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Why Dubai has a high rental ROI - examples

Published 08.08.2021

Mortgage

In Dubai, foreigners have the right to purchase a property only in specially designated areas only, which are called freehold. Local banks provide mortgage loans to expats. One can take a mortgage both for a completed and off-plan unit. The loan can be obtained for a period of up to 25 years, provided that the borrower does not reach the retirement age (65 years) before the completion of the loan repayment.

Average interest rates on a loan in the emirate are 3-5% per annum. Depending on the bank, interest can be charged at a fixed or floating rate. The lender retains the right to early repayment of the loan but in this case, a penalty of 1% will have to be paid.

Note! An application for a mortgage in Dubai will cost 1% of the property value, however, in case of refusal, this amount will be refunded.

It is better to take out a loan for a longer period. The longer the term, the lower the payment is; moreover it decreases the risk of facing negative market conditions and unfavorable refinancing conditions. Of course, the longer the loan term, the more interest you will have to pay to the bank, but even with an average loan rate of 3% per annum with a minimum yield of 4%, you will still remain in the black.

As for on-lending and refinancing, these options should be avoided. When issuing a mortgage, Dubai banks assess, among other things, the total loan burden of the borrower in relation to his assets. If the loan burden is too big then lenders can give a mortgage on less favorable terms (increased loan rates and a reduced loan amount).

Tax Optimization

In terms of taxation, Dubai is one of the best jurisdictions for expats. The emirate does not provide any taxes and fees for real estate ownership. All your tax expenses will be made only at the purchase stage.

When purchasing a property you must pay:
Tax
Rate

Dubai Land Department transfer fee
4% of the cost
Registration fees
AED 2,000 (USD 545) for properties up to AED 500,000 (USD 137,000); AED 4,000 (USD 1,100) for properties over AED 500,000 (USD 137,000) + 5% VAT
Fee for the issuance of a certificate of ownership
AED 258 (USD 70)
Value-added tax (VAT)
5%
Services of a real estate agent
2%
Property appraisal (when reselling property in the secondary market)
AED 2,500-3, 500 (USD 680-955)

Exiting the Project

Frequently the average tenure of an investment property is 5-20 years. It takes 12 years on average for a property to pay off fully and start making a profit.

Liquidity is one of the key investment risks. Even if you buy a home with a 6-8% yield, there is no guarantee that after 10 years you will be able to sell it at the current market value. An example of such property is workers' camps and parking lots. The demand for renting such real estate is very high, but there are not many people who want to own an expensive property of this kind. If you want to sell this asset then you will have to reduce the price significantly. This factor negates all other benefits.

According to DLD data, the average annual growth in the value of a residential real estate in Dubai is 1.2%. With an ROI of 4-8%, this will be a profitable stable asset that can be sold on beneficial terms.

Another liquid instrument is commercial real estate. Office and retail premises add on average 2-3% in value annually. The starting profitability of such units rarely crosses the threshold of 4-6% but the lease of commercial spaces can be concluded for a period of five-ten years. This makes the asset more stable and reduces the impact of negative factors.

Highlights

  1. Purchasing rental properties is one of the best ways to invest in the Dubai economy. Local housing is in demand from tenants. In addition, participation in the rental business does not require special knowledge and the constant presence of the owner.

  2. The starting budget for starting investment can be from AED 1,102,000 (USD 300,000). If you have large assets, you can consider both residential and commercial property. Local banks issue mortgage loans to foreigners. Borrowed funds can finance up to 50% of the cost.

  3. The return on a real estate directly depends on its location. The more developed your chosen area, the more categories of tenants will be interested in it.

  4. There is no property ownership tax in Dubai. Payment of taxes and fees is required at the stage of purchase only.

  5. The average payback period for property in Dubai is 12 years. In order not to lose your savings, it is of utmost importance to sell your asset on time at the current market value.

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