Thursday, 13 August 2020

Two areas where investing in property wallops alternatives

Prague Connect |
23 February 2012

The recent downturn in property prices has caused even many property aficionados to question whether real estate is the best investment choice.

In a following article we will discuss the disadvantages of investing in real estate because, yes, there are some, but for this article let’s look at the top two reasons where it beats alternatives.

1. Leverage

What is leverage? In one simple sentence you could say it is doing more with less.

An example of leverage is a student borrowing money in order to complete an education which will pay them back in the future with increased earnings.

Leverage in real estate is typically achieved by borrowing money from banks up to a certain percentage of the total price of the property.

Leverage will amplify the results of the investment to you either up or down.

A demonstration of confidence that real estate typically goes up in price is that a bank would never lend you money at 4% over 20 years to invest in stocks or mutual funds whereas that is exactly what Czech banks will do for you to purchase investment real estate.

If you have leverage, inflation actually works to your advantage since your debt becomes ‘cheaper’ with time. Thus a 1,000,000 CZK mortgage today is not the same as what it was 10 years ago and 10 years in the future a 1,000,000 CZK mortgage will seem like nothing.

2. Tax Advantages

There are a few tax advantages of property that you will not get with other investments.

For example, in Czech Republic you can depreciate your property at a fixed rate per year which basically means you will be able to get income without paying tax on it. That’s right; income without paying tax on it, how nice is that!

Depreciation is a huge advantage of property investing but can be difficult to understand. I would really recommend searching on YouTube for an explanation if you have trouble understanding what this is. There are some great video explanations with examples.

Another tax advantage of property is that you can expense costs related to your property. So, for example, if you owned a property in another city of Czech Republic you could expense travel costs and hotel expenses if you went to inspect the property.

There may be office or vehicle costs related to managing the property which are also allowable expenses.

Can you expense your office setup if you buy stocks or mutual funds? Not a chance. The only allowable expenses in Czech Republic for stocks or mutual funds are purchase fees and broker fees.

In Czech Republic, a property also becomes free of any tax on the capital gains if you hold the property for 5 years or longer. Stocks are capital gains free in 6 months only if you own less than 5% of the company.

So in conclusion, property is more tax favored to other investments while you hold it as well as when you sell it.

Runner-up Reasons

I can add to the two above other secondary reasons such as cash flow, appreciation, principal reduction and the non-volatile nature of real estate.

It is also physical which means you can touch and feel it which can be a real comfort to investors in times such as these.

But before you run off and buy some investment real estate, be sure to read the next article which will look at some of the disadvantages of investing in real estate. It’s not a one-way street.

by Nathan Brown - - owner and managing director of Czech Point 101 - "You’re in good hands whether buying, selling or managing property in the Czech Republic."