Investing In The Baltic Real Estate Market

Last Updated on November 24, 2020 by Oddmund Groette

Kitchen in the living room

In a previous article, I mentioned the pros and cons of day trading from another country. One of the pros was looking for other business opportunities. After living in Latvia for 1,5 years I have found some attractive real estate opportunities. This adds a great cash flow besides trading. Here is my analysis of the Riga market:

  • The real estate market has fallen sharply in price since the bubble burst. On these price levels, I see no particular downside. The market is 50-60% down from the peak in 2006/2007.
  • Credit is very tight. The banks have learned a lesson, and most people can not get a loan. Most importantly, people do not want credit either. The rental market seems very strong.
  • Latvia went through austerity in 2008 and 2009 when most European countries did the opposite. In hindsight, this was a good idea. The Latvian economy is under control and costs have been slashed. For the next 3 years, the general personal income tax rate will go down from 25 to 20%. Even VAT will be reduced by 1 percentage point from 1. July 2012.
  • The Latvian population is shrinking by almost 1% a year, quite dramatic. This might dampen upward pressure on prices. This is due to both low birth rates and emigration.
  • There is no lack of supply, but as far as I can see a lack of renovated apartments. To my surprise, people are willing to rent apartments to much higher prices if renovated.
  • I expect no future increase in the value adjusted for inflation. For me, this is a yield case. I decided to invest just outside the city center because of this. In the city center, it is basically impossible to find anything yielding more than 6%.
  • I have bought renovated apartments in old factories, build during soviet times and rock-solid with concrete, build to withstand bombs. Everything inside is taken out and replaced with concrete floors, new plumbing and elctronics. The apartments are practically brand new, with a standard which I consider mid-end. No luxury, but offers good living conditions. I pay approximately 24 000 – 27 000 EUR for 37 square meters including kitchen and basic furniture. For this, the tenants pay about 255 EUR a month (and they also pay the utility bills). My income is 255 before taxes and maintenance.
  • So far it has been easy to rent out by using a real estate broker. He takes 50% of the first month’s rent. Most apartments are rented out for 12 months, but some for 6 months. I expect one month vacancy per year. The yield before maintenance and taxes is between 9 to 12% (I have paid different prices for the apartments). I find this very attractive.
  • The apartments are furnished, so it remains to be seen how the costs of this will develop.
  • I have established a limited company and pay 9% tax on the gross proceeds. I can pay myself a salary which is tax-free (the tax is included in the 9% of the company, also included is my social security taxes).
  • I do not think Latvia will devalue their currency. They are working hard to enter the eurozone since 2014, and when they did not devalue in 2008 I can not see them doing it now.
Bathroom

I had no plans to invest in real estate here in Riga, except for my house which I live in. However, I consider this a good investment with a very attractive yield and protection against inflation.