Investing in real estate in Poland has long been considered a stable, profitable venture, especially when leveraging rental income. In Poland, the real estate market has seen consistent growth in recent years, making it an attractive option for investors. However, before committing to a mortgage for a rental property, it is crucial to carefully consider the financial outcomes, including how quickly the investment will pay off. In this article, we will explore three scenarios for purchasing a flat with a 10%, 20%, and 30-year mortgage, using historical data on price appreciation and rental income growth to determine when the investment breaks even.
Key Assumptions
- Flat Purchase Price: 600,000 PLN
- Down Payment: 10% (60,000 PLN)
- Mortgage Interest Rate: 8% annually
- Monthly Rental Income: 2,500 PLN (increases by 6% annually)
- Rental Income Tax: 8.5%
- Property Value Growth: 6% annually
- Monthly Mortgage Payments:
- 10-year mortgage: 6,100 PLN
- 20-year mortgage: 4,100 PLN
- 30-year mortgage: 3,500 PLN
Scenario 1: 10-Year Mortgage
- Annual Rental Income (after tax):
In the first year, the rental income is 2,500 PLN/month or 30,000 PLN annually. After paying 8.5% rental income tax, the net annual rental income is 27,450 PLN. - Annual Mortgage Payments:
The monthly mortgage payment is 6,100 PLN, or 73,200 PLN annually. - Net Cost in Year 1:
The net cost in the first year (after accounting for rental income) is:
73,200 PLN – 27,450 PLN = 45,750 PLN - Property Value Growth:
The flat’s value increases by 6% annually. In the first year, the value grows by 36,000 PLN.
After accounting for property appreciation in the first year, the net cost is:
45,750 PLN – 36,000 PLN = 9,750 PLN loss.
- When Does the Investment Break Even?
Over time, the rental income increases by 6% each year, meaning that after 10 years, the total rental income earned will be significantly higher. By year 8, the rental income combined with property appreciation should offset the mortgage payments, leading to a breakeven point.
In this scenario, the investment is likely to break even around year 8.
Scenario 2: 20-Year Mortgage
- Annual Rental Income (after tax):
In the first year, the rental income is 27,450 PLN after tax, with the rental income increasing by 6% annually. - Annual Mortgage Payments:
The monthly mortgage payment is 4,100 PLN, or 49,200 PLN annually. - Net Cost in Year 1:
The net cost in the first year (after accounting for rental income) is:
49,200 PLN – 27,450 PLN = 21,750 PLN - Property Value Growth:
The property value increases by 36,000 PLN in the first year.
After accounting for property appreciation, the net cost is:
21,750 PLN – 36,000 PLN = 14,250 PLN profit.
- When Does the Investment Break Even?
With a 20-year mortgage, the rental income will continue to increase while the mortgage payment remains fixed. By year 12, the increasing rental income and property appreciation should allow the investor to fully cover all costs and start turning a profit.
In this scenario, the investment is expected to break even around year 12.
Scenario 3: 30-Year Mortgage
- Annual Rental Income (after tax):
The rental income is 27,450 PLN after tax in the first year, increasing by 6% annually. - Annual Mortgage Payments:
The monthly mortgage payment is 3,500 PLN, or 42,000 PLN annually. - Net Cost in Year 1:
The net cost in the first year (after accounting for rental income) is:
42,000 PLN – 27,450 PLN = 14,550 PLN - Property Value Growth:
The property value grows by 36,000 PLN in the first year.
After accounting for property appreciation, the net profit is:
14,550 PLN – 36,000 PLN = 21,450 PLN profit.
- When Does the Investment Break Even?
With lower monthly mortgage payments and growing rental income, the investment breaks even earlier compared to shorter mortgage terms. The rental income growth quickly catches up to the mortgage payments, and combined with property appreciation, the breakeven point is expected around year 6.
Cumulative Returns Over Time
As the mortgage is paid off in each scenario, the rental income continues to grow by 6% annually. By the time the mortgage is paid off in the 10-year scenario, the property’s value would have grown to approximately 1,073,000 PLN. For the 20-year mortgage, the property will be worth approximately 1,918,000 PLN at the end of the term, while the 30-year mortgage results in a property valued at around 3,431,000 PLN.
Which Mortgage Term Offers the Best Return?
- 10-Year Mortgage:
This option offers faster equity buildup, as the higher monthly payments mean you own the property outright much sooner. However, the monthly mortgage payments are significantly higher, making cash flow tighter for the first few years. The breakeven point occurs around year 8, and after 10 years, you own the property entirely and can collect rental income without any mortgage payments. - 20-Year Mortgage:
With lower monthly payments, the 20-year mortgage offers a more balanced cash flow. The breakeven point is delayed to year 12, but this option may offer better long-term flexibility, especially if the investor wants to avoid being cash-flow negative in the early years. - 30-Year Mortgage:
The lowest monthly payments make the 30-year mortgage the most comfortable option in terms of immediate cash flow. The breakeven point is reached earlier at year 6, thanks to lower costs and increasing rental income. While you’ll take longer to own the property outright, the lower monthly commitment allows for more cash to be used elsewhere.
Conclusion
Investing in a rental flat in Poland using a mortgage can be a highly profitable venture, especially with a consistent property value growth of 6% and increasing rental income. The choice between a 10, 20, or 30-year mortgage depends on your financial goals. The 30-year mortgage offers the earliest breakeven point, but the 10-year mortgage allows you to own the property outright sooner, providing a quicker route to building equity. Here you can find informations about how to buy a flat in Poland as a foreigner.
Each scenario provides a path to profitability, and the decision comes down to how quickly you want to pay off the mortgage versus how much flexibility you need in monthly payments.
