|
Questions
About Buying Property
:: What
are some examples of properties currently available?
:: Can I buy to let? That is, purchase property
and rent it out?
:: Should I buy off-plan? That is, purchase
property before it is built, at a discount
off market rates, and then rent it out while I enjoy high returns?
:: What does the total price of a property
purchase come out to be?
:: Can I get a mortgage for my property
purchase?
:: Are Czech real estate agents accredited?
:: Are property search fees common among
property agencies?
:: Can a foreign citizen buy property
in the Czech Republic?
:: What are the risks of property acquisition
in Czech Republic?
:: What are the pros/cons of buying with
a residency permit vrs through an SRO?
WHY CZECH REPUBLIC?
--------------------------------------------------------------------------------
What
are some examples of properties currently available?
--------------------------------------------------------------------------------
Due to the
internal changes making way for the arrival of the Euro common
currency, property prices are steadily rising in the Czech Republic
and will continue to do so over the next 6 years, to more closely
match those of neighboring European countries. The rise is happening
at a rapid pace that is gaining momentum on a monthly, not yearly,
basis.
However,
an investor can still buy businesses, land and property for
a fraction of what this would cost today in Western Europe,
earn a substantial ROI minus expenses on rapid turnover, or
buy and hold for potentially greater future returns.
Some examples
of properties, and their prices, which we assisted clients with
over the last two years include the following (Click here to
get current exchange rates):
A large family house in excellent condition with 18,000 sq.
ft. (2,000 sq. m.) of property for 975 000 CZK. Typical prices
range between 1 000 000 - 2 500 000 CZK.
27,000 sq. ft. (3,000 sq. m.) of commercial property in a smaller
town with all utilities, permits and blue prints, pre-zoned
for building construction, for 600 000 CZK. Typical prices depend
heavily on location.
14,600 sq. ft. (1,800 sq. m.) of garden space near a small village,
with a 50-tree fruit orchard and a cozy 3-season cottage, with
city water and electric for 137 500 CZK. Typical prices range
from 125 000 - 1 000 000 CZK.
An apartment complex in Brno, the country’s second-largest
city, with 7 apartments, reconstructed, for 2 850 000 CZK. Typical
prices range from 2 500 000 – 6 000 000 CZK, up to 11 250
000 CZK for a reconstructed castle or villa (mansion).
Additionally
important to note, is that those foreign citizens who wish to
relocate permanently or just to have a holiday home in the Czech
Republic for personal and family reasons, should act over the
next 18 months as we expect property prices to increase substantially
over that period of time due to huge foreign and domestic demand.
Home prices
have already doubled over the 3 years prior to EU accession
in many areas of the Czech Republic, and US investors especially
should pay particular attention to the continuing slide of the
US dollar, which makes investing more costly as well. (From
June 2001 to now, the dollar has gone from being worth 40 Czech
Crowns (CZK) to only 15 as of today’s writing, July, 2008).
NOW is
the time to act if investing in this country is an important
business or personal/family goal.
Contact Us :: Return
to Top
--------------------------------------------------------------------------------
Can
I buy to let? That is, purchase property and rent it out?
--------------------------------------------------------------------------------
To explain,
the concept of “buying to let” is as follows in italics:
The investor
puts 30% of the purchase price down on the property in cash
and finances the rest (70%) through a mortgage. The investor
then rents the property to a tenant through a property management
company. The tenant pays rent every month, which the investor
uses to pay the mortgage on the property. Thus, the cost of
maintenance is very low, while in the meantime the value of
the property is always rising.
This, of
course, is an effective and profitable plan in the USA, Canada,
the UK, etc.
Can it also
be a successful investment plan in the Czech Republic? Yes,
if done properly with great care, patience, and the help of
a trustworthy agency.
However,
due to the popularity of this investment option in Europe and
the hype that often surrounds it, all too often an investor
is rushed into what may not be a prudent buy-to-let investment
in the Czech Republic itself, because the business environment
here is not the same as it is in Western Europe or the USA,
etc.
Critical
to remember, is that just because the option of buy-to-let works
in other countries where you have had previous experience, or
because you have heard good things about a certain development
offer within the Czech Republic, this does not automatically
mean that the Czech system is setup for such an arrangement
and this must be taken into account when making your investment
plans.
Here are
just a few potential problems with the buy-to-let option in
the Czech Republic:
Landlord / tenant laws in the Czech Republic are confusing,
ill administered, and impossible to enforce. If a tenant decides
not to pay, there is little the owner or landlord can do to
evict them, and absentee-owner properties are common targets
for nonpaying tenants, and for property management companies
who commonly place these “problem” tenants in flats
owned by foreign-based investors. The problem of theft, even
of entire plumbing, flooring and kitchen units, is also common
from absentee-administered rentals.
If the property falls under Czech rent control laws, the problems
worsen. Rent control means that the owner is unable to charge
market rates for rent, and in fact, is forced to charge rents
averaging out at about 1/5th of market rates. Meanwhile maintenance
requirements are strict and expensive, and place the absentee
owner constantly at risk of being overcharged by agents responsible
for performing the work, and, then falling outside of the law
because the work is actually not performed even thought it was
paid for. Tenants under rent control are also nearly impossible
to evict.
Also under rent control, apartment swaps (illegal exchanging
of tenants) is controlled not by the owner, but by the property
management company and on the black market. The owner will have
no control, nor even usually be aware that any swaps are taking
place.
The problems get even more complex if you are buying “off-plan”
with the purpose of arranging a buy-to-let, which will be discussed
in detail in the next question.
Can Buying to Let Be Successful?
Again, yes,
if the investor makes a serious commitment to doing their due
diligence, carefully researching the offer, all parties involved,
etc., and contracts the help of a trustworthy local agency –
not a foreign agency working through an unknown local provider
as is very often the case with British investors and investment
firms!
Let’s
discuss the buy-to-let situation in this country in greater
detail:
Czech property,
and Prague especially, has experienced an immense amount of
hype in recent years, and especially since EU accession in May
2004 foreigners are scrambling to take advantage of “buy
to let” deals.
Most of
these deals are offered by foreign “investment firms,”
and work like this:
You buy
a property through them off-plan, (“off-plan” means
that you pay first, and they promise to build the property at
a later date, offering you a "discount price" as opposed
to the "actual" price in exchange for buying early),
then they agree to manage the property for you: collecting rents,
doing maintenance, even advertising for tenants, all for a small
fee.
In theory,
they do the work, you collect the interest and watch your property
increase in value.
In the real
world, however, the majority of these companies, if not all
of them, are brokers. They are not established entities in the
Czech Republic, and they have little, if any experience conducting
business deals in the Czech Republic.
That means
they don't really do anything but collect their fees and arrange
the deals, usually through a local representative, and then
try to oversee the work performed from a foreign office located
in another country.
The bottom
line is that IF the broker is honest AND efficient AND experienced
AND puts the time and care into hiring the construction companies,
management companies, real estate agents, etc., that share the
same values and commitment to you, the investor - then and only
then can the deal be assured a reasonable success.
You are
betting YOUR MONEY on their care, honesty, expertise, etc. in
either case!
Realistically
however, our combined experience in the Czech Republic has shown
that the actual scenario is commonly otherwise. That is, that
the broker is experienced in other countries and has the best
of intentions, BUT - has little if any experience in the Czech
Republic itself, and how deals actually proceed here, which
always follow a very simple formula, being…
agents and brokers in the Czech Republic care about their fees,
period - they do not care about their clients' financial safety
or success rates.
Obviously,
the burden of the investment's safety and ROI falls on the investor,
not the broker. They tell you the story you want to hear, and
if you believe it, that's your problem, not theirs. After all,
that’s what they were told by their agents.
Thus, putting
your money down on the often mistaken belief that an agent or
broker or management company has your own best interests in
mind, in the Czech Republic, is about as safe as trusting a
stranger with your wallet and credit card In point of fact,
that's exactly what you are doing.
The Bottom
Line
There is
money to be made in the Czech Republic. Take it from all of
us: we all live here, we have all invested here, and we are
all making a decent return on our investments.
Like anywhere,
investing in the Czech Republic – including and especially
buying off-plan or buying to let - requires planning, due diligence,
and careful weighing of all factors involved. It also requires
the assistance of a trustworthy local company like our own to
perform all legal work and look out for your best interests
in all deals.
Contact Us :: Return
to Top
--------------------------------------------------------------------------------
Should
I buy off-plan? That is, purchase property before it is built,
at a discount off market rates, and then rent it out while I
enjoy high returns?
--------------------------------------------------------------------------------
It is our professional opinion at this office that investing
in off-plan in the Czech Republic need extreme care when choosing
an off-plan investment opportunity.
Contact Us :: Return
to Top
--------------------------------------------------------------------------------
What
does the total price of a property purchase come out to be?
--------------------------------------------------------------------------------
A good rule
of thumb is to take the purchase price + 8% (approximately 6%
if you use us for your property closing - see fee structure),
to cover all commissions, expenses, taxes and fees if you are
purchasing in the 1.000.000 to 2.000.000 range.
Thus, on
a purchase of a property worth 1.600.000 CZK, your normal total
price would be approximately 1.728.000(total fees are 128.000).
If you used
our services the total fees would be approximately 96 000 CZK.
Prices and
commission fees inside of Prague can be much higher due to the
very high competition for attractive properties. It is common
even to pay simply for information, or a prospectus, about a
viable property.
Once purchased,
yearly land and property taxes must be paid, but are extremely
minimal. They range from 1Kc to 4Kc per square meter, per year.
Maintenance fees also apply, and will be briefly discussed in
the next question.
Yearly SRO
maintenance costs about 20.000 CZK a year, which covers basic
accounting, tax filing and registered office rental.
Contact Us :: Return
to Top
--------------------------------------------------------------------------------
Can
I get a mortgage for my property purchase? *
--------------------------------------------------------------------------------
Generally,
yes.
Mortgages
are granted to foreign residents by local banks via an established
SRO, (Czech limited liability company) or as an individual if
you have a Czech residency. You can read much more about SROs
in the next section of this webpage.
Banks lend
more freely to longtime established entities and companies than
they do new ones, as can be expected. Otherwise, they do not
usually distinguish between foreign and local citizens that
heavily.
In case
of a newly established business (SRO), it is sometimes necessary
to provide the bank with a precise business plan in order to
assure the lender that adequate funds are available for consistent
payments, (a fairly large concern here).
If the bank
approves the business plan the mortgage is normally granted
under the following five (5) conditions:
1. The amount
lended will not exceed 75% of the maximum value of the property,
as valued by the bank’s own property evaluation firm.
2. The borrower
must invest their own funds at a minimum level of 20-30% of
the maximum value of the property, et. al.
3. The maximum
lending period cannot exceed 15 years.
4. The interest
rate is fixed for a maximum of 5 years, after which it is recalculated
by the lender.
5. Interest
rates currently range from 4-7% per annum.
* While
this information is deemed to be current, banks are always changing
their offers and many are based on the qualifications of the
buyer. Please contact a bank or mortgage broker for more details.
Contact
Us :: Return to Top
--------------------------------------------------------------------------------
Are
Czech real estate agents accredited?
--------------------------------------------------------------------------------
The answer
is no, but it is required under Czech law a license. Real estate
agents team up with lawyers, paralegals and team of real estage
experts to do the work.
Contact Us :: Return
to Top
--------------------------------------------------------------------------------
Are
property search fees common among property agencies?
--------------------------------------------------------------------------------
Many high-profile,
reliable Prague-based firms charge a search fee which is typically
around 100,000 CZK. Most also charge substantial additional
fees for due diligence work.
Property
search fees are a prudent investment for anyone looking to buy
real estate in the Czech Republic. In our years of professional
experience working with Czechs, we have grown to depend on paid
property searches for accurate information that can be relied
upon when evaluating a potential investment.
The simple
fact is that paid searches not only provide the most accurate
results and the widest possible choice for the investor, (as
opposed to real estate firms who provide free searches but ONLY
from within their own listings), but they also tend to guarantee
the assistance of a service provider who takes a true and genuine
concern in looking out for your best interests.
Property
searches which are performed free of charge normally result
in the type of information you would expect to receive if you
are paying nothing: a basic idea of what is available, but without
any proper due diligence performed to establish it's accuracy
or reliability, or any care taken to assure that the results
represent a quality investment.
Contact
Us :: Return to Top
--------------------------------------------------------------------------------
Can
a foreign citizen buy property in the Czech Republic?
--------------------------------------------------------------------------------
A foreign
citizen can buy property in the Czech Republic, but the laws
vary according to whether or not you are a citizen of the European
Union (EU) or not.
Non-EU and
Non-'Favored Nation' Citizens (EU citizens should read this
also):
To purchase
property in the Czech Republic as a non-EU citizen for either
business or residential use, you must have a Czech limited liability
corporation (called an SRO) setup in your name.
The good
news is that an SRO is an essential tool for all foreigners
living in the Czech Republic, EU citizens and non-EU citizens
alike, because it provides an essential tax and liability shelter
to assist you with legal compliance issues and to protect your
assets - both here and at home - from litigation and fraud.
The only
exception to this requirement is for Permanent Residence holders
who are also married to a Czech spouse. Even if this describes
you, however, I strongly recommend that all foreign investors
and/or those simply relocating to do business in the Czech Republic
have an established SRO for their own protection.
'Favored
Nation' Citizens (Norway, Switzerland, Lichenstein, USA):
Each of
these countries have 'favored nation' agreements with the Czech
Republic which give them rights regarding property purchase
that are similar to those granted to EU citizens.
In the agreement
between the USA and Czech Republic, any US citizen who acquires
a residency permit for longer than 3 months can buy property
as an individual.
An exception
for the US citizen is in the case of agricultural land. To purchase
agricultural land they must have a registered agricultural business
in the Czech Republic.
Please recognize
that since this treaty was quietly adopted and hasn't been approved
by Parliament yet, it would be advisable to check with the local
Land Registry office before purchasing a property. It is law
and should be recognized but changes don't occur fast here and
often government offices are not fully informed of the laws.
Please contact
us for questions regarding the property purchasing rights of
the other 'favored nation' countries mentioned above.
EU Citizens:
EU citizens
may purchase land, except for agricultural or forest land, after
acquiring the proper residence permit. However, as stated above
both EU citizens and non-EU citizens with an SRO are exempt
from any restrictions on land purchased at this time, and do
not require a residence permit to purchase land.
More importantly,
owning land without the protection of an SRO is extremely risky,
just as it is at home but even more so here, as your personal
assets (including your new property) can be attached via any
legitimate, or fraudulent, liability suit.
The simple
fact is that foreigners are still seen by many unscrupulous
people as a cash cow in the Czech Republic. This reality needs
to play an important role in your investment plans. If you are
a foreigner, it is assumed that you are rich and unaware of
the steps necessary to protect yourself from fraud.
It is also
assumed that you do not know just how little the law offers
you any protection in these matters, (it doesn't). Therefore,
you must always play it safe by keeping your property and business
assets under separate, individual SROs in order to protect your
assets both here and abroad from litigation and fraud.
Click here
to see a more in depth discussion of purchasing property by
each method for an EU citizen.
Contact
Us :: Return to Top
--------------------------------------------------------------------------------
What
are the risks of property acquisition in Czech Republic?
--------------------------------------------------------------------------------
Here are
some factors as published by CEREAN (Central European Real Estate
Associations Network) in their Czech Republic section:
"The
Czech legal code gives preference to the real owner of a property
instead of that which is written into the public records (in
the cadastre of real estate). An extract from the cadastre of
real estate does not always reliably reflect the ownership rights
to real estate. It can happen that a seller can bring forth
documentation of ownership of a lot or piece of land from the
cadastre of real estate, an investor buys the land, and the
cadastral office registers him as the owner. A few years later,
though, legal proceedings are begun to determine the actual
ownership of the land, and a court decides that the owner of
the land is someone else."
"An
extract from the cadastre of real estate is not, therefore,
sufficient documentation for closing a contract. The results
of privatization and restitution of real estate do not always
correspond to the actual, factual state of affairs. When buying
real estate in the Czech Republic, it is of the utmost importance
to thoroughly go through all available documentation on the
basis of which the ownership rights have been granted to the
seller, or as the case may be to any of his family members,
either living or deceased. This requires adequate knowledge
of local conditions and the legal directives in individual time
periods in which the evaluated documentation came about. The
goal of this investigative process is to find out whether there
was ever an ownership dispute or conflict in the past that could
in the future threaten the rights of the investor."
"Strict
rules and regulations are valid for transfer of real estate
in the Czech Republic. A purchase contract can be declared invalid
for slight errors in how the real estate is named or described,
or because certain less than specific wording is used. It is
not enough for the cadastral office to agree to register the
ownership rights to the cadastre. There have been and continue
to be cases when the formal validity of a contract is disputed
years after the cadastre office has agreed to an investment
or transfer. The actual contract itself, then, by Czech law,
is rendered less important. Simple, mechanical inspection of
foreign contracts can act to rob an investor of his money and
his real estate."
"During
the Communist era, in 1951, there occurred on the territory
of what is now the Czech Republic the denial of traditional
principles known as 'superficies solo cedit', which up to that
time had been valid. This legal principle made it impossible
for one person to own a building on land which belonged to another
person. Essentially, what the new legal ruling did was make
it legal for one person to own a building on another person’s
land. This rather inconvenient amendment to ownership law has
remained on the books until today."
"A
general problem in the Czech Republic is the slow rate of court
proceedings. Like a number of other countries, the Czech Republic
has been sanctioned for its slow pace of court proceedings.
The European Court of Human Rights has ruled that the country
must pay compensation in a court case on the settlement of a
real estate dispute in the common name of a married couple.
The court case was stuck in the court system for more than 10
years. "
Contact
Us :: Return to Top
--------------------------------------------------------------------------------
What
are the pros/cons of buying with a residency permit vrs through
an SRO?
--------------------------------------------------------------------------------
The vast
majority of property investors in the Czech Republic are members
of the EU. Currently Czech Republic restricts how even EU citizens
can purchase property here. No fixed date has been given regarding
when these restrictions will be lifted.
The two
options for an EU citizen for purchasing property are through
an SRO (Czech limited liability company) or as an individual
with a Czech residency permit.
Taxation
The main
consideration of whether to go the route of one or the other
remains taxation.
If you buy
as an individual and hold the property for more than 5 years,
this property not being your primary residence, you will not
pay capital gains on the property in Czech Republic.
This being
said, some clients from EU countries have informed me that even
if the capital gains is not paid here because of this exemption,
their home countries would require payment of taxes on this
gain. This would be a good question to pose to your home country
accountant. In some cases there can be a tax advantage in your
home country to receive the capital gains as dividend payment
through a foreign company rather than capital gains.
If you buy
as an individual and sell before the 5 years, you will be required
to pay capital gains tax as an individual.
Here is
the current chart of taxation for an individual in the Czech
Republic:
Tax Base
(CZK) Tax
0 to 121,200 12%
121,201 to 218,400 19% of base exceeding 121,200
218,401 to 331,200 25% of base exceeding 218,400
331,201 and over 32% of base exceeding 331,200
As can be seen, taxation quickly jumps to the highest tax bracket
of 32%.
Let's work
through a scenario then where an individual sells a property
before the 5 years with a capital gains of a hypothetical 1
000 000 CZK with no other income. Based on the chart above you
would pay a total of close to 275 000 CZK in taxes.
For an SRO,
on the other hand, capital gains are always taxed at the corporate
tax rate for net profit. As of 2006 this is 24%. This would
make the tax on 1 000 000 CZK of capital gains at 240 000 CZK.
This leaves you with less tax on the amount than you would have
as an individual.
This is
an easy calculation should you choose to leave your gains in
the SRO and reinvest it. However, many at this time might be
interested in retrieving it for other purposes. In this case
a possible scenario is to withdraw it as dividends, in which
case there would be a 15% withholding tax (in the scenario above,
another 114 000 CZK) from the payments.
In the SRO
scenario, your take-away would be 646 000 CZK while as an individual,
760 000 CZK.
Another
consideration of taxation is that it is generally easier to
expense property related costs through an SRO compared to an
individual, because it is a stand-alone enterprise.
Costs
Regarding
the costs of each, an SRO is definitely more expensive to maintain
and requires some added costs because of the higher standard
of accounting required. Currently the cost of accounting and
tax filing for a one property SRO through our accounting partner
is around 10 000 CZK/year.
Also, there
can be slightly higher rates for electrical and gas if the owner
of a property is a company rather than an individual (don't
understand this one...).
Liability
Another
consideration is liability.
Czech law
stipulates that a company is only liable for the amount of assets
it possesses. The individual shareholders are not personally
responsible unless there is unpaid initial capital outstanding
(200 000 CZK total). If this is paid in full then there is no
additional liabilities. This being said, there is personal liability
on the part of the director of the company, should there be
found gross negligence.
Although
the Czech Republic has not typically been a litigation oriented
society, it is increasing moving in this direction, following
the trends in Western countries.
Mortgages
Currently
at the outset of investment in Czech Republic, it is easier
for a person purchasing as an individual to get a better loan
to value ratio and slightly better interest rates than purchasing
through an SRO.
Banks are
looking for a track record on the SRO.
This being
said, after two years of good investment history and payment
through an SRO, the banks often offer better interest rates
and mortgage terms to an SRO as opposed to an individual.
Attainability
The final
factor in the discussion, is how difficult it is to obtain either.
A Czech
SRO can be owned by any individual and individuals of any citizenship
are now able to fulfill all roles within a company, provided
they have a clean criminal record, are over 18, have not been
subject to bankruptcy, etc.
For an EU
citizen obtaining a residence permit, it requires two things
that can be difficult to obtain.
The first
is a valid 'purpose of stay'. This can be any number of things
including being registered in a university program, having a
work permit or being a licensed professional or business person.
The second
requirement is that you need an accommodation address for which
you have permission to stay while in Czech Republic.
Meeting
these requirements can be the difficult part of obtaining a
Czech residency permit for those who are not actually living
here at the time of purchasing a property.
Conclusion
Well, hopefully
this adds some factors and helps you to make the right decision
when it comes to which route you will take when investing in
Czech Republic.
We are prepared
to assist you with either route in meeting the requirements
and, ultimately, help you to achieving a successful investment.
Real
Estate Property Inquiry form
Contact Us :: Return to Top
|
