Investing In The Baltic Real Estate Market, Part 2

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I have received some e-mails after writing about my investments in the Riga real estate market. Good, I like feedback!

I would like to clarify som points:

Yes, the gross yield is approximately 9-12% before taxes and maintanance. Taxes is fixed, so no uncertainty there, but costs to maintanence is still unknown. The absolute number in rent per apartment is quite low, and each apartment requires sofa/bed, TV, wardrobe and dinner table with chairs. I have calculated about 10% of gross income in maintanence.

I am only buying from the same developer (so far). Their concept is to buy old factories or similar buildings from Soviet times. They demolish most of the interior, and install new plumbing, heating, electronics etc. They give you up to 10% discount from selling price the more apartments you buy. The more apartments the customer buys, the less hassle for them. The developer also register the bilding/apartments as “apartment hotel” in the landbook. They do this to avoid mandatory additional things like garages, lawns, trees etc. As a rental investment, I can more easily get rid of problematic tenants if registered as a hotel. If it was registered as normal apartments, the tenants would have a stronger backing from the laws, ie. much more difficult to get rid of them. As of now, they have to vacate the apartments after 7 days if they do not pay. That is regulated by the written agreement I have made.

I guess about 85% of the apartments to the developer are 18 to 35 square metres, and all are studios. Most people buy to use it as a permanent residence. In one of the projects the developer estimated that 25% of the buyers are foreign. Many businessmen buy instead of paying for hotel.

Will the registration of the apartments as a hotel softening the future price? I do not think so. Anyway, I expect the high yield to make up for it. I do not expect any price increase adjusted for inflation. I invest to get a high yield and to protect my assets from monetary inflation.

Personally I would not have any problems living there myself. The common areas are clean, it gets washed every day and a management company takes care of the building.

I pay about 600 to 1000 EUR/meter. That excludes kitchen (1300 EUR) and bed/sofa, washing machine, wardrobe etc (1000 EUR). The last apartment I purchased cost about 24 500 EUR for 35 square metres, all included. I fetch about 255 EUR net a month for that. I calculate 11 months per year in rent. That means 11,6% yield per year. It remains to be seen how much tear and wear from the tenants….. Perhaps I am too optimistic as regards both the rental price and maintanence. But even a 20% reduction in rent gives a good yield! So far my apartments are rented out to the prices below in the table.

Here is a summary in a table version in euro (the purchase price includes everything, also 2% stamp duty taxes):

 

Apartment type 1 (35 metres):
Purchase price 25000
Gross income per month 255
Tax 9% 23
Income after taxes 232
Yield after taxes (11 months) 10.21%
Maintanence 25.5
Yield after maintanance and taxes 9.09%
Apartment type 2 (18 metres):
Purchase price 19400
Gross income per month 200
Tax 9% 18
Income after taxes 182
Yield after taxes (11 months) 10.32%
Maintanence 20
Yield after maintanance and taxes 9.19%