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Why Rental Property Is a Better Bet than Farmland

There has been much hype in the news lately about investing in farmland. Reportedly it is a favorite investment choice among Czech and Slovak millionaires. Investment funds has also been gobbling it up and promoting it.

Agreeably, farmland has gained in price right through a recession that hit all other types of property investment. Jaroslav Urban, director of the land sale website farmy.cz, claims that farmland has been increasing in price at an average of 10% per year.

Should an investor looking now for opportunities consider buying farmland as opposed to a rental property?

 

The price of Czech farmland has reportedly been increasing at 10% per year.

From 2009 to 2013 we saw falling prices as the downward part of a real estate cycle. Since then we have started to see growth. This year we will, by indications thus far, see growth in the price of apartments of 3 to 4%.

ROI on Agricultural Land over 5 years

Farmy.cz says that an average price for agricultural land right now in Czech Republic is 144,000 CZK per hectare. The average rent price for a hectare in 2012 was between 1400 CZK to 1700 CZK per year. So this gives a gross rental yield of 1.2%, counting with the highest achievable rent.

Based on our research, unless you are an existing farmer, you will most likely be buying agricultural land for cash. Average investors aren’t able to get mortgages for agricultural land.

So over a five year period at 10% growth per year of both land prices and rent prices a person could expect to achieve a total return on investment of 63% or a 10.3% CAGR (compound annual growth rate).

ROI on Rental Investment Property over 5 years

The big advantage of rental property is that the bank will lend you money to buy it, meaning you can leverage your investment.

Let’s be very pessimistic about property and say that property prices now increased at an average of 1% per year and rents didn’t increase. We will calculate with a 5% vacancy in your apartment and you have a property management company handle everything about the property.

With the same investment of around 144,000 CZK into a rental apartment you would have a total return on investment of 128% or a CAGR of 18%. Here are the numbers. These rents and numbers are currently easily achievable in Ostrava.

But, you might argue, I don’t want to invest in Ostrava, I want to invest in Prague.

Well, you’d need a little bit more money to get started but with very achievable numbers for Prague and a 1% price increase per year you could have a total ROI over 5 years of 74% or 12% CAGR. With a 2% apartment price increase per year you would be looking at a total return after 5 years of 110% with a 16% CAGR. Here are the numbers.

Conclusions
1. Don’t follow investment trends unless you do the research and crunch the numbers.
2. Leverage is extremely powerful and when applied to solid investments, gives you incredible returns.  


by Nathan Brown (Google+) - nathan@czechpoint101.com - owner and managing director of Czech Point 101  - "You’re in good hands whether buying, selling or managing property in the Czech Republic."       

 
 
 
 
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