The main reason for the popularity of real estate is the historically good experience of Slovaks with this type of investment. The vast majority of people have come to their housing privatization, which has made the pen owner’s tenants less expensive. The amount for which the apartments could be bought into private ownership is ridiculous compared to today’s prices.
Slovaks + real estate = great love
So if today almost everyone is “in their own place” and profits are tens to hundreds of thousands of euros, we cannot be too surprised by the popularity of real estate. Even the majority of young people who have already had to take out a mortgage are now in a lot of trouble.
The media also contributed to the popularity of the property to a large extent. Articles about the amazing rise in the apartment and home prices have been unresolved in recent years. Didn’t anyone hear about how many tens of thousands of euros cost apartments in Nitra after the arrival of Jaguar Land Rover? However, the last few good years should not be deciding whether the best investment is.
So let’s take a look at investment properties (ie, rented, not homeowner) rationally and see how they stand up to Molly Bloom Intelligent Investing.
1. Yield: the most important criterion and the main reason for investing/buying a property.
Over the last almost 16 years, prices of two-room apartments in Bratislava have grown at a rate of 6.76% a year, which is definitely not a bad result. If we look at the growth in prices of apartments and houses all over Slovakia, we will achieve an annual yield of 5.86% per year.
But it would be too daring to reckon with a similar appreciation for the future. For most of the total profits, the exceptionally high price growth in 2002-2008 may have contributed significantly to Slovakia’s accession to the European Union in 2004. By contrast, real estate prices in Slovakia have hardly changed over the past 10 years.
The best long-term data was collected by American professor Robert Shiller, who analyzed US property prices since 1890. And the result? Over the past 128 years, inflation-adjusted prices have risen by only 0.43% per year. So much for real estate yields in developed markets.
But let’s be a bit optimistic, Slovakia has, even more, to do within the EU, so let us also expect faster price growth. If we can count on long-term inflation of around 2% per year in the euro area, real estate in Slovakia could grow by an average of 3-4% per year.
With a long-term investment in the Molly Bloom 100/0 portfolio, you can count on an annual recovery of 9% pa (historical revenue since 1987).
2. Risk: There are certain risks associated with each investment. Without risk, even a return could not be achieved. What is important is how you can protect and spread the risk.
When buying an investment property, it is not possible to effectively manage risk as you typically buy one / a few apartments. You are so fully dependent on the choice of a particular location (state, city, neighborhood, street, floor, neighbors). Today, a good location can deteriorate very quickly due to new construction. If a garage house grows under the windows, you will probably find it harder for tenants. And good luck in selling …
When investing in index funds, your investment is diversified among the thousands of largest and most successful companies around the world. As a result, you can sleep peacefully, the average stock market yield (about 9% per year) can be achieved even if not all companies do well.
3. Liquidity: The ability to quickly convert cash into cash.
In general, real estate is the least liquid asset. If you need to sell a property, it may take several weeks or months depending on the current market situation. Typically, quick sales will mean a (substantially) lower selling price.
You can easily monetize your investment in index funds within a few days. You just need to instruct on the sale or withdrawal of the money from the portfolio and after you settle the sale of your securities on the stock exchange you will have the money in the account.
4. No time-consuming.
It takes a few minutes to open an investment account. After transferring cash or setting a standing order, you can have the money invested within a few days. This ends for you. You don’t have to do anything for the next 10/20/30 years.
Buying and managing an investment property is much more complicated. If you decide to entrust the whole process to the hands of professionals, prepare a few thousand euros for a real estate agency commission. But that doesn’t stop there. If you do not want to pay attention to the report (rental, provision of minor repairs, etc.), it will cost you approximately 10% of the annual rent.
If you want to ensure everything on your own, you will be waiting for a market survey, a selection of a particular property, financing, cadastre, insurance, tenant search, contract preparation, etc. You do not win even after you have successfully bought and rented the property. You will have to deal with tenant outages, major refurbishments and minor repairs, tax returns, house meetings on a continuous basis … These are the hours of time you might otherwise have devoted to yourself or your family.
5. Taxes: None of us want to pay more on taxes than absolutely necessary.
Revenue from investment in index funds, if you own them for more than 1 year, is exempt from income tax. You do not pay any levies either, so the whole profit remains with you.
For real estate, it is necessary to count on a 5-year time test. If you sell a property less than 5 years after its acquisition, say goodbye to a third of your profit. The state will register 19% in the form of income tax, another 14% will pay the health insurance company.