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July 29th, 2016

Planning on purchasing a flat? If you make the right moves, you can hit big bucks – Part three

Due to the differences between the levels of expenses, the incomes of the two different lease types are much closer before taxation even with an occupation rate higher than 80%, and if vacancies reach up to 40%, the pre-taxation incomes of long-term leasing can even surpass that of its short-term counterpart. If the owner only runs one housing as a hotel flat, the taxation is much more favourable in case of short-term leasing: a 32 000 HUF tax has to be paid by the owner annually, per room.

In case of long-term leasing, the owner also has to pay personal income tax, and if their incomes are greater than one million Forints, they also have to pay a yearly healthcare contribution. As demonstrated, the differences between taxation increase the differences between the two leasing types. However, if the owner runs more than one property as flat hotels, these differences disappear, as in this case they also have to pay both personal income tax and healthcare contribution – which greatly decreases post-taxation incomes. 

With the lease of a property situated at a premium location in district V. – calculating with a real selling value, 80% occupancy rates and accommodation fees –, a return of up to 6% can be achieved short-term, while the same number is only 3% in case of long-term leasing. Total returns can reach as much as 7% in case of the property described above if we take into account a possible future valuation around 1% (in the same manner, total returns can only go up to 4% long-term). Thus, the difference is significant, but the 3% gap also includes the amount of extra work necessary to provide accommodation services.

It’s also important to note that the property used as an example can be found at an exceptionally favourable location, which also makes its 80% occupancy rate an outstanding result. A worse location grants a lesser income, which also brings the achievable returns of long and short-term leasing closer. Risks of short-term leasing are well demonstrated by the fact that if the housing’s vacancy is at 40%, total returns can drop to only 4.5%, which only barely surpasses that of long-term leasing, making it unable to cover the owner’s extra work invested.

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Parameters of the model:

  • The flat has an area of 68 m2 and can be found at a popular part of district V. It consists of two apartments.
  • According to the advertisement, the flat costs 48 million HUF (with a 5% bargain margin).
  • Duties and retainers cost 4+1%.
  • On a short term, the property can be leased for approximately 19 000 Forints per night.
  • The flat hotel works at an occupancy rate of 80% (we also examined the 60% rate).
  • On a long term, the apartments can be leased for 300 000 HUF per month – averagely, the property is rented for 10 months a year.
  • When providing accommodation service, referral fees cost 10%, municipal taxes cost 1500 HUF per m2, while tourist tax is 4% of the incomes.
  • The amortisation rate is 2% in both cases (both housing and furniture).
  • In the case of accommodation services, overhead expenses averagely cost 60 000 HUF monthy. (Common charges, water, gas, electricity, garbage disposal, Internet and television subscription.)
  • Short-term leasing only involves a single flat, which results in a personal income tax of 32 000 Forints per room.
  • Long-term leasing results in a personal income tax of 15%, while health contribution equals 14% of the incomes.
  • We calculated with a yearly price rise of 1%.

 

(Source:  http://www.portfolio.hu/)

 

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