Eight percent rental income in Istanbul. Sounds amazing, doesn’t it? In a city where rental income sits around 5% of property value, 8% guaranteed rental income is a good prospect, right?
Wrong. The old adage, if it seems too good to be true, it probably is, is a well worn cliche for a reason.
Smoke and mirrors
Property Turkey director Cameron Deggin says the Istanbul property market can be a confusing landscape to new buyers. The vast, heavily populated city is awash with Istanbul apartments and villas: real estate of varying prices and qualities, making it difficult to distinguish good deals from bad. Into this mix step companies keen to take advantage of new, undiscerning buyers, bombarding them with incredible sounding deals: low prices, high rental income.
“These companies are slick,” says Deggin. “They know their client base, and they play on their clients’ desires to own property in Istanbul. They package their deals so well that some naive investors will inevitably get caught.”
These private developers offer:
- Low entry price
- Ongoing assured rental income
- A solid exit strategy - the ability to sell on with a profit.
Deggin cites a project that recently came on the market as an example: a large university apartment complex in western Istanbul where developers are offering a 8% guaranteed rental income for five years.
“While the marketing material is polished and these companies can be convincing, these great deals are simply smoke and mirrors,” he says.
In the case of the university project mentioned above, the genuine rental income will be around 4.5%, just short of the 5% Istanbul average, Deggin says.
“These are students, they won’t be paying much in rent. So how do you get 8% rental income from tenants paying only 4.5%? Who is paying the difference of 3.5% for five years - a total of 17.5%?”
The answer, he explains, is the buyer. You.
“The developer takes your money and gives it back to you as 'rent'. In the industry we call this 'cash back' and it is a very well known gimmick. The naive buyer thinks he is getting excellent rent, however, he’s simply paying himself back.”
“In big cities like Istanbul rental returns are similar to London and New York, sitting around the 5% mark. If anyone offers you 8% rental guarantee then you should immediately know that it's a gimmick. There is no such thing when you invest in Turkey.”
Do the math
Projects like these require around a 35% down payment, Deggin says.
“Look at the sums: half of 35% is 17.5%. In other words, with the down payment you’re making, half of it goes into a pot to be paid back to you - topping up that rental income to reach that 8% figure. The rest stays with the developer.”
“In other words, you’re overpaying by at least 17.5%. These projects will not gain this in value in the next five years - that is, if the project is even approved for construction.
What’s more, the purchase price is inflated hugely.
“So when he comes to sell it, the buyer will not even get what he paid for it. The investor is being tricked into expecting excellent returns, when in fact he is shooting himself in the foot.”
As a long-time industry and finance expert Deggin has seen many such examples of these schemes selling Turkey apartments. Two recent projects that popped up on his radar include:
- A project in Esenyurt that offered a 10% rental guarantee several years ago. The offer has now been withdrawn, and the project has missed three completion deadlines.
- Several student accommodation developments in Western Istanbul are offering 8-10% rental guarantee on projects whose permits have not even been obtained.
Deggin adds that build quality on these projects is low, allowing developers to reduce costs and increase their profits.
“And leaving aside the rental guarantee aspect, the fact is these projects are all-round risky. They suffer from poor cash flow and there’s a high chance they’ll never see completion. Many don’t even have building permits.”
He warns unless a project is underwritten by a well known international bank potential investors should steer clear.
“Just remember that if a deal seems too good to be true, it usually is. Go with a reputable agent and established developer.”
As a long-time veteran of the Istanbul real estate market, Deggin adds that he’s willing to speak with any prospective buyers unsure of whether the development they’re eyeing up is above board.
“I’ve seen buyers fall for this type of deal far too many times. Don’t let it happen to you.”
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