Rental Income and Investment Property

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. Properties in Malta and in many other developed countries around the world continue to register yearly increases in their market value, which makes investment property even more appealing.

After all, property investment managed to produce some of the wealthiest people around the globe. This further delineates why experts consider this type of investment as a sound and robust investment.

Banks also agree with this investment sentiment. As a result, they provide various financial products to support the acquisition of property. Banks typically also require property as a security, even in loans unrelated to property. This implies that one can own property without having to immediately fork out the entire sum that is required to acquire such property in the first place. The abundance of these property financing products makes property investment even more common amongst businesses and individuals, who are ultimately looking at ways to invest their savings, protect them from inflation and aiming to generate a passive income.

Property investments tend to also be more predominant in those countries that despite their geographical limitations, are experiencing an ever-increasing influx of foreigners who decide to relocate. This is exactly the type of scenario that Malta is and has been coming across in the past few years, since many individuals are resettling for various purposes – namely retirement, business relocation or to find new career and employment prospects on the Maltese islands.

With this scenario in force, property investment has increased in popularity. Yet, as with all types of investments, it is essential for one to be well versed in the market and its requirements before proceeding with such an investment. Additionally, as with all other different types of investments, one must understand that while property investment is deemed to be safe, it still comes with a number of risks.

At Borg Galea & Associates, we have compiled a list of considerations that our clients have willingly shared with us. We believe everyone should be aware of such considerations before ultimately opting to venture into property investment.

1. Finance versus Outright Purchase

Property is not cheap, especially on a geographically small island like Malta. If you are willing to invest €1,000 you will not be able to do any investments in Malta that are directly related to investment, as the average apartment price is more than €200,000.

However, most 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, the bank’s legal fees and other related expenses.

Financing in Malta makes it possible to own property that is 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 shoot your property portfolio investment to €1,000,000. Yet, one must take into consideration that while the latter 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 pay a mortgage from the rental income that is being generated. However, those who in the long run opt to leverage their savings with positive market appreciation, they would ultimately see a bigger return on their investment once the mortgage is fully paid up.

2. Other Medium to Long Term Commitments

One must also be considerate of other crucial factors when it comes to property investment. Are you considering of upgrading your home to a bigger one very soon? Do you foresee additional expenses in the near future? An example would be your kids’ private schooling, which can eat away a substantial amount of your monthly income. Or perhaps you are thinking of buying a new car soon? What about your current employment? Are you working in an unstable environment? Should you decide to change your job or business, does this mean that you will be generating a lower monthly disposable income compared to now?

One must analyse his personal, business and employment situation deeply and think of all the possible scenarios that might come their way and how such scenario will impact their monthly income. Once this is achieved, 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 the fluctuation in interest rates. Governments around the world are renowned to apply monetary policies to influence the decisions of their population with the aim to influence savings, achieve full employment and other macroeconomic goals.

It is a country’s Central Bank which manages the supply of and control of money. Therefore, one of the measures at their disposal is changes in the interest rates. In times of economic depression, it is normal for governments to lower the interest rates as much as possible, with some countries even offering negative interest rates (meaning 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, rather than keeping it locked at the bank. The increase in spending will generate what is called a multiplier effect. The latter increases the country’s gross domestic product, ultimately boosting and strengthening the 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. The latter will result in having bigger gaps in the population’s economic class, which might be detrimental to governments. One corrective measure is for the country’s central bank to increase the interest rates.

Economic depressions are typically followed by economic booms. Therefore, 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 increase on the interest rate of 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 if a family member or friend boasts of generating a rental income of Eur3,000 a month from his investment property, as you will undoubtedly assume that your investment property will generate as much rental income or even more!

While most places in Malta are approximately half an hour’s drive away from each other, property location will definitely play a key part in the potential rental income generation. The Sliema and St. Julians area is renowned as one where demand is high, 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 must factor unexpected costs that might crop up from time to time. A small water leak can be fixed after paying €20 at the ironmongery store. Not the same can be said in the case of an unnoticed water leak. This might result in having to fork out thousands of unexpected costs, such as replacing tiling and furniture, as well as the potential loss of rental income if the property becomes uninhabitable.

6. Legal obligations

Sometimes, rental laws prove to be tricky. What are your 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 day and night seven days a week? Do you plan on spending significant time away from the island? Are you good in D-IY tasks? Being a landlord is much 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 carry out such things or you lack the knowledge in the first place, do take into consideration the fact that a small D-I-Y task will cost you even more should you need 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. Since the income that is generated from investment property is a passive one, it does not mean that you are exempt from paying taxes.

Additionally, the tax rates that work best for your family or friends might not necessarily be the most efficient ones for you. There are times and ways to reduce your tax exposure to just €0 a year. However, bear in mind that there are also times when this is not possible, meaning you will have to pay taxes at 15% or other rates.

To learn more about the different reduced property taxes which you can benefit from, go to Investment Property Tax. Whichever property investment you set your mind to, remember not to leave your taxes at risk! Partner with Borg Galea & Associates and speak to one of our taxation experts to provide you with tailored advice on what taxes you would need to pay and when to do so for total peace of mind. You can easily reach us today on +356 2703 7012 or simply send us an email on info@borggalea.com.

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