.
However, there are times, especially during economic booms (when the economy is doing very well and increasing year on year) that the country starts to experience high inflation rates. High inflation rates will result in having bigger gaps in the population economic class which might be detrimental of governments. One corrective measure is for the country's central bank to increase the interest rates.
Economic depressions are typically followed by economical booms. So, when you are making your decision on whether or not to take a mortgage or how many mortgages to take to finance investment property, take into consideration the effect of an increased in interest rate on your mortgage and whether your current monthly income will be sufficient to cover such increase in mortgage repayment.
4. Property location
You must have an acquittance whether family member or friend who boasts of generating rental income of Eur3,000 a month from his investment property and you are undoubtedly assuming that your investment property will generate as much rental income or even more!
While the vast majority of places in Malta are just an hour's drive away at the most from each other, property location will definitely play a key part in the potential rental income generation. Sliema and the St. Julians area are renowned from being in high demand and hence the rental income generated from such properties is higher on average than those in other localities. However, so is the cost to acquire the property in the first place. When buying a property, do take into consideration the cost to acquire the property and its location.
5. Unexpected costs
Apart from the usual maintenance costs to keep the property in habitable condition, one has to factor unexpected costs. A small water leak might be fixed after a €20 at the ironmongery store but an unnoticed water leak might also result in thousands of unexpected costs such as replacing tiling, furniture etc apart from the potential loss of rental income if the property becomes uninhabitable.
6. Legal obligations
Rental laws are at times tricky. What are you rights if your tenants fail to pay the rent? Can you force them to vacate the property? Do you need to register the rental contract? What terms and conditions can you impose in your contract? Staying in touch with the legal requirements in relation to rental property will save you money in the long run and ensure that you are being compliant with the country's requirements.
7. Can you be a landlord?
Do you work from dawn to sunset seven days a week? Or do you plan on spending significant time away from the island? Are you good in D-I-Y tasks? Being a landlord is more than owning the property. Undoubtedly you will need to get your hands dirty every now and then to fix things or to install new appliances. If your schedule does not permit you to do such or you don't have the knowledge in the first place, do take into consideration the fact that a small D-I-Y task will cost you even more before you will have to engage a professional to do it for you.
8. What taxes have to be paid?
Taxes are seldomly taken into consideration when making the decision on whether to invest in rental property or not. Being passive income will not exempt you from paying taxes and the tax rates which work best for your family and friends will not necessary be the most efficient way for you. There are ways to reduce your tax exposure to just €0 a year while there are other times when this is not possible and you will have to pay taxes at 15% or other rates.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.