Investing in Romania Property - A "How To" Guide
The case for investing in Romania property has been stated clearly. Now we will explain how to go about it in clear, easy to understand steps.
As already mentioned, foreigners are allowed to purchase property in Romania, but when buying a property abroad it is best to factor in an extra 10–20% of the purchase price to cover costs, explained in detail below.
Most property investment in foreign markets involves the purchase of off-plan property - that is property bought before the development is complete.
First, the seller must provide:
- A fiscal certificate - confirming everything has been registered and paid to the authorities
- A title certificate - to confirm that the property is his to sell
Both buyer and seller then sign the contract in front of a Notary Public, which is then legalised and sent to the Land Registry.
Buying an off-plan property will involve paying a deposit and then either paying in installments during build time or a final payemnt on completion or handover.
Typically, the deposit is paid up front out of existing funds the buyer has or through a small loan, using a mortgage to pay the required installments or final payment only. Back in 2006 payment terms were around 20-30% deposit, 50-70% during the build period and 10% on delivery.
Terms have improved since then, and we are now seeing 25% up front with 75% on delivery (and in some cases even better). This means that there can be as much as two years before drawdown on a mortgage and first payment of interest on it.
It is important, however, for the buyer to have a mortgage in place in anticipation of these payments, as any delay could lead to missing contracted payments. The developer could then repossess the property and the buyer would lose any money already paid.
OBTAINING FINANCE
Since April 2006 foreign investors have been able to obtain finance in Romania. While terms were initially unattractive, the market has developed well and quickly. 85% Loan To Value is now available to foreigners and the number of providers continues to grow.
List of Romanian Mortgage Providers »
FEES & TAXATION
FEES
Outside of the purchase price of the Romania property there are a number of taxes, fees and other duties payable. Prudent investors allow 10–20% above the purchase price to cover these costs.
Sale and purchase of real estate are subject to notary fees and judicial stamp duty.
- Stamp duty is charged as a percentage of the value of the transaction (1–3%).
- Notary fees are around 0.5–1.5% of the transaction.
- Real Estate Agency fees are 3% to both buyer and seller.
TAXES
Value Added Tax has to be paid on the purchase of Romanian property . For new-build property this is charged at 19%.
Repayment of mortgages is subject to fixed or variable rates of interest and may be deductible for tax purposes.
In practice this means that when calculating UK income tax, the amount of interest paid on foreign mortgage repayment can be offset against taxation of rental income.
Income tax is payable at a flat rate of 16% in Romania. Double taxation agreements are in place with the UK enabling foreigners to pay tax once in their country of domicile.
Tax on rental income is 16%, but again this is subject to double taxation agreements.
Rental income is VAT exempt.
A building tax is payable to the local authorities. This amounts to between 0.25–1.5% of the transaction.
EXIT STRATEGY
It is always important when considering any kind of property investment to consider your exit strategy.
For example, in some cases investors can reassign the contract prior to completion. Known as "flipping", it means that an investor will cash in on capital growth before drawing on the mortgage and before the apartment has even been built.
This is not an advisable strategy because it incurs buying costs and selling costs within a short period of time and so reducing the return on investment (although there is no capital gains tax to pay in this scenario).
Most investors are looking for long term growth and draw on the mortgage to complete the purchase. The mortgage is then serviced through rental of the property. In this way the interest on the borrowing is paid while at the same time long term capital growth on the asset is realised.
But in order to realise capital growth the investor needs to plan an exit strategy. Consideration must be given by an investor as to the ease with which a property can be sold at the end of the investment period.
Important questions to ask include:
- Am I in this for the long term or the short term?
- What costs are involved in selling?
- Will the rental income be enough to cover the mortgage payments?
- Can I afford any negative cashflow?
The answers to those questions will determine your exit strategy, costs especially. Capital Gains Tax in Romania is subject to the same 16% flat rate, but double taxation treaties signed by Romania mean foreigners are liable to CGT only in their own country.
Selling criteria are the same in Eastern Europe as in other secure marketplaces; it turns on location and price. If the property is well placed and well priced then disposing of it will be no different than in the UK.