How to determine the value of the property based on rental income
In other words: If you buy a property for “x” thousand how much annual income could you expect to earn from its rental?
What is a good annual income from rental?
The consulting company “First World” published their results of research on this topic for 2016. Data was collected from the 29 EU countries including Turkey (LINK). The Netherlands proved to be most cost effective and Sweden the least interesting in this regard. Data:
1. 6.57% Netherlands
2. 6.47% Portugal
3. 6.27% Belgium
29. 2.88% Sweden
So, for 100,000Euro invested in an apartment in the Netherlands, you can expect an annual revenue of 6,570Euro. And this is the best result in the EU. The worst is 2,880Euro in Sweden but, in truth, it is better than the interest rate on term deposits which is currently given by the bank.
Where does Montenegro fit into all of this and how can you estimate the annual income of a property in Montenegro?
As it is the closest, I will discuss Kotor. Similar mathematics apply also to other locations and is highly recommended before you decide to invest in real estate.
First let’s see what can be rented on the Internet. On one of the largest sites for individual rental, AirBnB, I find a beautiful dressed up little flat near the Old Town and the sea. The size is 45m2, one bedroom and sleeps four. It has excellent references from past guests. The prices are from 25Euro per day in low season to 55Euro during peak season. OK, so we will use this one as an example.
How much per year could be expected from such a place?
(Those who are reluctant to do any math are free to skip to the bottom of the paragraph)
Let’s divide the year into five periods:
- From January to April (which is a total of 120 days)- this is out of season in Kotor and hardly if any rental cannot be expected. A few tourists can be expected over Easter and school holidays, so approximately 15% of this period or 18 days of a total of 120 will be rented. For 25 Euros per day for 18 days is 450Euro for four months!?
- May (31 days) – in this period you should be able to expect approximately 25% occupancy (8 days) at a cost of 35Euro per day would be a total of 271Euro for May.
- High season June-August (92 days) – during this time you can expectapproximately 80% occupancy and at a price of 55Euro per day this is 4.048Euro for the season.
- September (30 days) –rental over September could be around 12 days (40%) and for approximately 40Euro per day this is 480Euro.
- October-December (92 days) – again you can expect some tourists around Christmas and New Year. With a max of 15% occupancy (14 days) at 25Euro per day this is 345Euro.
After we gather all of this information we get a gross income of approximately 5,594Euro.
This is not including bills, taxes, maintenance etc. This could be approximately one quarter which is 1,400Euro.
So the remaining is: 5594-1400 = 4.194 Euro pure (net) revenue.
How much to offer for this apartment if you are buying?
If you had paid 100,000Euro at the beginning of this story, the annual interest rate would have been 4.19%, which would have put us only in the 24th position of the table within the EU. It has to be cheaper than this, i.e. 24thposition is poor even if we were inside the EU.
If we want to reach the Dutch standards then you would need to offer less than 100,000 Euro or to be precise, 63,775 Euro which comes to 1.417 Euro per sqm.
Can you find this kind of offer on the market?
For 63,775Euro you cannot.
However, you can definitely find below 100,000Euro.
The example in this LINK of a quite tastefully furnished apartment with a pool, parking and great views can be bought for 85,000Euro. Revenue from 4,194Euro per year would be 4.74% (purchase tax and notary fee included). With this result, we are already in 16th place. If after a little price haggling you can get it fore.g. 80,000Euro, then the annual income will rise to 5.04%, which raises us to 14th place and so on.
So Montenegro (Kotor to be precise) is currently somewhere in the middle in comparison to the EU.
And this is one of the reasons for the decline in the market prices of real estate that we have witnessed in recent years. We are simply becoming more competitive. And so we must.
It would also be great, if the season could be slightly extended.
We can also give a few interesting proposals in and around the Old Town for those few who have endured to the end of this text with some practical examples to refine this simple financial mathematics that can help a lot in making the right decisions with regards to long-term investment in real estate.