The Art (and Science) of Investing in Poland

Introduction

Poland was recently ranked by several leading analyst organisations as one of the best places to invest in. The World Bank has ranked Poland 3rd best country to invest in, given its high growth Gross Domestic Product (GDP), record low unemployment, and potential to keep growing over the following decades. Places 1 and 2 were taken by the Philippines and Indonesia respectively. Not surprisingly, I spent a few months there this year to check out investment opportunities but was put off by the fact that you cannot own land as a foreigner – a major concern for me as a property investor. Before I go on, please remember Poland was also one of the handful of countries globally that didn’t go into recession during the Great Recession aka Global Financial Crisis which took place between 2007 and 2009, so investments there are relatively safe while generating above average returns. I chose Poland to invest into real estate, generating over 6% returns after tax and fees almost 2 years ago. Before investing here I did my personal due diligence and research which I will try to break down for you here in this blog post.

Poland – Macroeconomics and Demographics

Poland is located in Central Europe and has been historically considered a buffer country between Western Europe and Eastern Europe. Its geographic and political location comes with both up- and downsides, being situated between two dominant economic super powers being the EU and Russia. Mostly though, you can expect to experience the upsides given it had joined the European Union in 2004 and Germany being Poland’s largest trading partner; both imports and exports hover at around 26%.

The GDP growth since Poland’s independence in 1991 has been averaging 3.5% which is spectacular. With 4.4% in 2017, it has been amongst the fastest growing economies in the World, and was nominated by FTSE Russell to be upgraded from Advanced Developing Market to Developed Market next month (September 2018). It will be the first Eastern European Country to join the prestigious club of the 23 FTSE Russell developed markets in the World. Poland has an average GDP per capita of over USD 16,000, or USD 31,000 at Purchasing Power Parity (PPP) – this means your earned Polish income gets you a whole lot further (in Poland) than in other countries due to the relatively lower price of goods and services – half price judging by the figures.

Population growth is stagnant at 38.5 million people, as many young Poles emigrate overseas to make a living, saving their earnings, and often bringing the savings back eventually to invest in Poland. There are millions of Poles working overseas right now. Meanwhile foreign talent is pouring into Poland’s high growth services sector,keeping the net immigration and population rate afloat. In addition the government has commenced a financial incentive program for families with kids which has had early positive effects on the new born rate which has been in line with other developed nations at about 1.3 children per female so far.

Let’s talk about real estate macroeconomics for a minute. About 100,000 flats are newly built and sold a year on average, this number has been steadily rising to accommodate the demand for higher quality living and desire for Poles to move out earlier from the family homes. About 4% of the population rents at present (compared to 50% in Western Europe) and over 50% of flats are sold for cash without being financed through banks or loans. You can quickly see that the demand for rental property will stay up high if Poland is to move closer to the living standards of the Western World.

Rental yields are generally still good in major population hubs like Warszawa, Wroclaw, and Krakow with well over 3%, sometimes even 5%. In 2016 and 2017 the highest rental yields however were achieved in Katowice and Tychy at almost 7%; second-tier cities which are growing at incredible rates and attracting the bulk of infrastructure and foreign direct investments due to their low entry prices to access talent and set-up offices.

Purchasing Real Estate

I bought my very first property in Poland on a non-EU passport, knowing very little about real estate investment there, whilst I was still working in Asia. You might wonder how you can purchase property in Poland as a foreigner? It is entirely possible and fairly easily done, as you do not have be a citizen of Poland or the EU to purchase a flat, together with your share of the land that the building sits on (in most cases). It’s safe and land ownership is transferred to you via the deed. Of course having family in Poland and having a grasp of the language did make me feel a lot safer when I first transacted. Having said this, I know enough people that have no clue about the law, don’t care to read the paper work, the deed, or the notary agreement in detail, so a foreign language wouldn’t make much of a difference, right? If in any doubt, and we should always be, the good news is that most educated and young people in Poland do speak fluent English theses days and a transaction document can also be produced in English.

When I set out to build my income stream from real estate investments, all I wanted was peace of mind, long term and solid tenants, who would care about living in my apartments and take good care of it. I argued that peace of mind and lower maintenance effort was worth the potential foregone return in higher income generating real estate assets, such as student accommodation. I hence focused my investments on high-end properties in established and/ or up-and coming suburbs in Katowice, Silesia.

For comparison, prices per square meter (sqm) in Warsaw were ranging from 7,000 to 44,000zl per sqm (1,850USD to 11,700USD) for an apartment while in Katowice you could buy in from a mere 2,500zl to 5,000zl per sqm (or about 650USD to 1300USD) – in my view a bargain especially given that business investment in the services economy locally was booming. Until 2015 the Polish property market experienced a halt in growth post the financial crisis which lasted from 2009. It was then the 6th year of property price stagnation while wages kept rising aggressively. I made the assumption that it was just a matter of time before property prices were starting to grow again – it helped that I knew the the average property correction takes between anywhere 3 to 6 years across history. Shortly after purchasing my first property, prices in Katowice began to rise strongly. I estimate my real estate investment capital gains to be around 30% today – but I am also fully aware this is all funny money until I transact – which I do not plan to do anytime soon. My actual long term plan is to have the value of the Polish properties increase and compound at a much faster rate that I would be able to see in the rest of the developed World, so that by the time I hit my actual government retirement age, the properties would have increased in value much further than if I had invested where I used to live and plan to live again in the future: Singapore, and Australia/ New Zealand. Meanwhile the rental income yield of over 6% should be sufficient to support myself living mostly in developed countries and traveling the globe. An additional option is to adjust rents periodically which in total should grow faster than my living costs in the developed World.

My Numbers

As I described in my story, my net income from my properties is about 3,500USD a month (this can go up or down 10%’ish given foreign exchange rates). I could never have this net income had I invested the same amount of cash in Singaporean or Australian property given the combination of high income tax, land tax, property tax, maintenance fees, etc which are much much higher than in Poland. When it comes to the actual income tax rate in Poland, the income tax rate goes up to 32% for individuals, similar to many other developed countries. But for rental property income, this is different. In Poland there are several ways to pay taxes for rental property, and I use the simplest way to declare income tax. Once a year I fill an online form showing my income and paying a mere 8.5% tax for the first 100,000zl of rental income and 12.5% on anything above that. Since I haven’t had a full year of all my properties rented out, I cannot tell you the effective tax rate but it will be much closer to 8.5% than 12.5%. The downside of this method of taxation is that you cannot deduct any costs (mortgage, depreciation, utilities, maintenance costs, property agent, etc.); the upside obviously is that you don’t have to keep a full accounting system and associated paper work. Having said this there is not a lot of costs associated with new properties and given I don’t work with banks or property agents (both I consider parasites of wealth), this is probably the easiest way to pay my taxes. Furthermore, I pay between 3-7% of my rental income to maintain the properties. It should be below 5% but one of my investment properties is owner association self-managed and produces a much higher cost because of it – this is something I am in the process of changing. Overall the costs associated with property ownership in Poland are extremely low compared to other developed markets. Taxation, as you can see, is highly favourable for the property investor, property and income taxes are low and the demand for properties in Poland doesn’t seem to slow down. Even if it does, a crisis is highly unlikely as most apartments were purchased for cash so investors are not squeezed to sell should when the markets will take a turn. Properties and assets have been growing or holding their value since 1992 for the most part.

Questions for you:

  • Have you ever thought to invest in developing countries?
  • What is your experience if you invested in developing countries?
  • Do you know of alternatively safe methods to invest your hard earned cash?

I’m looking forward to your comments and thoughts.

For Freedom and to Live Your Dreams,
Your Financial Gladiator


About: This Financial Gladiator retired early at age 34 by investing most of his savings in a small real estate portfolio in Eastern Europe. Today he saves approximately 75% of his income while roaming the world and occasionally teaching as a Scuba Instructor on tropical islands. It helps him to keep fit while doing what he loves – teaching, traveling, and scuba diving. He called quits following a successful 13 year career in Information Technology throughout which he saved between 30-40% of his net income annually. Before he quit he positioned himself in a role he suspected was going to be made redundant eventually. The day arrived quickly and he ensured not to leave without a retrenchment package reducing the need to work and save 3 more years. His real estate portfolio draws a return high enough to pay him twice his annual expenses, allowing him to continue to build up his retirement portfolio while enjoying 100% freedom today.

Disclaimer: All information provided on this site is for informational purposes only and does not constitute professional financial advice.

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