Dubai: is it attractive investment BUY-TO-LET?
One of the most attractive investment option is buying an apartment using loan facility for the purpose of its subsequent leasing and covering the loan through repayments.
Is the option available in Dubai? It is viable option under certain conditions.
Let’s consider an example from the Dubai property market. The investor is considering the purchase of a one-bedroom apartment (and living room) in Jumeirah Beach Residence for AED 1 million. Omitting the incidental travel costs, the direct transaction costs are approximately AED 1,064,780.
Additionally the preparation of the apartment to rent out will be:
- Renovation, AED 10,000
- Connection to utilities (refundable deposits) – AED 4,400.
Thus the initial direct costs would be AED 1,079,180.
The optimistic forecast of the annual expenditures (optimistic forecast because we consider only Service Fee) is AED 18,000. Thus, long-term lease is AED 70,000.
Option 1. Investment in apartment is 100% using own funds
Thus, the annual return on investment will be:
70,000-18,000
ROI = ------------------------- = 4.82%
1,079,180
This is normal return for a premium area.
If the investor manages to find an apartment at a stressful price, then the rate of return will be higher.
For example, if you buy at a price of AED 800,000 (such options also appear on the market), the return will be about 6.03%.
Option 2. Purchase the apartment by taking the loan.
We will assume that the loan is issued for 15 years with an annual interest rate of 4%. Consider the base case, when the investor is not a resident of Dubai and is forced to invest 50% of his own funds.
Based on the above conditions, the monthly payment will be about AED 3,800, per year - AED 45,600.
Thus the annual return on the investment (AED 500,000) will be:
70,000-18,000-45,600
ROI = -------------------------------- = 1.10%
579,180
Of course, the loan will be repaid with monthly payments, but the 1.1% return on investment (AED 500,000) is not attractive.
Additionally when the market is down, the market price may fall below AED 63,000, which will require the investor to cover monthly expenses related with part of the loan. In general, this is happening during the market downturn or pandemic.
A typical situation for Dubai is when the investor can not cover the loan at the expense of the income from the apartment and is forced to constantly re-invest, eventually realizes that it is better to sell with losses, which he does.
SOLUTIONS
Additionally to the obvious decision to purchase unit or apartment using the loan only significantly below the market, you need to look for options to increase the value (income) of the apartment.
One of these options is investing in apartments for the purpose of leasing them out to tourists on daily basis.
Then the income in the optimistic version after deducting all the expenses can sum to AED 120,000:
120,000-18,000-45,600
ROI = -------------------------------- = 9.73%
579,180
And it's after the repayment of the loan. In the real situation, the return on investment of personal investment is about 5%.
