How to earn passive income from a real estate investment

Investing in real estate has the status of a golden grail in the Czech Republic. While stocks and cryptocurrencies can fluctuate, real estate is literally in front of your eyes. People perceive investment property as a stable and “tangible” asset security, which brings a double return – from renting and possible market price growth. In addition, in times of inflation, investment properties also represent an effective protection of the value of money.

But be warned, even investing in real estate is not without risks, which is why you should always think carefully about the purchase of an investment home and know all the aspects. The key to success is not just location or rental yield, but also quality contracts and thoughtful structuring of the entire investment.

What is an investment property?

An investment property is one that you acquire primarily for income purposes, not for your own living. It can be an apartment, a house, an office space or even a parking space. Most often, however, we talk about so-called investment properties that are intended for long-term or short-term rental. The aim is that the investment in the property will gradually appreciate in value, both through regular rent payments and through the increase in the price of the property itself.

Therefore, when choosing a property, you need to think like a businessman: who will live here? How much will they pay? How stable will demand be in the area? And above all: what are the legal risks of the purchase? Investing in real estate is not a game, it is a serious discipline that requires a good plan and perfect due diligence.

Investment apartments can hide problems

It’s one thing to buy a property, it’s another to buy it safely. Legal risks lurk at virtually every turn. Before signing a purchase contract, it is necessary to check not only the title deed and cadastral listing, but also any liens, easements, foreclosures or pending litigation.

For investment flats, a common problem is an unfinished lease relationship with the previous tenant or obligations to the HOA. Contracts downloaded from the Internet may save you a few crowns, but they can cost you hundreds of thousands if they do not properly handle the handover of the flat, defects or escrow of the purchase price. This is where the role of the solicitor comes into play. It’s his or her job to not only draw up a bulletproof contract, but also to inspect the entire transaction and arrange for a solicitor’s escrow. Investing in real estate without legal oversight can be like driving at night without lights – you may drive, but you’ll probably crash.

How do you finance investment properties?

Investment properties can be financed in several ways, through equity, mortgage or a combination of the two. Mortgages for investment properties have their own specifics: banks usually require a higher equity deposit (usually 20-30%) and count on rental income as a secondary income. Well-structured financing is essential: if the mortgage payment exceeds the rent, the planned investment can become a time bomb.

In addition to this, the legal aspects of the mortgage – the mortgage agreement, the vindication of the insurance policy, the conditions of drawdown and any guarantees – must also be addressed when investing in a property. Even at this stage, it is advisable to have an attorney on hand to review the bank documentation and point out any hidden hooks. Remember also that once you have everything set up correctly, you can claim the mortgage interest as an expense when taxing rental income.

According to a survey by the Capital Market Association of the Czech Republic, Czechs consider buying real estate to be their best investment in life.

Contracts with tenants can be a legal minefield

Investment properties only start making you money when someone moves in. Ideally, someone who pays on time, doesn’t destroy the apartment and its furnishings, and returns the apartment in its original condition at the end of the lease. To make this idyll a reality, you need a good lease. In practice, this means a clear statement of rights and obligations, the amount of rent, how payments will be made, rules for maintenance, inspections of the condition of the apartment and, of course, the grounds for notice.

In the past, we have helped clients who have only entered into verbal agreements with their tenants, insufficiently secured rent, unclearly defined security deposits or dealt with illegal terminations. This is because the tenancy relationship is governed by the strict rules of the Civil Code, which gives relatively strong protection to tenants. But with a good contract, you can significantly reduce these risks. Investing in real estate is not just about numbers, but also about legal prevention. And that starts with every single contract.

What about taxes?

Rental income is taxed under the Income Tax Act. This means that you have to declare the rental income from your investment apartment on your tax return. The good news is that you can claim expenses against this income – either as a flat rate (30%, max. CZK 600,000) or at the actual amount. This includes, for example, depreciation of the property, mortgage interest, repairs, insurance, HOA fees and other operating costs.

In order to take advantage of this benefit, you must ensure that you have all the documents. In addition, you also need to sort out your property tax each year, or income tax on the sale if you don’t meet the exemption test (e.g., five-year ownership).

Is it worth investing through a company?

You can invest in real estate as an individual or through a legal entity, most commonly an LLC. A natural person has a simpler tax return, less administration and can benefit from, for example, tax forgiveness when selling the property after five years.

On the other hand, as your portfolio grows , it may pay more to invest in property through your own company. There are several advantages: you can control your costs better, you can use leasing, you can accumulate profits more efficiently and, most importantly, you protect your personal assets thanks to the limited liability of the LLC.

If you plan to own more than one investment property, we recommend getting an individual legal and tax opinion. There is no one-size-fits-all solution; it is always the size, ambition and level of risk you are willing to take that determines.

What risks can you face?

Investing in real estate is not without risks. Defaulters, property damage, falling market values, tighter regulations – these are all real threats. How can you protect yourself against them? The first step is to thoroughly vet your tenants (e.g. by extracting them from the debtors’ register), the second is good contractual documentation that will enable you to deal with any problems quickly.

The third point is insurance – not just for the property, but also for loss of rental income or legal protection. If you are investing larger sums, we also recommend using a trust fund or holding structure to protect your private wealth.

Don’t forget that you should also sort out any inheritance issues. What happens to the investment property when you die? Legal protection is not just some perceived luxury, it’s an investment that pays you back the moment a problem arises. And in real estate, it’s doubly true that those who don’t cover their backs legally will sooner or later crash.

How to invest in real estate without buying a home?

Not everyone has a few million in their bank account to buy a whole apartment or house outright. Still, that doesn’t mean that the world of real estate investing is closed to the rich. Even with less capital (tens of thousands of crowns) you can get involved today. How? By using tools such as real estate funds, REITs (Real Estate Investment Trusts) or crowdfunding platforms.

Real estate funds work similarly to equity funds – investors pool their money and the management company invests it in different properties: offices, warehouses, shopping centres or rental apartments. REITs are similar but more commonly traded on the stock market; you can buy them like stocks. And crowdfunding? That’s a model where hundreds or thousands of people put down money for a specific real estate project (such as building an apartment building) and share in the profits.

The advantages are clear: low upfront capital, the ability to spread the risk (diversification) and professional management. The disadvantage is that you have no say in how the property is managed and your return depends on the performance of the fund or project. In other words, you are investing passively, but with that comes a loss of control.

Again, however, it is not worth entering these instruments without legal due diligence. Check the fund’s license, statute, fees and exit rules. With crowdfunding, you need to check the legal relationship between you and the project to make sure you are not just a “donor” with no rights to the proceeds.

Invest wisely and with an attorney

Investing in real estate can be a path to financial independence, but it can also be a trap fraught with problems. It’s not just the location or the rent amount that matters, but whether all the legalities are in order. Every step from choosing a home to mortgage and lease agreements to taxes has its own rules. That’s where the role of a lawyer comes in: to be a partner who protects your interests, identifies risks and ensures that investing in real estate is truly profitable.

Summary

Real estate investments are a popular way to appreciate money, but they hide a number of legal and financial pitfalls. Whether you’re buying an investment home, entering into lease agreements, or dealing with taxes, legal certainty is key to success – from title searches, to mortgage set-up, to protection against defaulters. The legal service can help you avoid problems with land registry defects, tenants or inheritance and enable you to take advantage of tax benefits. You can also invest without buying the property – through funds, REITs or crowdfunding, but even here you need to know the legal framework and check exactly what you are getting as an investor. If you are considering investing through an LLC, expect more legal and tax complexity. In all cases: if you want to protect your assets and achieve the expected return, invest with your head – and a lawyer.