Foreign Buyers' Czech Real Estate FAQ
Investing in a Prague property from outside the country? Here's how to avoid the pitfalls and strike the best possible deal
If you're serious about reducing exposure to currency risk, we normally recommend setting up a forward contract with a currency risk firm. Forward contracts usually guarantee up to two years at a set exchange rate.
If you want to finance your property via a mortgage, the best option would be to have the loan paid in the domestic currency (Czech crowns). By doing this, because you'll be collecting rent in domestic currency, you can reduce exposure to any fluctuations in the exchange rate. (This is unlikely anyway - the Czech crown has been stable against foreign currencies for some time.)
Note: With a forward contract, while you may be able to secure a set rate for two years, it could end up costing you more money than you save. A substantial inflow of Foreign Direct Investment over the past few years looks set to sustain long-term economic growth, meaning that the crown is likely to remain strong.
What kind of taxes would be involved in a residential property purchase in the Czech Republic?
A seller must pay a property transfer tax. This is 3% of the sale price.
Under current Czech legislation there's no involuntary VAT (DPH) on rental income. If a client wants to reclaim VAT, however, they must also pay it. The current rate is 19%.
If you're buying a property through a limited company (s.r.o.), there's no VAT on capital gains, since any such gain would be taxed at the prevailing corporate tax rate.
The corporate tax on capital gains (currently 26% but dropping to 24% by 2006) is unavoidable. There is pressure to further lower corporate tax rates, however, in years to come.
A treaty between the Czech Republic and the United Kingdom prevents double taxation. The withholding tax for UK residents is 5%.
What are the typical real estate agent fees?
A real estate agent typically charges between 2.5% and 5% and is almost always paid by the seller.
Can I purchase property directly?
In order to purchase property you must set up a limited liability company (s.r.o.) or have a long-term resident visa (one lasting five years or more).
I know I can only buy property in the Czech Republic by setting up a property holding vehicle or by acquiring a Czech s.r.o but can such a company get a mortgage?
Yes, but your s.r.o. must be a single-purpose company established only to acquire and maintain real estate. It cannot engage in any other business.
What if I decide to buy a flat privately? Can I save money?
You could save money by purchasing property independently, but you'd need to spend a substantial amount of time teaching yourself about Czech taxation, company formation regulations, and other legal regulations. You'd also have to spend a lot of time searching through Czech-language publications for property deals and overcoming other language barriers.
Saving money is one thing, but if you want to go it alone, you'll have to overcome plenty of other barriers on the way to buying your property.
Am I too late to buy property in Prague? I hate being the last one in!
The statistics suggest that there will be strong growth in the residential property market for some years to come. Property in neighborhoods adjacent to the center (where 3,000 euros per square meter is a typical price) can be cost as little as 1200 euros per square meter (p/m2) with a price differential of 1800 euros. There is, therefore, certainly plenty of room for strong growth.
What are the most popular locations for European tenants? And where are Prague's International schools located?
The most popular area for European residents would be "the closer the center the better," meaning Malá Strana, Staré Město (Old Town) or Nové Město (New Town). There are, however, many other beautiful parts of Prague, and some of the best deals are to be found in areas adjacent to the center.
The city's main English-language international schools are in Prague 6-Nebušice and Prague 4-Podolí.
What capital growth and rental yields would I get on a property investment?
The market average for gross rental income was 7.7 percent in 2004, but with wisely chosen investment strategies, it's not hard to beat the market. Capital growth was around 12% last year (2004). This is expected to be around 8-10% in 2005 but it's possible to target high-growth areas and beat these estimates.
Investing in a foreign property is a bold step. How can I be sure that I won't lose all my money?
Making an investment in a foreign country is a bold step, which is why it's always wise to be as well informed as possible. With thorough research and some local knowledge, you should be able to find the best deals and avoid pitfalls.
The Czech Republic joined the European Union (EU) in May 2004 and has overhauled its legal, financial and regulatory systems to meet EU standards. Thanks to EU membership, the potential effect of political issues on the Czech currency and economy is very limited. So while, there is always an element of uncertainty to any investment, these measures should significantly reduce the risk associated with your investment.
I'm not a millionaire yet, and only have limited funds to invest. Can I get a mortgage in the Czech Republic?
Yes, but there are capital (monetary) restrictions. When it comes to foreign buyers, banks want to reduce their exposure to risk, so you'll most likely have to put down 10-30% of the property value.
I've heard that dealing with Czech bureaucracy and breaking through the language barrier are agonizing processes. Should I start taking language courses?
Most local agents, lawyers and brokers tend to be bi-lingual, speaking both Czech and English. On the other hand, Czech language skills make it possible to strike great deals with people who only speak Czech.
I hear there are good areas and bad areas. What neighborhoods should I buy into?
It depends on what kind of investment you're planning. If you're looking to rent long-term to the local market you should focus on neighborhoods adjacent to the center. Because of strong price differentials, buyers are often able to find some great deals. Hot properties tend to go quickly, though - they're rarely on the market for more than a month, and can often be snapped up within 24 hours.
Foreign buyers tend to look for properties in Prague 1 and Prague 2, but long-term renting yields there are very low. Short-term letting to tourists can provide much higher yields, but it's more cyclical, and can be vulnerable to downswings in the tourism economy.
Vinohrady (straddling Prague 2 and Prague 3), Prague 6-Bubeneč and Prague 8-Karlín are hotspots at the moment.
I've heard that I can 3,000 euros renting to the local market. Is this true?
It's true, but you may have to spend a lot of money, and your rental yield will be very low - possibly as low as 2-3% gross yield.
You should target one-to-two bedroom properties, in the middle-income-to-working-class market, aiming to rent to a young corporate couple who are planning to start a family and to buy an apartment of their own some day.
Rental income has upward friction starting at around 700 euros. Once you break the friction point, your vacancy risk will increase.
I've seen adverts for Prague developments in British newspapers that offer 10-30% discounts. How do these prices compare to adjacent projects?
In order to determine how generous a discount really is, you need to check it against comparable market prices. Even with a "30% discount," the price of a property can sometimes equal the list price for an adjacent property. Be wary of buy-to-let marketing schemes in the UK - many are sound and reputable but some are looking to take foreign buyers for a ride. Your best bet is to team up with local advisors or agents.
Can I trust Czech real estate brokers, Czech banks and Czech lawyers?
Real estate brokers and lawyers are the same in pretty much every part of the world - some are good and some are bad. In most cases, agencies and lawyers are reliable and reputable. If in doubt, choose one of the higher profile firms.
Most local banks are now foreign-owned, and generally quite safe. If you want to be absolutely certain, though, you should stick with a multinational bank.
Should I sign a property purchase contract if it's only written in Czech?
Be very careful about signing any contract that you can't read. It may not cost that much to have the document translated and, for extra security, notarized. Always have a lawyer read over the contract and offer you their professional advice.
Friends have told me to watch out for co-op ownership housing. What should I know?
You should listen to your friend. Co-op ownership allows you to have ownership in a building but only in the form of a stock, and not direct title ownership. This makes it virtually impossible to get a mortgage for your property. Don't sign a purchase contract for a co-op-owned property unless you intend to pay cash. Also, be aware that if you do buy into a co-op, you'll have to abide by the building's rules and regulations.
I've found a great-looking apartment for sale. The developer tells me that they'll install an elevator, underground parking, a new roof, but this reconstruction work hasn't been completed. Should I buy?
Be sure to have this work included in the contract, and perhaps even keep some of the purchase money in escrow so that the developer pays a penalty if the work isn't completed within a year. Any promises that a developer makes about construction work should always be included in the contract. Never rely on good faith - even in your home country - because it isn't legally binding.
What happens if the developer I buy from goes bankrupt?
This isn't a common occurrence in the Czech Republic, since many developers use their own money to fund the reconstruction of a building. If, however, bankruptcy is an issue that worries you, keep your money in an escrow account for safety. Also, be cautious of foreign developers entering the market who don't understand the Czech planning and zoning bureaucracy.
This article is for information purposes only. Please seek professional advice before making any major decisions.
Marcus Fuchs is the senior economist at Property in Prague, s.r.o.
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