An apartment as an investment can be a convenient and profitable matter. It carries plenty of advantages, but also disadvantages and potential risks. Are you considering buying an investment property? Before you dive into it, devote some time to it. Buying an investment apartment to rent out requires knowledge about rental practices, mortgage loans, relationships between tenants and landlords, property management, and much more. Without enough information, instead of a beautiful annual return you could be left with nothing but tears.
What investment apartments are
Investment apartments are residential properties that an investor (= you) buys primarily for the purpose of generating income or growing capital – that is, either:
- for long-term rental (classic apartments in the city, where you look for long-term tenants),
- for short-term rental (flats and apartments in tourist-attractive locations), or
- to sell at a higher price than the one they bought them for.
In this article we'll deal with the first two types: apartments that you intend to rent out.
Why is investing in an apartment popular?
Investing in real estate carries several attractive advantages:
- Regular rental income
- Long-term appreciation of the property: The value of the property can grow over time, which can lead to a profit when it is sold.
- Tax advantages and reliefs: In some cases, expenses associated with investment apartments (e.g. mortgage interest, repairs) may be tax-deductible.
- Protection against inflation
Investment apartments can be part of a long-term investment strategy or serve as a means of diversifying an investment portfolio. They are popular mainly among those looking for less risky investments (e.g. compared to stocks).
Typical risks of investment apartments
Whether it's city apartments for long-term rental or apartments in tourist areas intended for short-term rental, you can typically deal with:
- Vacancy of the apartment/flat or problems with tenants: If a tenant moves out or if no one rents the holiday apartment, you still have to pay the monthly costs.
- High initial costs: And the monthly rental income may not cover the total monthly mortgage loan instalment.
- Financial costs for maintenance and repairs: Even the most honest and decent tenants break or damage something every now and then, and you, as the owner, will have to deal with it.
- Investment in marketing (in the case of short-term rentals): If you don't want to give 20% of every rental to companies like AirBnB or Booking, you'll have to manage your marketing activities on your own.
- Time investment: Looking for tenants, running viewings with potential tenants, and so on.
- Market risks and economic cycles: Changes in the real estate market, changes in interest rates, new laws and regulations concerning real estate, rental, or taxes are beyond your control and must be reckoned with.
If you want to avoid these risks while still drawing on all the advantages, consider micro-investing in real estate with InvestBay. In this case, you'll avoid all of these risks.
- You don't have to find tenants or deal with any problems with them. We at InvestBay handle the property management. For complete transparency: It's true that any vacancy will be reflected in the statement and the overall earnings (and your share), but for you this aspect comes without any time burden or stress.
- Nor are you concerned with any property maintenance, ownership, purchase, sale… We at InvestBay handle all of that.
- The initial costs are as high as you decide for yourself – with us you can start from as little as 100 euros. Nevertheless, as with any investment: The more you invest, the greater the return you get.
- You don't have to take care of the apartment or its marketing in any way, or put further money or time into it.
On the contrary, with this method further advantages are added, for example excellent awareness of the given property, portfolio diversification, or a double return (ongoing profit from rental as well as from the sale). If you buy a classic investment apartment, you bet everything on one card in one location. With InvestBay you can fractionally own as many as 5 properties in 5 different countries.
It's true that you'll know the exact return on the investment only at the very end of the whole period after the sale (since the selling price and the property's increase over time make up the main part of that appreciation), but all the information we provide you before the investment is based on serious estimates that take into account all possible aspects.
Tip: Read in detail how InvestBay works.
How to choose the right apartment for an investment?
Right at the start we have to mention a basic thing that many people don't realise. If you're choosing an apartment for an investment (and not necessarily for yourself for retirement), it's necessary to keep your emotions in check and look at the property truly from that analytical / investment perspective. According to Andrew Thompson, this is one of the biggest mistakes when acquiring an investment apartment (read the whole interview on this topic in the third part of the interview with him). This can be difficult especially because real estate agents often bet on emotions and pretty pictures.
What to ask your real estate agent when buying an investment apartment?
- How has the market developed in the given location?
When choosing a profitable property to rent out, look for a location with good amenities (schools, shops, restaurants, cafés, public transport stops, and parks) and walkability. At the same time, it's good if it's a neighbourhood with a low crime rate, or near businesses. You can also consider an area with a growing population or with an ongoing revitalisation plan. All of this signals a greater potential number of tenants. - What is the current state of the apartment?
Will further investment be needed, e.g. in reconstruction, furnishings, or more extensive repairs? And what is the prospect that someone will want to buy this apartment in 10 years – and in what condition will it be at that time? Will it be ripe for a complete reconstruction, or still relatively undamaged? - What is the building activity around it? When you can't build in a given place, the price of existing properties and rental income grows faster.
- How is tourism developing in the area?
- How are rents developing in the area?
Market analysis
Before every investment, carefully consider your priorities and financial options. At the same time, watch the market, so that you don't buy when prices are at their highest – that reduces your potential profits.
Due diligence
In addition, legal and technical so-called due diligence must also take place. It is a thorough process of vetting the legal and technical aspects in major business or investment decisions – which buying a property definitely is.
Its goal is to identify and evaluate risks, verify the legal status, ensure compliance with applicable laws, and assess legal obligations. This process includes an analysis of company documents, contracts, employment relationships, properties, regulatory compliance, lawsuits, and intellectual property. The result is an informed report that helps in decision-making and negotiating the terms of the transaction, which protects the interests of all parties involved.
"In one of the apartments we examined, during the technical due diligence we discovered that it is located directly above a boiler room and an electricity source. That means there would be vibrations and noise in it, which would reduce the attractiveness of such a holiday property. No one wants to spend their holiday above a power plant." This is an excerpt from the interview When choosing a property, the quality of data is crucial, with Andrew Thompson. Read it in full and find out even more about how investment apartments and InvestBay work.
Where to buy an apartment for an investment?
If you're deciding in which Czech location to invest in a rental apartment (for long-term rental), we recommend larger cities rather than smaller ones.
For example, Prague offers stability, a growing market, and lower risk, but requires a higher initial investment. Conversely, a smaller town with a worse job market will, while requiring a lower initial investment (and thus promising potentially higher returns), at the same time carry higher risk and challenges associated with vacancy, tenant turnover, and property maintenance.
If you want to buy an investment apartment for short-term (holiday) rental, focus on attractive tourist locations. By the sea, by a lake, with good access to the city centre or, on the contrary, far from civilisation. In short, where people will want to go on holiday. Then consider what the potential occupancy is, what the potential rental income over the course of the year is, and, on the other hand, what the costs are or what role seasonal variability plays.
Investment apartments abroad
This type of investment offers the potential to take advantage of growth in property values in rapidly developing economies or stable markets with high rental demand. For you as a solo investor, however, it carries far more worries and information-gathering. Different countries have different acquisition costs, different selling costs, transfer taxes, and so on, not to mention cultural differences or currency risks.
If you decide to invest in a property abroad with InvestBay, these worries fall away, while the main advantage remains: you have your own property abroad (also) for holiday purposes.
We at InvestBay select the most attractive locations with the lowest risks for you. We are well aware that real estate agents often don't provide enough relevant information – and often because the potential investor (= you) doesn't know what to ask. So with us, in the offering on InvestBay, you know exactly everything you need for such an investment.
What are the options for financing an investment apartment
The options for financing an investment apartment include several different approaches, each of which has its advantages and disadvantages. The most commonly used options:
Mortgage loan
- Classic mortgage: A traditional mortgage loan, where the bank lends a certain amount of money that the investor repays over a longer horizon. This type of loan often offers lower interest rates, but requires the property as collateral and usually higher equity as well.
- Buy-to-let mortgage: A special type of mortgage intended for investment properties, where the rental income is taken into account when assessing the applicant's creditworthiness.
Building savings loan
This type of loan is frequently used in the Czech Republic. It offers favourable interest rates and you can use it to buy as well as reconstruct a property.
Personal loan
A less common financing method, where the investor obtains an unrestricted personal loan that they can use to buy an investment property. These loans usually have higher interest rates and a shorter maturity than mortgages.
Cash
Some investors may have enough equity to buy a property directly without the need for a loan. This way they avoid interest costs and can react more quickly to opportunities on the market.
Crowdowning / Micro-investing
A modern financing method, where a group of people jointly invest smaller amounts of money in a specific property through an online platform. This micro-investing together with other investors, where each contributes a part of the capital, can reduce individual risk and enable access to larger or more attractive properties.
How to manage an investment apartment effectively and trouble-free
Effective and trouble-free management of an investment apartment for long-term rental requires careful planning, thorough preparation, and regular maintenance. Here are a few steps and tips that can help you achieve successful management:
- Set a competitive rent
Carry out market research and find out what rent is usual in the given location. Offer an attractive but realistic price that takes into account the quality and furnishings of the apartment. - Choosing the right tenant
Vet tenants carefully, including checking their credit history, employment, and references from previous landlords.
You can choose them on your own, or call in a real estate agency to help. Both have their advantages and disadvantages:
Advantages Disadvantages On your own You don't have to pay a commission to a real estate agency, which can mean considerable financial savings. The process of searching for, vetting, and communicating with potential tenants can be time-consuming. You have full control over the choice of tenant and can choose the one who best matches your requirements and criteria. If you don't have experience with choosing tenants, you may overlook important aspects, which can lead to problems in the future. Direct communication with the tenant can lead to a better understanding of their needs and a faster resolution of any problems. Choosing tenants involves administrative tasks, such as drawing up rental contracts, checking references, and more. Real estate agency Real estate agencies have experience and expertise that can help with choosing reliable tenants. The services of a real estate agency usually include a commission, which can be considerable (usually one to two months' rent). The real estate agency takes care of the entire selection process, which saves you time and worry. When using a real estate agency, you have less direct control over the choice of tenant. Real estate agencies have access to tools and databases that allow them to thoroughly vet potential tenants, including their credit history and previous references. Despite the real estate agency's expertise, it can happen that the chosen tenant doesn't meet your expectations. - Conclude a clear and detailed rental contract that defines the obligations and rights of both parties.
- Regularly check the condition of the property and carry out preventive maintenance
React quickly to repairs and problems reported by tenants, in order to prevent greater damage and maintain a good relationship with the tenants. - Keep your accounts
Maintain accurate and up-to-date records of all income and expenses associated with the property. Keep track of tax obligations and the options for tax deductions. - Insurance
Take out adequate property insurance that covers damage caused by fire, floods, vandalism, and other risks. Also consider landlord liability insurance. - Communicate with tenants
Maintain open and regular communication with tenants. Be available to resolve tenants' problems and queries. - Comply with legal regulations
Comply with all local laws and regulations concerning the rental of real estate, including safety standards and furnishing requirements.
Does this seem like too much worry? Consider hiring a professional management company that specialises in managing investment properties. These companies can handle the selection of tenants, maintenance, repairs, and administrative matters.
In the case of short-term rental, you commonly deal with problems such as marketing and recruiting new holidaymakers, more frequent repairs, higher costs for cleaning and maintenance, and more frequent problems (locked-out keys, a forgotten entry code, and the like).
If you want to have even fewer worries with an investment apartment, invest in a lucrative property with InvestBay. Attractive locations, transparent offers, returns known in advance. Take a look at our current investment offering and get started!
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