Turkey frequently makes headlines in Western media in a negative light. I attempted to provide an honest and balanced perspective in my first article on Turkey that can be seen as an in-between article to this one (Is the idea of investing into Turkey possible?). Making a real estate investment with a property in Istanbul, Turkey, is straightforward with all the agents selling shiny new developments on the internet. But is this the best way to go about it?
1. The state of the market for investment in real estate located in Istanbul, Turkey
The main concern is the Turkish Lira/USD exchange rate.
It is interesting to note the fact that prices for real estate have actually been beating inflation in real measures.
So far, following the years of price decline due to the deleveraging process, the Turkish real property market is now on the upswing again , as consumers see property as their best protection against rising inflation rates.
What this graph fails to illustrate is that the prices are growing all the way to USD terms.
In reality, as you are a Turkish saver, you’re better off having local, affordable real estate in your portfolio than USD in a bank and especially when inflation is raging in the US and currently at 8.8% or more.
Turks think about inflation has changed. Because the USD has been declining as a currency worth, the Turks might also own local property and collect rent.
Demographic pressure increases the attraction to this particular market. Istanbul is currently home to 15 million residents, and is expected to expand strongly over the years thanks to positive nationwide demographics and urbanization. According to the World Bank, Turkey’s fertility rate is about 2.1 kids per woman. This is very comparable to its arch-rival Greece which has an average of 1.4 children per woman.
2. The biggest trap to avoid when you make an investment in real estate Istanbul
I’m going to start with this since it’s typical for foreigners to be treated this way. You came across some excellent real estate websites; the salesperson speaks flawless English offers to pick you up at the airport, and offers you a variety of new exciting developments, with fancy brochures, rental guarantees, and promises of high-quality yields in the future.
Run away. You’re in danger of being swindled!
3. To make money in Istanbul property, make investments as the Turk
Locals are aware that a lot new developments in the area are expensive. However, the best prices can come from the secondary market. It is best to purchase an investment property on the second hand market in a bustling neighborhood, and, ideally, renovate it according to Western standards. This is the way you can probably get better returns as well as capital gains, due to the remodeling work. Be aware that you must to think as if you were born there. If you’re looking to earn money from real property investments in Istanbul, you have to be one of them and think like you are a Turk.
Two ways to participate in the market.
You can get top-quality Istanbul houses for sale with a stunning view at the Bosphorus. If the economy picks up and these apartments are in prime locations, they will become the first to increase in value. But, you can expect lower gross rental yields of about 3 to 5 percent.
You buy in up & emerging areas that are close to luxury neighborhoods. This will result in more rental income (double) as well as capital appreciation if the area continues to gentrify, and general appreciation if the overall market does improve (though not as much as prime locations).
4. Do you want to invest in the European or Anatolian (Asian) side of Istanbul?
Istanbul is famously cut in two, The Asian side and the European side. Although both sides are expanding but the majority of most important factors are concentrated on the European side.
The brand new Istanbul airport, which was inaugurated in the year 2019 is the biggest airport in the world. It is located deep in the European side.
A massive new Canal will be constructed to replace the Bosphorus as a shipping route. About 48,000 ships pass through the Bosphorus every year. This results in overcrowding and an enormous risk to the environment. To decrease risk and increase revenues, Turkey plans on creating a new canal along this side. European side.
These two projects are a massive job-creation opportunity, and will lead to further infrastructure development, logistics hubs, manufacturing and more.
It’s not to say that there is no dynamism on the Anatolian part, as there is action there as well. For instance, a massive international financial center is currently being developed on along the Anatolian side, which includes an office of the Turkish Central Bank, the main banking regulator in the country, as well as the headquarters of a handful of the most important public and private banks.
Although this is positive, the two other projects are huge and will drive an increase in economic activity. I’m not saying that there’s not a lot of good investments on this side of Anatolian side, but I see a clearer story from what’s happening on the European side.
5. Which neighbourhoods to invest in on the European aspect of Istanbul?
Start by looking at the seismic map and avoid any area that appears dark red. Every homeowner should have earthquake insurance, so that at least you are somewhat covered if this were to happen. Typically, when there are earthquakes in Turkey the buildings are with poor construction that fall. The buildings built in the 1960s and earlier are more durable than typical and can withstand these unforseen circumstances.
Also, having been all over the European area of Istanbul I would steer clear of the more affluent areas. I’m not interested in buying rows of brand new buildings that will look ugly in 10 years, especially because they are not sold at a lower cost than near-prime locations in the center of European Istanbul.
We are left with the city’s historical center, Istanbul.
Taksim, Cihangir, Galata It is extremely touristy, but lots of locals reside here as well. Bars, clubs, an artistic zone. Average prices and moderate yields.
Sultanahmet (right part of the red circle): This is where the famous Hagia Sophia is located. It’s a touristy area and has lots of Airbnbs but not really appealing to locals. Overpriced.
Besiktas local, middle class with low yields despite the fact that the prices aren’t too high.
Nisantasi and Macka: Premium area. Hotels, restaurants High-end shopping, and bars. Low yields.
Kurtulus, Bomonti, Osmanbey local up and coming areas. It was once a working class area, but has been rapidly gentrifying. The low cost and high yields
6. A case study of a estate investment in Istanbul
This loft-style apartment is intriguing. It is located in the Sisli/Osmanbey area, an attractive area in the European side. Its distinctive feature is that it is located on the street that is lined with textile workshops. It is therefore during the daytime it is lively, though not noisy, and in the evenings it is extremely peaceful, but only a 2-minute walk away from all of the trendy, upmarket bars. There’s a certain cachet to this area.
It is necessary to consider seismic insurance, but the cost is minimal. One of the great advantages of making a investment in real estate to invest in Istanbul is that landlords do not usually pay for finding tenants. The reverse is true; tenants pay the agents to locate their apartments. Also, the building common charges are paid through the tenant. Importantly, tenant demand is very high, and finding a new tenant normally will take about a week.
If you own more rentals in Turkey, then expect to pay a higher income tax rate.
7. And you can even get the free passport you need from it
If you buy at least $400,000 worth of real estate in Turkey the owner, your spouse, and your children younger than 18 can be granted Turkish citizenship. It’s a great alternative and also a great travel document.
8. Real estate taxes in Turkey
Tax rates for personal income range between 15% and 40%. If you invest the minimum amount for citizenship via investment, you will earn a gross return of 5%-6 percent, then take all expenses allowed (most) then you’ll likely pay around 20 percent.
You can read more about me and my International Tax Consulting for more information.
Capital gains are not subject to tax if you have real estate for five or more years. If you sell it before and pay capital gains tax, these taxes get added to your yearly income (after a deduction of TRY 18,000) in addition to taking CPI indexing into consideration. In actuality, these capital gains taxes are very low.
There is an annual property tax of around 0.2% from the appraised value of real estate in Istanbul which is less than the majority of Western markets.
Finally, there is about the equivalent of 4% stamp duty costs when buying real estate in Turkey. In many cases , this percent is divided between buyer and the seller, however there are times when it’s not. It’s all about the negotiation process when sealing the deal.
There’s VAT under certain circumstances, but it doesn’t apply to foreigners’ initial real acquisition in Turkey. Most of the time, it can be avoided, particularly if you buy in the secondary market.