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 22 as of
today’s writing, November 2006).
As we've said before many times, NOW is the time to act if investing
in this country is an important business or personal/family goal.
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 non-paying
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 – and any local Czech person (not involved
in your deal, of course) will clearly substantiate - 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.
Nor does your broker, in the end, really care either as it is
not their job to do so.
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 no "easy money" to be made in the Czech Republic.
Take it from all of us at Czech Point 101: 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.
Based upon our over 8 years of experience here, we estimate
that 50% of the people who follow these buy-to-let plans will
be ripped off in some way; be it a total loss of their investment
capital in rare but unfortunate cases, or more commonly, the
realization after the deal is completed that their expectations,
which are based upon their broker’s brochures and verbal
commitments, are not going to be met.
One experienced client recently told us: “Absolutely none of the
promises about our development were actually kept, but as the
construction itself started 6 months late, at this point we’re
simply happy that the properties were built.”
Buying to let or buying off-plan are certainly not investment
options which are “doomed to fail” by any means. But in this
country, it is emphatic that the investor does their homework
and is very selective about the opportunities they get involved
with, and the firms they choose to represent them here. There
is far too much risk in this country to do so otherwise.
For more information on this important topic, please see the
next question on “buying off-plan.”
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?
In a nutshell, it is our professional opinion at this office
that fully 50% of those investing in off-plan in the Czech
Republic will be victims of fraud, large or small, and that
fully 90% of off-plan investors will suffer a disappointing
discrepancy between what is promised and what they actually
receive. Numbers like these point to a need for extreme
care when choosing an off-plan investment opportunity here.
Request our free comprehensive, property
buyer's guide which answers this question thoroughly including
5 risks of buying such properties in Czech Republic.
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% (aproximately 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.
Can I get a mortgage for my property purchase? *
In short, 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.
For individuals, 100% mortgages are possible for those with good, provable
income.
As well, banks can use potential income from a property toward proving necessary
funds to cover a mortgage, however, each bank calculates this differently and there
is often a interest rate penalty for doing this.
Banks lend more freely to long-time 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 85% 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
15% of the maximum value of the property, et. al.
3. The maximum lending period cannot exceed 25 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.
Are Czech real estate agents accredited?
This is an extremely important question, because the answer
is a 100% “NO.”
For any individual to sell real estate in the Czech Republic –
that is, in order to represent the buyer, seller or both
parties - and/or to represent any investment, development or
property firm to a foreign or domestic investor:
No accreditation is necessary.
No functioning oversight committee exists.
No schooling is required or offered.
No degree or certificate is required.
No official standardization committee exists.
Incorporation is not required.
What is required under Czech law is simply a $40 license, which
is often neglected because it forces the agent to register
for tax purposes.
There is one association of real estate offices called
ARK CR
however, we have found the effects of this organization on the actual conduct of its members
to be minimal.
In addition, it is sometimes the case that real estate “agents” to team
up with “lawyers” who are also not licensed attorneys, but
paralegals or law students.
Don't think it's THAT bad? Read some non-client experiences I've received.
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.
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.
'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 Parliment 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.
We have assisted and been successful with US citizens buying through this route.
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.
Click here
to see a more in depth discussion of purchasing property by each method for an
EU citizen.
What are the implications of the two main types of Czech ownership
(‘osobní vlastnictví’ and ‘družstevní vlastnictví')?
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. "
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. Since there is no capital gains tax as such in Czech Republic, tax is calculated on it as if it
were normal income.
As of 2008, personal income tax is a flat 15%.
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 flat
personal income tax of 15% you would pay a total of 150 000 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 2008 this is 21%. This would make the tax on 1 000 000 CZK of capital gains
at 210 000 CZK. This leaves you already with more tax on the amount than you would have as an
individual.
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 (in 100% of the SROs that Czech Point 101 has setup, this is done at the outset)
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.
At Czech Point 101 we are prepared to assist you with either route in meeting the requirements and,
ultimately, help you to achieving a successful investment.
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