This is the first in our two-part guide to buying investment property in the UAE. You can read the second post here.
Buying an investment property can be a great way to not only have a sizeable asset in your name but also earn an income on that investment. But there are three main factors a potential investor needs to consider to ensure they profit from their investment – from picking the best property location to accounting for the real cost of taking out a home loan:
1. Buying the property
For those buying with cash only, they simply need to decide how much they want to spend and ensure they don’t overstretch their budget or dip into emergency savings.
For those that need to take out a mortgage, it becomes a little more complicated. In the UAE, buy-to-let mortgages and end-user mortgages are the same and everyone has to secure approval the same way.
Last year, the Central Bank introduced a mortgage cap to limit how much banks can lend. Under the new guidelines, expats buying a property for under Dh5 million must now produce a minimum deposit of 25%, rising to 35% for properties above Dh5 million. For second properties, the minimum deposit is 40%. For UAE Nationals, a a 20% deposit is required for a first home under Dh5 million; this rises to 30% for homes over Dh5 million, and 30% for any second or third properties.
It means mortgage buyers also need a lump sum of cash ready for their downpayment.
Factors to consider when applying for a mortgage are your minimum salary, the tenure of the loan and whether you want an Islamic or conventional product.
For the mortgage approval itself, standard paperwork required includes six months bank statements, copies of all your ID such as a passport, visa and Emirates ID card, a salary certificate, proof of address, such as a utility bill, and details of all your liabilities.
2. Location, location, location
Once the bank’s pre-approval comes through for the mortgage, which generally takes three to five days, start hunting for the property you want. By this stage you will know exactly how much you can borrow and therefore how much you have to spend. This is where you need to think like an investor and not someone buying a home for themselves. Things to consider include:
Location is key.
That’s right, where you buy the property will not only have a big impact on the demand from tenants but also the property’s value when you come to sell further down the line. Prime locations include the Palm Jumeirah, Business Bay, DIFC, Arabian Ranches and the Emirates Hills Community.
What amenities are near by?
It’s well documented that properties located close to the Dubai Metro will attract higher returns as do those near to good schools, medical facilities, malls, local shopping centres, parks, the beach and gyms or children’s play areas.
Apartment or villa?
Villas have traditionally fared better than apartments in terms of holding their price. That’s not to say an apartment, something which can be more affordable, will not earn you a good rental income. An apartment situated close to the Dubai metro, in DIFC or with views of the Burj Khalifa will always attract interest purely because of its location.
What is the rental market you are targeting?
If you have decided to rent out to professionals in Dubai then aim for the Dubai Marina or JLT with its good transport links and easy access to grocery shops, restaurants and shopping malls. If you want to attract a family, pick a villa development such as the Springs, Lakes or Arabian Ranches.
3. Fees, fees, fees
You’ve selected your property, so now you need to consider the real cost of purchasing a buy-to-let property. Yes, you need a sizeable deposit but there are several other expenses involved too.
Fees alone can account for up to 5% of the total purchase price. They include an arrangement fee – typically 1 per cent of the mortgage – a valuation fee for the property to be valued, and an upfront processing fee – again, this is typically 1%. There is also compulsory life and home insurance to consider and the Land Department’s fees such as a mortgage registration fee.
If you have used a mortgage broker – a method that can help you find the best deal for your needs – there will be fees for that service too as well as conveyance fees to cover the legal aspects of the deal.
For the mortgage itself, compare the options available and be careful which lender you borrow from. The lowest interest rate may seem like the best, but watch out for transfer fees, which are charged when you switch from one lender to another. These can also be as much as 5% and leave consumers locked into deals that are too expensive to get out of.
Other fees to consider are the maintenance of the property. You may be alerted to maintenance glitches by your tenants that will add up and, of course, all properties come with maintenance fees which are paid to the developer to either keep the building or the surrounding area in good condition.