Is it worth investing in a rental house? Here's how you can calculate your return on investment (ROI) based on all costs!

Recently, it has become more than obvious that in a tourist country like Croatia, more and more people are looking at real estate as a way to earn extra money (but also as a hedge against inflation). In other words, the properties that are springing up along our coast are most often not designed as a family home, but as vacation homes to be rented out to tourists. And this does not surprise us - anyone who hears about someone else and how much they earn by renting out real estate will decide to do the same at the first opportunity. If my cousin Pero can get 10,000 euros a year, why can't I?

And here are the reasons why we decided to write this blog.

Pero may have a better location for the property. Pero may manage all the rentals himself and do the repairs himself. The size of Pero's house will not be the same as the size of your house. Pero may not have a swimming pool to maintain.

These are just some of the factors to consider when talking about investing in real estate. What if we don't take them? Just look at the search engines under the "Houses for sale" section and you will see how many people were disappointed with the income from real estate.

So read on and find out what factors you need to take into account (and why) and how to correctly calculate the return on investment!

For starters...

Regardless of whether you bought a house, are renovating it, or are building a new one from scratch, put all the costs down on paper. So, the price of a house is not just the "clean" one you see when you buy it. There is also the agency fee, the price of legal services, the cost of renovation, the cost of modifications.

Have you taken all of this into account? Then you have the first segment of this calculation.

Now we can move on to the second part.

povrat investicije
Photo: Saša Šekoranja

 

Location, location, location

There are some calculations that can give you the gross average income from a property, for example in Istria.

However, this income will not be the same for everyone. It is not the same if you have a property in Rovinj or Pazin! The coast has much higher prices, which is why building or buying a house there will be much more profitable than building or buying the same house inland (unless it is a tourist destination like Bale).

So, if cousin Pero is on the coast, and you are going to build a house 50 km inland, you cannot ask for the same rental prices as him. And your wallet will therefore remain thinner.

If you want to invest in a property that is not in the city itself, make sure that it is close to it. It is important for tourists to have a place where they can sit and have a coffee and do a big purchase.

DIY or let others take care of it?

Realistically, people who rent properties on our coast are often foreigners who do not actually live here permanently and who have built/bought the property for pure profit, and not so that they have to deal with it additionally. The same applies to Croatians for whom this is their second property and who, in addition to renting, deal with other things.

This means that all the work related to renting out a property will be taken over by agencies. This leads to several problems.

First of all, dealing with an agency and other service businesses means additional costs. The gross income of people who do not manage their own rental business can be as much as 50-60% lower than those who take care of everything themselves. Do you want guests? You pay a commission to an agency. Do you want cleaning? You pay a service to a cleaning business. Do you want to clean a pool? Pay someone to take care of it. Do you need to water and maintain plants? This costs money too! There are many things that are not taken into account when planning a rental property, and which will contribute to significantly lower income than that of cousin Pero who takes care of everything himself.

In addition, this depersonalized approach to renting often does not get good reviews. Tourists who come to Croatia want to be handed the keys by a smiling person, to be greeted with a delicious meal or a glass of local drink, and to see real people behind this facade of tourism.

And that's why the ideal solution for those who are unable to rent a property themselves is to hire a smaller, local agency and leave all the worries about the rental to them. Unlike those larger agencies that are a bit like corporations in their approach, these smaller local rental agencies still preserve what makes Croatian tourism special. They will make sure that your guests are welcomed with the warmth that once made us special, before the time of key boxes!

Photo: Saša Šekoranja

 

Size (of the house) matters

They say that less is more, and this is certainly true in the world of real estate. Why?

Large houses are harder to rent because rental properties are usually sought by couples or families, not large groups of people.

Large houses also have higher maintenance costs. This has become really important recently, when the cost of living, utilities and services has almost tripled.

And finally, large houses are harder to sell. If cousin Pero is selling his 112 m2 house, and you are selling your 312 m2 house, although they were in the same location and are the same year, Pero will sell his house “in no time”, while yours will remain on the offer of real estate agencies for a certain period of time. Let's be realistic, everyone who invests in real estate also thinks about selling it one day when the price of real estate increases. Smaller houses are a safe bet in this case.

However, just because you have a smaller house, does not mean that you cannot have all the desired amenities for tourists. You just have to make sure that it is in accordance with their wishes. For example, tourists are looking for amenities that are adapted to the youngest ones – children. If you are already planning to build a swimming pool, make sure that it is in the form of a beach pool, that is, that it has a slightly sloping entrance suitable for children (but also for the elderly and people with reduced mobility). Others will not care what it is anyway, the important thing is that it is a pool!

Photo: Saša Šekoranja

 

Appearance is important

When building a house, many people neglect the design. This is also a big mistake.

Along the Croatian coast, we will see numerous generic holiday homes or those with apartments that do not fit in with their surroundings. The truth, which may not be so appealing, but which everyone should hear, is that these properties will be rented by those who really do not care about the location and who only want to swim in the sea. Such properties ignore the region (in our case Istria) and all the wonderful tradition and history that it offers.

Therefore, if you are buying a property, let it be traditional stone. If you are already starting to build a house, hire an architect who knows how to achieve that “original touch”. This does not mean that you have to give up modern conveniences - there are numerous examples of wonderful renovations or new buildings that have both sheep and money, that is, both traditional and contemporary. A great example is the photos found in this blog, which show a beautiful property behind which Saša Šekoranja is standing.

With a house like this, you will achieve a higher rental price for the property because it will be rented by people who come for the regional story, and not (only) for the sun and sea. After all, they look much nicer!

Photo: Saša Šekoranja

 

What can we conclude?

Yes, there are many factors to consider when planning to build or buy a property for rental purposes. In addition to what we have mentioned, there are also costs that come from the state apparatus - while Croatians have the option of a flat rate, foreigners have a state tax that can be significantly more expensive.

Your cousin Pero probably sat down and put all the estimates and costs on paper, which is why he makes such good money from his property. There is a lot of money involved, both in terms of costs and potential earnings, so you shouldn't rush like a goose into the fog.

The most important thing is to take into account the items that vary the most in the price you can achieve with a rental, which are:

  • Location of the property
  • Design of the property
  • Service you will provide to tourists

For all other items, there is our table for calculating the return on investment!

Cost and income table - example

We know, we have just started this blog and now you probably have too many items to remember and worry about. However, that is why we have created a clear and simple table that you can use to plan your return on investment. It contains all the costs that you may encounter when renting a property, even those that you have not thought about.

We hope that it will be a good starting point for your further business plan, and you can download it at this link.

For any additional questions, as always, we are at your disposal.

P.S. Bratić Pero is a fictional character used only for the purpose of illustrating the issue of return on investment. Any similarity to real people is coincidental.