Investing In The Baltic Real Estate Market

Last Updated on June 19, 2022 by Quantified Trading

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.

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.

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  • “This adds a great cash flow besides trading”
    I invest in real estate for the very same reason, plus some others.
    1. CASH FLOW – Relatively little work is required to maintain properties, so one can focus 100% on trading. If the workload is still too large, one can easily hire someone for a cut of the rent.
    2. RETIREMENT – The properties will have value for decades to come. I.e. a secure cash flow (even if rent falls into half, one still has an income … unless the properties become vacant -> a liability is unlikely)
    3. RISK MANAGEMENT – After a good period of trading one can convert the gains into real estate. Both the secure cash flow and this realization of gains make it easier to handle risk (in my opinion).

    That said, I’d like to diversify into other high yielding assets on other continents as well.