Real Estate
Real Estate in Turkey
Turkey constantly makes the headlines in Western media in a very negative light. Making a real estate investment in Istanbul, Turkey is made easy by all these agents selling flashy new developments online. But is this the best way to go about it?
We’ll have a look at the following:
- The general state of the real estate investment market in Istanbul, Turkey
- The number one trap you should avoid when making a real estate investment in Istanbul
- To make money in Istanbul real estate, invest like a Turk
- Investing on the European or the Anatolian (Asian) side of Istanbul?
- Which neighbourhoods to invest in on the European side of Istanbul?
- A case study of a real estate investment in Istanbul
- A video case study of a real estate investment in Istanbul
- Free Turkish passport
- Real estate taxes in Turkey
- My buyer’s agent in Istanbul
1. The general state of the real estate investment market in Istanbul, Turkey
I have to start with this as it’s very common for foreigners to get played this way. You found some great real estate website, the salesman speaks perfect English, offers to pick you up at the airport, and he pitches you a bunch of developments with flashy brochures, rental guarantees and promises of high future returns?
Run away. You’re about to get fleeced.
2. The number one trap you should avoid when making a real estate investment in Istanbul
A foreigner who has not been convicted, has not violated Turkish immigration laws and has fulfilled the conditions of the program can obtain Turkish citizenship.
Citizens of Armenia, Cuba, Nigeria, North Korea and Syria cannot participate in the program.
Turkish citizenship is granted to the spouse of the investor and children under 18 years of age. Furthermore, the parents of the spouses or their adult children can obtain citizenship if they are financially dependent on the investor. There is no need to make additional investments for children and parents.
If the adult children and parents of the investor have their own sources of income, they cannot be included in the application. To obtain citizenship, they participate in the program as individual main applicants and fulfill the investment conditions.
3. To make money in Istanbul real estate, invest like a Turk
Locals know that many of these developments are overpriced. The reality is that the best deals are to be found on the secondary market. You want to buy a secondhand property in a thriving neighbourhood, and preferably renovate it up to Western standards. This is how you are likely to obtain better yields, and capital gains thanks to the renovation work.
There are two ways to play the market.
You can buy top notch real estate with a view of the Bosphorus. Once the economy starts improving again, these prime location apartments will be the first to jump in value. However, expect low gross rental yields of about 2-3%.
You buy in up & coming areas close to high-end neighbourhoods. This way, you get higher rental yields (double), capital appreciation if the area continues to gentrify, and general appreciation if the overall market improves (though less than prime location).
4. Investing on the European or the Anatolian (Asian) side of Istanbul?
Istanbul is famously cut in two; the Asian side and the European side. Though both sides are growing, many more of the major catalysts are on the European side.
The new Istanbul airport which was launched in 2019 is the world’s largest. It is located deep in the European side.
A massive new Canal will be built to replace the Bosphorus as a shipment route. About 48,000 ships pass through the Bosphorus every year. The result is overcrowding, and huge environmental risk. To reduce risk, and increase revenue, Turkey plans on creating a new canal on the European side.
Source: The Guardian
These two projects are a massive draw for jobs, further infrastructure development, logistics hubs, manufacturing, etc.
It’s not to say that there is no dynamism on the Anatolian side, because there is action there as well. For example, a large international financial center is being built that side, which include the Turkish Central Bank, the main banking regulator, as well as the headquarters of a few of the major public and private banks.
While this is encouraging, the two other projects are massive and catalyze more economic activity. I’m not saying that there are no pockets of good investments on the Anatolian side, just that I see a clearer story on the European side.
5. Which neighbourhoods to invest in on the European side of Istanbul?
First step, look at the seismic map and avoid any area that is dark red. Every homeowner MUST get earthquake insurance, so at least you are somewhat covered if this were to happen. Traditionally, when there are earthquakes in Turkey, it’s buildings of poor quality that collapse. Buildings from the 1960s and earlier are sturdier than the average and better withstand such unfortunate circumstances.
Source: Jag
Also, having been all over the European part of Istanbul, I would avoid the outer districts. I am not interested in buying in rows of new-built blocks that will look awful in 10 years, especially as they do not come at a discount to near-prime locations in the center of European Istanbul.
This leaves us with the historical core center of Istanbul.
Taksim, Cihangir, Galata: Very touristy, but many locals live here as well. Bars, clubs, artistic area. Moderate prices and moderate yields.
Sultanahmet (right part of the red circle): This is where the famous Hagia Sophia is located. It’s a very touristic area with lots of Airbnbs and not very desirable to locals. Overpriced.
Besiktas: Local, middle class, and for some reason low yields even though prices are not extremely high.
Nisantasi and Macka: Premium area. Nice hotels, restaurants, high ends shopping and bars. Low yields.
Kurtulus, Bomonti, Osmanbey: Local up & coming areas. Originally working class but rapidly gentrifying. Low prices and high yields.
6. A case study of a real estate investment in Istanbul
This loft apartment is quite interesting. It is in Sisli/Osmanbey, a nice area on the European side. Its particularity is that it is located on a street of textile workshops. So during the day it is lively, though not noisy, and in the evenings it is extremely quiet, yet a two-minute walk away from all the trendy, upmarket bars. There’s a certain cachet to this area.
This 90m2 apartment all-in (including furniture), cost TRY 980,000. It was immediately rented out long term for TRY 4,500 per month, which is a gross yield of 5.5%.
Rent TRY 4,500 x 12 (gross yield 5.5%)TRY 54,000Vacancy of 5%TRY 2,700Maintenance 5% (low because newly renovated)TRY 2,700Management fees 10%TRY 5,130Property tax of 0.2% (based on a lower value of 900k)TRY 1,800Income tax (let’s use a rough average of 15% for one apartment)TRY 6,250Net, net yearly after tax incomeTRY 41,670Net, net yield3.6%
You’ll have to factor in seismic insurance, but the sums are negligible. One of the great advantages of making a real estate investment in Istanbul is that the landlord does not typically pay to find tenants. It’s the other way around; tenants pay the agents to find them an apartment. Also, the building common charges are paid for by the tenants. Importantly, tenant demand is strong, so finding a new tenant typically takes a week or so.
If you own more rental property in Turkey, then expect to pay a higher income tax rate.
7. And you can even get a free passport out of it
If you buy $250,000 or more of real estate in Turkey, you, your spouse, and your children below the age 18 are entitled to Turkish citizenship. It’s a great plan B, and not a bad travel document. I wrote this article which details the Citizenship by Investment programme in Turkey, its timelines, exact fees, and traps to avoid.
8. Real estate taxes in Turkey
Personal income tax rates vary from 15% to 40%. If you invest the minimum amount for citizenship by investment and make a gross return of 5%-6%, and then deduct all allowable expenses (most), then you will probably pay about 20%.
There are no capital gains taxes if you hold real estate for five years or more. If you sell it beforehand, the capital gains taxes get added to your yearly income (after a TRY 18,000 deduction), and taking CPI indexing into account. In reality, these capital gains taxes are minimal.
There is an annual property tax of about 0.2% of the assessed value for real estate in Istanbul, which is lower than in most Western markets.
Finally, there is about 4% in stamp duty charges when you purchase real estate in Turkey. In many cases this 4% is divided between the buyer and seller, but in many cases it isn’t. It comes down to the negotiations that take place when sealing the deal.
There is VAT in some circumstances, but it doesn’t apply to foreigners’ first real estate investment in Turkey. In most cases it can be avoided especially if you buy in the secondary market.