Straight Talk: Should I Invest in Istanbul property with guaranteed rental income?

Not all real estate is created equal. And it's scattered on a landscape laid with traps for new investors: like rental guarantee schemes. Separating a doozy from a dud is a matter of experience, says Property Turkey director Cameron Deggin. "There are many seemingly viable investment opportunities, but when you look at them only a small proportion of them make up what I would call a viable investment."

Three simple points

Deggin can distill his criteria into three simple points:

  1. Buy below market value: "It's so important to factor in for your profit."

  2. Stable income: "You need a stable income stream during the period of asset ownership: that’s the rental income from your investment."

  3. Exit strategy: "This is the most important one, and one that is often overlooked by investors."

How do you ensure a good exit strategy?

Whether you’ve made 10, 20 or even 50% capital gains: your investment value is only as good as your exit strategy, Deggin says. “You will need to be able to sell your property, collect your profits and go home. Otherwise it’s all paper profits, it's not real: it only becomes realised cash in your pocket if and when you manage to sell the property at the price that you're hoping to sell it.”

Deggin turns to Istanbul to give an example. 

“What foreign investors need to understand is that 95% of real estate transactions in Istanbul are among Turkish people,” he says. That means that the 5% of overseas investors buying Istanbul property have a large market available to them that they can tap into for their exit strategy.

“Statistically speaking, when you're investing in real estate in Istanbul you have a 95% chance of selling to a Turk. So this means when you are investing you need to have the Turkish buyer in mind.”

Deggin recommends prospective buyers look at what Turkish buyers are attracted to.

“What makes a good home for them?”

To know that, you have to know the demographics of the city and understand and appreciate that Turkish people will have different sets of rules when they're buying their homes, he says. “So if you’re an investor from South Africa or China or from the Middle East, and coming into Istanbul with a mindset of what makes a good investment, or what makes a good home, you need to test those assertions, because the dynamics in Istanbul are not the same as dynamics in Dubai.”

Istanbul’s dynamic and ever-growing population has an insatiable appetite for property, Deggin says. Choosing the right property, one that appeals to the domestic market, means an assured exit strategy.

Busting the rental guarantee myth

To boost their desirability, a number of real estate companies dangle an enticing carrot in front of investors: the rental guarantee, Deggin says. But how legitimate is the claim that your rental will attract renters, and earn you a good income?

“I'm not going to make a sweeping statement and say it's definitely a gimmick, but I will tell you from my experience over the past 10 to 15 years that I have seen many such claims.” He explains that agents will offer this plan on a project that is off-plan or under construction, telling investors they are guaranteed 6 to 10% rental income as many as 10 years.

However, this is smoke and mirrors, Deggin says. “When you go and talk to the developers of these properties of these real estate projects you’ll find the developers do not provide a rental guarantee.”

So what’s happening? Where is this rental income coming from? "It’s simply a cashback scheme", Deggin explains.

He gives an example of a property with a 10% rental guarantee.

Let’s say your property’s market value is $70,000. The seller will inflate that price to $100,000. Then, over three years, they will give you a rental guarantee of 10% per annum, Deggin says. "So they’re taking the $30,000 and giving you $10,000 each year. It's basically a setup, it's a cashback: they are giving your money back to you.”

The real problem will come when you want to sell, he says.

If you’ve bought your property for an inflated price, when you come to sell it after three years it will have only appreciated from its market value of $70,000 - not the price you paid.

Which means zero capital gains, Deggin explains.

“What they're doing is they are taking your future profits that you're going to have as capital appreciation and they are giving it back to you as rental guarantee.”

There's a better way

To counter the what-not-to-do example, Deggin maps out a better investment route. He takes the example of a property bought at $100,000, slightly below market value, with a more realistic rental of 6%. 

“That is realistic in Istanbul, in fact it's on a high side. 6% each year gives you $18,000 rental income altogether.”

Then, there's capital gains. Assuming your property appreciates at 7% each year, after three years, the capital gains and rental income amount to $138,000, almost 40% return on investment. “That’s what a smart investor can easily achieve in Istanbul under today's market conditions,” Deggin says.

For more information, contact [email protected].

Click here for more Straight Talk with Cameron Deggin.


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