Investment Property in Bulgaria

Bulgaria Proves to be a Favorite With European Property Investors.

Property is today’s preferred financial investment. The Stock Market has traditionally offered high returns but today it proves to be a highly volatile market. When compared to the relative stability of many worldwide property markets, under performing stock markets are becoming less popular among investors. It is interesting to note that 50% of all members of The Times Rich List made their fortunes through property investments.

Property has therefore become the wise investor’s weapon of choice. Remember that no other investment allows you to purchase and sell using other peoples’ money, ie. the bank’s money. Meanwhile the property is often paid for by rental income from holiday makers or tenants, leaving the investor largely free of personal expenditure.

Shrewd investors regard property as a product rather than an emotional preference. With adequate due diligence, property can be selected and used as a successful investment vehicle, whether this is in the form of a re-assignable contract option from an off-plan investment or a buy-to-let situation to generate reliable rental income. Whatever your strategy, property chosen in the right location can generate substantial capital appreciation.

Equity release is a popular option allowing you to release funds against a property you already own. Experience shows that property in good condition and located in the right area will see an increase in value each year, eg. a property worth just €4,000 30 years ago, today would be worth around €225,000.

Why Invest in Bulgarian Property?

Bulgaria is an exciting emerging market and currently offers property at prices simply unobtainable in other areas of the world. With prices steadily rising and set to continue to do so for some time, wise property investment in Bulgaria promises excellent returns on investment. Purchasers are snapping up bargains now, with a view to enjoying excellent returns on investment in the near future. With an increase in tourism of 50% between 2000 and 2004, Bulgaria has established itself with the fastest growing tourist trade in Europe and this, in turn, is steadily driving property prices upwards. Tourism concentrates mainly on the Black Sea Coast resorts and increasingly popular ski locations and it is creating a very stable buy-to-let environment for investors. Bulgaria is a new member of the EU.  Traditionally new EU countries experience steep increases in property values and tourism from other EU nations, and have upgraded  their infrastructures and economic structures to EU standards. Bulgaria has come a long way since its former Communist days and today has a stable government  committed to economic reform. Now a modern, strong and rapidly growing country, Bulgaria is recognized for  its promise on the international market with  GDP growth reaching the highest in Eastern Europe (Institute of International Finance) at 6% for 2005/2006. With warm weather and stunning blue flag beaches as well as beautiful countryside,and modern, vibrant cities Bulgaria has something to offer everyone. Close proximity to Europe and increased low cost airlines offering direct routes to Bulgaria from many UK and other European airports, make Bulgaria easily accessible and a viable property location for investors and property purchasers alike.

Natural and Cultural Factors

• 11 "Blue Flag" beaches along 354 km of Black Sea Coast
• 37,500 km hiking paths and mountain trails
• Roman, Greek and Thracian historical attractions, which includes nine UNESCO world heritage sites
• Top ski resorts with latest equipment - See Bulgaria ski resorts
• Modern, vibrant city of Sofia, steeped in history and bustling with 21st century commercialism. See Sofia city property investment
• Budget air services and short direct flight times from Europe.
• Borders with Greece, Macedonia, Romania, Serbia and Montenegro and Turkey
• Low population density
• Average air temperature on Black Sea Coast in summer is 27°C and the average water temperature is 22°C
• Over 500 mineral springs, some with world-class spa facilities

Economic Factors

1. Early stages of development in Bulgaria make it an ideal time to invest.
2. Huge tourism growth, with figures up by 20% in 2006 compared to the previous year
3. The World Tourism Organisation predicts Bulgaria to welcome in excess of 20 million tourists by 2020.
4. EU member with stable government, committed to further economic reform.
5. Large amounts of ongoing foreign direct investment.
6. Excellent property prices and growth potential compared with most other European locations.
7. Widely considered as one of the most rapidly advancing European countries.
8. Property construction now puts emphasis on high quality design and build with minimal environmental effect.
9. According to the Institute of International Finance, GDP growth is expected to be highest in Eastern Europe at 6% for 2005/2006.

Logistical Factors

Increased international flight routes to Bulgarian airports were opened last year, and all foreign carriers operate from Sofia Airport's new Terminal 2 which opened in March 2007. This increased accessibility has encouraged more flights to arrive into Bulgaria and had a significant positive effect on the tourist and property markets.

Bulgaria is only a short 2 ½ to 3 hour flight from the UK and other European locations. Direct scheduled flights with British Airways and Bulgarian Air operate to Sofia all year round. Direct charter flights to Varna and Bourgas on the Black Sea coast run from April to October.

Flights arrive at one of four international airports: Sofia (SOF), the largest of the airports, Varna (VAR), Plovdiv (PDV) for charter flights to the ski resort of Pomparovo, and Bourgas (BOJ) for domestic flights and for summer charter flights to the Black Sea resorts.

Road travel has been greatly modernized in readiness for entry to the EU which took place in January 2007 and huge investment has gone into improvements, in line with the general development of the country's infrastructure. Getting to your destination should be easy and road conditions will be fair.

Land for Development/Project Sourcing

Bulgarian land purchase gives investors a prime opportunity to gain maximum returns on investment. Propertyshowrooms.com work with a close network of developers, land owners and agents alike to establish a carefully vetted list of sources and contacts which allows us to find our clients the very best options available today. Should you so require, we will also assist you to set up joint venture opportunities in Bulgaria and implement investment strategies with the help of our trusted network of professionals.

An improvement in the worldwide property investment climate now allows us to identify many large-scale individual investors and investment consortium's who wish to take advantage of the current hot investment locations in Bulgaria.

Investment Property Buying Process in Bulgaria

This is uncomplicated and much the same as the process in the rest of Europe.

Research to find the right location to suit your needs and find a desirable property at the right price. Negotiate. It is quite normal to for some price negotiation to take place. You make a verbal agreement to purchase and sign a Preliminary Contract, including a 10% deposit payment for the property. This removes the property from the market. The 10% is only refundable if the vendor pulls out of the sale. The lawyer´s fee for drawing up the contract is approximately 150 euros. The Lawyer (who will often represent both purchaser and vendor) checks that all municipal costs and paperwork are in order, prior to the day of completion, which is often within 3 weeks. The Notary deed is signed before the public notary and both the owner and the purchaser are present. The purchaser pays the balance of the purchase price, along with the notary fee, which is around 5%, depending on the declared value of the property. The Notary then registers the transaction in the Real Estate Registry in order to make the purchaser's title deeds defendable against third parties. You are now the proud owner of a property in Bulgaria. Don´t forget to insure it just as you would any of your other properties at home or abroad.

Approximate Fee Percentages

2% Stamp duty. 3-6% Estate agency commission. 5% Notary fees. 10% In ski resorts to cover agency and legal fees, but not stamp duty. 12% Land purchases to cover formation of Limited company.

Running Costs

The running costs associated with a property in Bulgaria are much lower, compared to those in other European countries. The owner of a property pays an annual property tax, which is 0.15% of the declared value of the property. In addition, owners pay waste-collection fees, public lighting etc.which are also minor expenses compared to in other countries.

In residential developments, the owner may pay a fee per year or a community charge for 24-hour security, cleaning, swimming pool, gardening, insurance, etc.

Mortgages

Mortgages are now available for property purchase in Bulgaria. Their typical interest rates are variable and around 7% with borrowing at around 70%.

We can help you to find the financial institutions that best suit your needs. Buy to let mortgages will naturally take into account your projected rental income whilst calculating your suitability for the mortgage.

It is clear that buying property in Bulgaria can be a very lucrative option. We will help you avoid any possible pitfalls and guide you in the right direction for the best deals currently available. The importance of location and price for a wise investment is never overlooked in achieving our aim: to ensure you find the best property to fit your own particular needs.

Taxation

Rental Income

A company investing in Bulgarian property is taxed on its gross income derived from the property, minus tax-deductible, property-related expenses and depreciation. Tax-deductible expenses include repairs, maintenance, renovation and similar costs, as well as interest on loans used for acquiring the property.

A Municipal Tax at a rate of 10% of profits is due. This is then deductible in calculating taxable profits which are subject to a flat corporate tax rate of 15%.

Depreciation

Land itself is not depreciable, although any immovable property affixed thereto is, provided that it is used for the business activities of the company and is recorded as a fixed asset.

Depreciation for tax purposes is at a rate of 4% per annum, and is usually calculated using the straight-line method. Real estate acquired for the purpose of re-sale is considered as "investment property". As such, it is non-depreciable and is subject to annual revaluation to the market value. In practice, it is often unclear in which situations a property should be treated as an "investment property" or a fixed asset.

Loss Carry-Forward

Tax losses can be carried forward for a five-year period. Losses cannot be offset against profits from previous years.

Capital Gains

Capital gains are treated as ordinary income subject to corporate income tax.

Transfer Taxes

Apart from corporate tax, no other direct taxes are levied on the transfer of real estate. However the transfer is subject to notary and municipal fees. Notary fees are paid on the higher of the market price or the book value of the property at varying rates, with the maximum being BGN 3,500. In addition, 2% of the market value of the property is paid to the municipality in which the property is located.

Local Taxes and Rates

The owner of a building or a plot is obliged to pay a real property tax. Where a building is built on a State or municipal plot, the value of the plot will also be included in the tax base. The tax is equal to 0.15% of the book value of the property. Arable land is exempt from local taxes. In addition to the real property tax, owners also pay waste-collection fees.

Value Added Tax

Transactions with land and lease of property for residential purposes are exempt from value added tax.

All other real estate transactions are subject to VAT at the uniform rate of 20%. The buyer/lessee is entitled to a VAT refund, provided it is registered for VAT purposes.

What to Buy

Off Plan

By far the most popular option is to buy off-plan. It makes financial sense to get in there while the price is at its lowest and sell upon completion of the project.

Take this example:

Purchase price = €200,000
pay 30% deposit = €60,000
plus 7% IVA (VAT) = €4,200
Total investment = €64,200

When the project is finished, if the developer puts up the price by 10%, then the increase is € 20,000.

If you bought the apartment immediately when it was released at € 200,000, then your gain would be as follows;

€20,000.00 / €64,200.00 = 31%

If you had bought it newly built, after the increase, then you would have thrown away a 31% gain!

Remember, developers normally charge 1-2% to change all the paperwork from one name to another, but this is normally paid by the purchaser.

Resale Property

Investment in older properties is the cheapest way to buy property in Bulgaria and, bought in the right location, can offer good returns.

Bear in mind though, that your idea of paradise, next to a lake in superbly remote corner away from mass tourism, is not your average purchaser's ideal location for a second home. When you wish to sell, it could therefore take you a good deal longer for the right purchaser to come along, than if you had invested in or near to tourist facilities.

Renovation is often easier and cheaper than building from scratch and avoids the problem of foreigners legally being obliged to own a company in order to buy land.

The cost to build is approximately 100-200 euros per m2 as opposed to a new build at 80-350 euros per m2.

The construction quality in Communist times is not comparable to the standards that are upheld today, so you may be in for more work than you bargained for. This is definitely an option for the more adventurous!

Words of Advice

With the absence of bank guarantees in Bulgaria, it is of utmost importance to know the financial stability of the developer. If they have only been around for a few months with no track record, can you really trust them to deliver the product you expect? As prices creep up, remember that the price of an off-plan development property must compete well with that of a similar finished or soon to be finished property in the surrounding area. If it is no cheaper, then there is no benefit buying off plan. Many of these developments appear rather remote. Make sure there are, or there are soon to be, amenities and roads to link the area to the facilities you need. If there is no evidence of this, you could struggle to sell on when you need to, let alone achieve the price you want. There are developments that do not permit you to sell on your contract before completion so be aware of the stance taken by the developer before signing anything. We never recommend a development to investors where the option to sell is not available. Other developers may permit you to sell, but often under certain conditions, for example:
- only once they have sold all their other apartments.
- they may allow you to sell but only if you don't undercut the sale price of the remaining apartments.
- or you may have to sell through the developer's sales office only, while they burn you for a hefty commission.

Buy to Let in Bulgaria

Bulgaria is a much less mature market than other European property markets such as Spain. However Bulgaria has enjoyed much press recently and its tourism idustry is growing at the fastest rate in Europe. Bulgaria is expected to enjoy 20 million annual tourists by 2010. This is of course excellent news for the Bulgarian property investor who is perfectly positioned to offer rental accommodation to this influx of tourists.

Obviously during the summer months the areas around the Black sea beaches attract the most tourists and so investors with quality property in these areas can expect good occupancy and rental yields both appreciating with the demand for accommodation in the area.

In the Winter months Bulgaria's Ski locations such as Bansko see the majority of tourist activity and so investors in these locations enjoy the rewards of owning a property in a location with increasing demand.

Over the next few years Bulgaria is expected to see a huge increase in tourism and so investors in popular areas are looking forward to seeing good return on investment from rental yields.

The Buy to Let model is becoming more and more popular with holidaymakers (and so in turn property investors) as low cost airlines offer excellent value flights into an increasing number of destinations via the internet allowing tourists to effectively create their own holiday by searching for private rental accommodation and avoiding the travel agent and package holidays all together.

Buy to Let Example Case Study

John decides to purchase an investment property and decides that the "Buy-to-Let" investment strategy is for him.

John has savings of around €80,000.

Investment property X is a new development with beautiful sea views and priced at €250,000.

Initially John pays his reservation fee of €3000 to hold the property.

Next John pays a 30% deposit of €75,000 (minus his €3000 reservation fee already paid)

Our investment specialists negotiate a mortgage for John for the remaining €175,000 at a rate of 2.75% (example only) this translates to a monthly mortgage repayment of €481.00 (interest only) which is equal to €5772.00 over 12 months.

John starts to rent his new property immediately and during the 3 months "High Season" he receives €2000 per month in rental income. These rental payments exceed his annual mortgage repayments and still leaves John with 9 months of rental potential to make a further profit.

If we assume that average rental rates for Johns new property are as follows (conservative figures):

High Season - €2000 Per Month Low Season - €1300 per Month

Now we assume that John decides to go on a short term rental strategy maximizing his income over the High Period. He easily rents his property for 3 Months during the high period earning €2000 per month. After this period he has a delay in getting his next tenants but over the course of the year he rents his property for a further 6 Months only.

3 Months x €2000 6 Months x €1300

Total Rental income = €13,800 after subtracting the €5,772 Mortgage repayments John has made a profit of €8,028.

* During this example we have not included any rental management or community fees that may apply but also we have only assumed rental income for 9 months of the year and with many holiday makers now booking private accommodation via the Internet this is very achievable.

Short-Term letting vs Long-Term Letting

The final decision to be made by the "Buy to Let" Investor is which letting strategy to use. Its obvious that the highest income is made by the property owner by letting out short term during the high season. However you can off-set this against the increased overheads in constantly finding short term rental clients and the maintenance costs between clients. Long term rentals typically pay less on a month on month basis but usually require far less input from the property owner and the rental income is fixed over the course of the year. Some property owners choose to rent long term during the low season and then short term to higher paying holiday clients during the high season. The decisions to be made on your letting strategy are usually answered in part by the property you purchase. Some properties lend themselves to short term holiday makers and others to long term locals as a permanent home. Our experts will help you decide what's best and choose the property and rental strategy that's best for you.

The "Buy to Let" Strategy is not ideal for EVERY investor and it is essential that property for this strategy is chosen wisely as it needs to be a rentable property in a popular location to allow the investor to maximize income from the Investment.

The other benefit from this type of Investment is that during the time this property is being rented and earning the Investor an income and holiday home it is still appreciating in value at one of the fastest rates available. All in all the "Buy to Let" Investment model is a sound investment decision and Bulgaria is currently an ideal location to deploy this strategy.

Land

For foreign individuals, land purchase in Bulgaria is essentially not permitted. However if you set up a private limited company which then owns the land, you are free to do so. This is a simple enough procedure (formation costs around 500-700 euros depending on the value of the property) and it seems a small price to pay for the land investment opportunities still available. As soon as the law changes, which it will do in line with new EU standards in 2007, land prices are predicted to increase steadily.

Company Formation for Land Purchase in Brief:

A company is incorporated onto the Commercial Register in a district court. The application for registration and legal documents are filed with the Court by a managing body.

Commercial law stipulates that in order to become incorporated a Private Limited Company must:

Have Articles of Association or Memorandum of Association; have appointed a Managing Director or Board of Directors; have paid at least 70% of its authorised capital, including at least one-third of each member's contribution.

Currency

Transfer of funds into local currency can be an expensive transaction. Even the smallest movement in foreign exchange rates can make a big difference to the price you pay for your property in Bulgaria. Using a professional foreign exchange company will often offer a better rate of exchange and avoid paying commissions. We can recommend a company that assures the best exchange rates, no commission, forward buying procedures and low cost transfer fees.

Summary

Bulgaria is now offering some of the best investment opportunities available, with profits on off-plan purchase often reaching as much as 50% upon completion. However, capital growth will undoubtedly slow down eventually. Intelligent investors are making the most of today's real estate market in Bulgaria, while opportunities still last for land, buy-to-let and pure investment options.