Real estate business investment in Italy

Real estate investments are those commercial ventures that relate to real estate intended as:

• residential buildings
• land
• warehouses
• shops.

Regardless of each property’s intended use, when we speak about a “real estate investment” what we’re referring to is definitely not limited to what concerns a property’s purchase, the income it produces, or its resale. The investment as such, in fact, involves and comprises a variety of issues and elements. First and foremost: the theoretical and underlying quality which defines a real estate investment is the fact that the object of the same is a physical asset that remains such over time, regardless of its market value. In describing this one ought to keep in mind that it is, in fact, possible to carry out purely financial transactions connected to a certain real estate asset without necessarily purchasing it.

Real estate investment business plan: calculating expenses

Purchasing any property involves a wide range of expenses that increase the investment value. At times this handicaps it, compared to alternative forms of use of capital. This can be seen in detail if we consider the main expenses incurred by an investor.

Notary expenses

Expenses sustained for the notary correspond to the value of the notary fee to carry out the deed. Generally figures are around 1,500-2,000 euros, but this obviously depends on the rates applied by each notary.

Purchase Tax

There are 3 different types of purchase taxes:

• The registration tax, i.e, the tax paid on the cadastral value of the property. The cadastral value of the property, as well as the tax rate, are calculated differently depending on whether it is a first or second home. If it is classified as a first home the rate applied is 2% on the cadastral value = cadastral income x 110. If it is classified as a second home the rate applied is equal to 9% on the cadastral value = cadastral income x 126
• The mortgage tax, equal to a fixed amount: 50 euros
• The cadastral tax, equal to a fixed amount: 50 euros

Agency fees

Agency fees applied are determined by the commission that the real estate agent demands to put the buyer in contact with the seller. Agency fees are generally higher for the buyer, and average out to a percentage ranging from 2% to 4% of the property’s price. Some agents do not charge the seller commission, or, if they do, it is usually within a range of 1% -1.5% less than what the buyer is charged.

Restructuring and furnishing expenses

These are expenses that depend on the conditions in which the purchased property stands. A property purchased at auction, for example, requires greater investments from this point of view than one purchased on the free market. Furniture is an extra that serves to give greater value to the property for the purposes of saleability. A particular aspect of the furniture is home staging, a technique used to make the house particularly attractive, for example by making use of specific lighting in the corridors to promote brightness, implementing special finishes for the interior and others such precautions

Technical expenses

Technical expenses start from the property evaluation. These are the expenses an investor incurs in to have a reference parameter on the price to be proposed in the purchase. In essence, these are costs for appraisals made by specialized and trusted technicians such as surveyors, architects, engineers, etc.

Bank charges

These expenses come into the game in presence of a loan agreement with a bank, hence when there is an institution financing the property purchase transaction. In this case bank charges correspond to the costs of the loan in terms of interest and administrative costs for disbursement.

Your real estate investment business plan: calculating the ROI and ROE

How can a prospective investor estimate his/her return on a specific investment? The return on a real estate investment is determined by taking both the capital employed and the expenses incurred into account. There are two performance metrics used: ROE and ROI.

ROE

The ROE (Return on Equity) expresses the return on investment in relation to the equity actually paid out. It is calculated with the ratio between the profit achieved and the equity capital.

ROI

The ROI (Return in Investment) pertains to the return on the transaction in relation to the total invested capital. It is determined as the ratio between the profit achieved and the invested capital.

A clarifying practical example:

Imagine buying a property at the price of 70,000 euros and incurring a total cost of 30,000. The total invested capital is financed for 50,000 euros with a mortgage loan and for 50,000 euros with own capital. If after 1 year the property is sold for 130,000, obtaining a profit of 30,000, you will obtain the following

ROE: profit 30,000 / equity invested 50,000 = 60%

ROI: profit 30,000 / total capital invested 100,000 = 30%

Italian Real Estate Market Outlook

OMI stands for Osservatorio sul Mercato Immobiliare – Real Estate Market Outlook and was created by the Italian Revenue Agency to ensure greater transparency regarding real estate transactions. Evaluations made are based on the different city areas’ purchase and sale contracts as registered with the Local Agency. The Observatory draws up a range of current prices corresponding to each property category, excluding greatly prestigious properties and those particularly degraded from the sample. This type of evaluation offers an advantage, it provides a reliable measure on the basis of the actual sale price as shown in the registered contract, and a drawback: it throws together houses located on dissimilar streets and classified in different cadastral categories. Houses which, though somewhat similarly located, have profoundly different characteristics.