Investing in flats for rent – is it still profitable during the pandemic?

There are as many reasons for investing in real estate, as investors, who decided to do so. Most of all real estate is a physical asset that can be seen, touched or felt. That physical aspect is particularly important in periods of financial turmoil, when decreasing exchange quotations lead some investors to hasty and ill-considered decisions. Secondly, investment in real estate protects the capital from inflation, which is mostly due to decrease in value of fiduciary money, much easier to print than actual increase of housing stock. Thirdly, real estate can generate constant and regular revenue, which for most of investors is the key argument for investing. Finally, investing in real estate may be financed by relatively cheap mortgage loan.

But are the above arguments still valid? Is investing in real estate right now, at the pandemic situation, still possible and profitable? Is it still true that purchase of a flat for rent will secure our money and ensure peace of mind?

The most important decision to take when investing in a dwelling for rent is choosing the right property. But what is ‘the right property’? From the owner’s perspective, the crucial issue to be handled is to ensure a maximum occupancy. Problems with finding a tenant are currently related to flats located in city centres, which were prepared for short-term rent, mostly for tourists. Owners of those flats dealt with lack of tenants already in spring, during the first COVID-19 wave. Most of them made their dwellings available for a longer period of time, hoping for an income high enough to pay at least part of fixed costs (administrative fees, mortgage installments etc.) and believing to return to a short-term rent business soon. However, it is already known that even if pandemic stops at the end of the year, tourism industry will be recovering during next few years. Additionally, it is worth remembering about possible new legal regulations concerning short-term rent principals to be developed as a consequence of the Court of Justice of the European Union (CJEU) judgement as of September 22, 2020. Taking all the aforementioned arguments into account, it seems that the short term rental may not be as profitable as it used to be just before the pandemic. What is important, the problem concerns dwellings in the best locations and therefore much more expensive compared to the average flats on the market, which makes the profitability issue even more critical for the owners.

The owners of flats rented per rooms are in a similarly problematic situation. Their tenants are mainly students, who, due to distance-learning, did not return to the academic cities in crowds. Obviously, there are some exceptions in that group, so the situation of owners of flats rented per rooms is not the worst, but still they have to take into account lower demand and, in consequence, reductions in rent rates and high fluctuation of tenants. Beside students, the other group of room tenants are foreign employees, mostly from Ukraine, but the current pandemic situation significantly decreased their number in Poland and therefore the demand for rent from that group of tenants is presently very limited.

In conclusion, what type of dwelling should be considered when investing in flat for rent? Standard one, which means easy to rent at any time and easy to sell in the future. Studios and two-room flats, preferably with separated kitchen, are the best option, as they will always be the most popular among both tenants and purchasers.

Time of uncertainty and economic imbalance is usually conductive to so-called ‘market opportunities’. Some owners, due to bad financial condition, may be forced to the emergency sale of the property. Others, even if not forced, may be concerned about the possibility of concluding a transaction in difficult market conditions and therefore may be eager to negotiate the price in purpose to finalize the transaction and end the feeling of insecurity.

Increased number of enforcement proceedings and consumer bankruptcies may be expected as a consequence of the post-pandemic crisis. However, properties sold under the enforced debt collection procedures will appear on the market at the earliest in mid-2021 because of the standard duration of such procedures, additionally prolonged by the slowed courts performance during the pandemic. Although the system of e-bailiff auctions of the National Bailiff Council was already launched, there is hardly any housing auction available there.

In case the investor plans to take out a mortgage loan to finance the transaction in lesser or greater part, it would be reasonable to verify current mortgage lending conditions and check the. Coronavirus pandemic and a lock-down of several sectors of the economy forced banks to change their lending policies. And as long as rules related to the properties as collaterals remained unchanged, rules concerning creditworthiness have changed significantly. Such economy sectors, as tourism, transportation, hospitality industry or gastronomy, are currently rated more risky, as well as all types of civil law contracts and self-employment. That is why it is important to find out in advance whether a mortgage loan is even accessible.

Some banks increased their requirements related to the down-payment. At the same time, due to the Monetary Policy Council’s decisions, WIBOR 3M and WIBOR 6M decreased to 0.22% and 0.25% respectively. According to Bankier.pl, the average mortgage margin of a loan with a 10% down-payment in Q2 2020 accounted for 2.63% and it was higher by 0.4% comparing to the average margin recorded in the same period last year. It means that at the current level of interest rates, repayment of such a loan should not be a problem, but it must be noted that presently mortgage loans are the highest-priced in the last two years. If interest rates start to increase, the amount of the installment may significantly influence the profitability of the investment and in such case refinancing will be the only reasonable solution.

When concluding the purchase transaction during the pandemic, particular attention should be paid to a detailed schedule of preparing the necessary documents. It is a good idea to choose a notary in advance and specify a list of documents indispensable for the transaction. It should be considered that the time necessary for obtaining a document is presently longer than usual, due to delays related with rotational work, e-appointments and necessary prearrangements related to the visit in the administration offices. At present, it takes approximately a month to collect all necessary documents, which should be taken into account when defining a date of a transaction in preliminary agreement.

In a pandemic situation, lessors will have to accept a decrease in profitability of rent in the nearest future, both due to smaller number of potential tenants, as well as predicted recession and economic disturbances. Reduced profitability will affect not only real estate, but all forms of investments. That phenomena is observable for a long time on the example of bank deposits, the interest rates of which oscillates between 0.01% and 2%, as well as 10-years state treasury bonds with current rate of return at the level of 1.7% in the firs interest period and 1% + inflation with annual capitalization of interests.

The shortage of flats in Poland is still huge – according to different estimations it amounts from 640 thousand to over 3.2 million of housing units, and therefore the demand for flats for rent will not suddenly disappear because of the pandemic or the economic crisis. When investing in real estate, the profitability should be calculated in a few-years perspective. And the analyses of the prices on real estate market allow to believe that the real estate may be a vehicle to transfer current savings into the future with no loss and moreover, to bring regular income in uncertain times.

Jakub Kaczor
Platform of Mortgage Borrowers Support Coordinator