Real estate: five rules for investing in Irish property

Irish real estate enjoyed a strong 2021 and this has carried into 2022. While many people may be looking to invest in it now as a result, there are some rules that should be followed to ensure it is successful.

In 2021, the Irish economy bounced back strongly from the ravages of the COVID-19 pandemic, posting 3% growth, the only positive numbers in the European Union. As part of this, the real estate investment market also kick-started again, having ground almost to a halt during the pandemic lockdowns.

In all, €5.5 billion was invested in the Irish real estate during 2021, of which 41% was invested in residential, 30% in offices, 18% in industrial & logistics and 6% in retail, according to research by CBRE Research.

The uptick in the Irish real estate market is anticipated to continue during 2022, although it is thought that it will be 2023 by the time volumes return to pre-pandemic levels. It is also anticipated that there will be a greater focus on the sustainability of real estate during the course of this year, with interest in insulation, energy-efficient heating and lighting etc.

Many people see investing in real estate as a relatively safe form of investment over the medium- to long-term, often giving solid returns if the estate is rented out, while the total asset often accrues in value over time and will deliver a worthwhile profit when sold. This applies when investing in domestic property, such as houses and blocks of flats, or commercial property, such as offices and warehousing.

Nevertheless, there are pitfalls to investing in property and there are some general rules that real estate investors should stick to if they want to do everything they can to ensure that their investment does make money for them in the short-, medium- and long-term.

This article outlines some rules for investors to think about before taking the plunge and making the deal – whether it is for commercial or residential properties or any other form of real estate.

Location is key

This may sound obvious, but the location of the property you are investing in is paramount, and time should be taken to investigate the area a building is in before deciding to purchase. You should, wherever possible, invest in prosperous areas, rather than sub-grade locations. There are good reasons for this; sub-grade locations tend to have higher maintenance costs, property management expenses and vacancy rates – as well as lower rental incomes. There is also greater demand from tenants for buildings in more prosperous locations. However, there are plenty of attractive areas to invest in in Ireland, from the capital, Dublin – which is, understandably, the costliest in terms of property cost – right across the country. Many cities have prosperous areas, whether you want to invest in residential, commercial or other forms of property.

Do your due diligence

Allied to the location rule, research prior to making an investment is crucial. Effective due diligence can highlight all sorts of problems with a building or buildings that may not be visible on an initial viewing, so it is important to ensure that it is as thorough as possible. While this may bring additional costs, up front due diligence can save a lot of problems – and much greater expenses – later down the line if it discovers an issue.

Due diligence can also highlight problems that might not appear obvious. Even things like weeds can create problems, if they are the wrong sort that can run rampant and affect a building’s structure if left unchecked.

In addition, the old adage that if a deal looks too good to be true it is, holds true. If the owner is looking to sell and the price seems cheap for what it is – then beware. While the chances are there is nothing seriously wrong with a building, if there is, then is can be ruinous.

Buy for cash flow from the off

If you are buying a building, you will want it to be cash generative as soon as the deal has completed. Look for those that are mostly occupied already – or if it is a new build, where there are commitments in place for new tenants – so that it will be cash generative from the start net of mortgage payments and all other expenses that owners incur.

Moreover, look at how much rent is being brought in and whether rent levels are at market value and comparative with similar properties in the area. There could be potential to increase rent levels, or to renovate and then raise the rent level.

If the building, when bought, isn’t generating cash, then you will need to ensure that you can stand any losses for a potentially significant period of time. A strategy that assumes tenants can be brought in, or the property can be renovated and then sold on quickly, is risky: if it doesn’t go according to plan can leave an investor paying bills and making a loss for a significant time.

Be aware of taxes

Tax always has to be a consideration, and there are various rules investors – domestic and foreign – need to be aware for. For instance, stamp duty must be paid on real estate acquisitions, which ranges from 1-7.5%, depending on the type of property being purchased and the price of it, with few exceptions. VAT of 13.5% may also be chargeable as well as the purchase cost in certain circumstances.

Once the deal has been completed, there are also registration fees involved with registering the property and the new owner with the Property Registration Authority. How much this costs depends on the form of property that has been acquired.

If a residential property has been acquired, the owner must pay property tax. Importantly, this cannot be passed onto a tenant. In a commercial property, the owner has to pay rates to the local authority, but in this case the cost can be passed onto an occupier.

Foreign investors can also take advantage of tax saving structures. For instance, if the investor is seeking to rent the property, then it could pay for them to set up a Real Estate Investment Trust (REIT) – subject to meeting certain conditions – as REITs do not have to pay corporation tax on the income and gains made from a rental property business.

Get advice

As this article has shown, investing in real estate in Ireland can be profitable. But the financial aspects can be complicated for investors, so it is always worth seeking advice from those with specialist knowledge of the real estate sector in Ireland – including its legal structure, history and local norms.

Malone & Co Accountants https://www.maloneaccountants.ie/ can assist on all the relevant aspects of real estate investment as well as anything from setting up a company and ensuring it is as tax efficient as possible to providing diligence services as part of an M&A deal or funding round in the sector. We can also provide in-depth information to ensure any deal achieves the value hoped for at the outset. Remember, while Ireland may share a land border with the UK, the regulatory regimes can be quite different, which can trip up unwary investors.