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Investing in real estate to rent in Croatia might not be as profitable as you think

Written by  Mar 24, 2023

Investing in real estate is the most popular way of maximising savings among Croats. Low interest rates and rising inflation have encouraged many to pull money out of the banks and invest it in real estate. The old adage of bricks and mortar are the best investment is certainly true in Croatia. Buying real estate for rent is considered a safe investment, but how profitable is it in Croatia?

Return on investment or return on investment is calculated as the ratio of income to investment. In the case of real estate, the income is the annual net rent, and the investment is the total cost of acquiring the real estate. The result is the rate of return, writes tportal.

What is the net yeild of real estate rental in Croatia? 

For example, if you invested 100,000 euros in an apartment and you collect 5,000 euros of rent per year, you have achieved a return (rental yield) of five percent. In other words, you can expect a return on investment in 20 years.

It should be emphasized that this is a gross yield. In order to obtain a net return (net yield), it is necessary to deduct reserve costs, income tax and regular maintenance costs (repairs, replacement of household appliances and furniture, painting of walls). As a rule, real earnings (net yield) are lower by one to two percentage points than gross earnings.

Also, when calculating, it should be taken into account that the total purchase cost, in addition to the purchase price of the real estate, includes sales tax (three percent), brokerage commission and decoration costs.

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Maintence costs can add up - Photo Canva

TPortal calculated the profitability of the investment using the example of an investment in a one-room apartment of 40 square metres in Zagreb in the Trešnjevka South district. The total cost of the investment is 115,000 euros (2,875 euros/m2), and the apartment is rented long-term at a monthly rent of 450 euros.

Income tax costs (10 percent plus surtax on the tax base, with a recognized deduction of 30 percent), reserve costs (0.7 euros per square meter) and maintenance costs (8 percent of the rent) were deducted from the gross income.

According to this calculation, renting a one-room apartment on Zagreb's Trešnjevca street brings a net annual return of 3.64 percent. For investing in real estate, this is a moderate yield.

Compared to similar low-risk investments, this yield is not particularly high. For example, an investment in a national bond brings a net yield of 3.65 percent, without any additional work and risks involved in real estate management (administration, rent collection, maintenance, possible problems with tenants, risk of vacancy, etc.).

For example, if the apartment is unoccupied for a month, the net yield drops to 3.28 percent.

Profits vary from city to city 

On the other hand, the advantage of investing in real estate is the growth in value that should be factored into the total return. The average price growth of residential real estate in the last twenty years was about ten percent. This percentage should be added to the rental return. But no one can guarantee you that in the next 20 years real estate prices will grow at such an intensity.

The profitability of investing in residential real estate in Croatia varies from city to city, and the yield can vary significantly depending on city districts and types of real estate.

According to the data of the specialized portal Global Property Guide, the rental of residential real estate in Croatia has an average gross return of 4.19 percent, which according to the criterion of profitability is classified as a poor investment (poor).

Due to the faster growth of residential real estate prices than the growth of rents, rent yields in European countries have fallen significantly, and in most countries in the surrounding area they range from poor to moderate. For example, in Slovenia the average gross yield is 4.17 percent, in Serbia 5.56 percent, and in BiH 3.96 percent.

When it comes to larger Croatian cities, the highest average gross yield is achieved in Osijek (5.12 percent), and the lowest in Zadar (2.96 percent).

On the largest real estate market, Zagreb, the average gross yield is 4.96 percent. Observed by neighborhoods, it is most profitable to buy a residential property in the Gornji grad - Medveščak district, where the average gross return on renting a one-room apartment reaches 6.42 percent, and the worst paying is the Črnomerec district with an average return of 3.56 percent, writes Tportal.

 

The Voice of Dubrovnik

THE VOICE OF DUBROVNIK


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