Real estate

Decision to invest

  • Introduction for this study case finished with two questions:
  • What would be the safe investment for you personally?
  • If you have decided for yourself what kind of investor you are, you should evaluate how much money you are ready to invest in future?
  • If you read this study, probably you answer to first question was „Real Estate“ and you have some estimation how much you are ready to invest.

This is all you need to read following study.

General Real estate investmentprincipals

  • Investment to real estate is normally a long-term investment (excl. Extraordinary growing markets).
    • Exit from the investment could take from 4 to 6 month.
  • Acquisition of the asset is important process,
    • because if you get the asset with a right price, you will get a better ratio for future income.
  • Do not try to buy the cheapest asset, wihtout consultation with local experts
    • it could be wrong location or other hidden problems)
  • Check general indicators of local economy: unemployement rate, grow of inhabitans in the area, loan interest rate
    • These numbers are indirect indicators of the market (real estate), they will not give 100% guarantee, but indicate general situation
  • Check the rental advertisment of target asset: price level, number of similar assets, how-long adverts are active
    • You will get first understanding if the choice is correct and planned profitability is achievable.

Real estate investment market in Tallinn

  • There could be different types of investors, who read this study, but all of you want to invest to limit risk and with a maximum margin of profit.
  • Those who have expirience of being investor know, that risk-free and maximum margin rate principals eliminate each other… If only not…
  • This „If only not“ consider „PERIOD of INVESMENT“
    • There is nothing more stable than instable economic development
    • „Rise and Fall“ always guarantees smaller flactuation in the end of the cycle.

Life-hack for real estate market

  • Never offer asked price. Alwas try to get a discount.
    • You should not pay for the try. Most easiest earned money – not spended money.
  • Always check window view, bath, wc and kitchen
    • If you miss deffect in those places, it will cost a lot of money to repair it.
  • Ask regarding parking slots , public transport connection  and neighbours
    • This will give you an advantage to negotiate discount
  • Check if you have any expert, who can advise you in this local area.
    • Costs you spend for expert is much less than costs spend later to repair “missed” defect

How much money you can invest?

  • Finally if you decided to invest you should answer this question: How much money I can invest?
  • This study is not going to calculate your money, but help you to chose the most effective way to invest.
  • To answer the question „How much money I can invest?“ you have to audit your life style:
    • Do you have surplus of money (savings) to be invested, which is enough to buy an appartment?
    • Do you have permanent surplus of your income, which would like to invest?
    • Do you have some savings and also you can do saving monthly from your income?

Strategy choice!

  • Strategy for the investment is chosen automatically if you already answered questions of previous section.
  • To have common understanding of the strategy let’s assign a nickname to each strategy
    • If you have saving to buy an appartment without the loan – „rental strategy“
    • If you have surplus of income and some savings – „multiplyer strategy“
    • If you have surplus of income (but no savings) – „borrow-to-rent strategy“
  • Each of those strategies has its risks and advantages, which we will describe in next s

Rental strategy

  • Bases for the rental strategy is that you have savings, which you want to increase or at least make them working.
  • Strategy is based on simple principal: buy an appartment to rent it.
  • Main headacke is the change of rental tenants as it requires:
    • Control if the asset is in good condition or something was damaged (also possible hidden damage)
    • Restore asset „sales condition“
    • Publish advertisment to find next client (answer the phone, meet and show the appartment)
    • Rental agreement preparation and signature (or signing)
  • You can easily deligate „headackes“ to a broker, who will recieve his fee from your rental tenant and save your time.

Rental strategy is a basement for „Borrow-to-rent“ and „Multiplyer“ strategies. The main difference is usage of financial resources

Rental strategy evaluation

List of action possible actions you have to do in addition to money investment described

  • If you to ret not „monthly“, but „daily“ your income will grow, more up to 10-15%, but you should also run more)
    • In this case you can not deligate any tasks to broker,
    • Use or similar to increase sales (additional cost)

As a conclusion to this strategy:

  • Rental income stable and based on capital
  • Long term investment lowers risks as real estate keeps its value in long term
  • Short-term exit could take up to 6 month or (with) possible property reduction of price up to 10-15%.

Multiplyer strategy

  • This strategy is based on the assumption, that you pay first down-payment for the appartment and then finance loan payments from the rental
  • Idea of the strategy is to multipy your own finance with a bank loan. Difference from „Rental strategy“ is that you have starting down payment and your cash-flow can cover additional loan payments.
  • You do not have to invest all money to one project, but you can get many of them.
  • Rental fee payment will generally covers of loan payments and interest. This investment strategy is the less risky strategy of all three:
    • Risk is shared with a bank (not „all eggs in one basket“)
    • Distribution risk between different investment projects
    • Easy to discuss with a bank regarding loan
    • Future payments (rental fee) will cover future liabilities (loan)

Borrow to rent strategy

  • This strategy is based on a fact: you can get a loan to buy an appartment to rent, without any starting balance (maybe downpayment?).
  • Principal of the strategy: loan+interest payments covered by your income and rental fee collected from the rental tenant. Every done payment of loan means you become closer to ownership (do we give ownership?), but did not paid full amount for that.
  • Main things to consider:
    • To get a loan with a reasonable interest rate (Bank interest could be higher than you income rate, but not much)
    • Longer exit (notification of bank normally 3 months or possible cost 3-5% of remaining loan value)
    • Some limitation from bank: insurances, notification of usage etc (not an issue, if everything is done officially)

  • Main advantage of the strategy: is that you do not have full amount in the beginning of investment. You can have some money or you can borrow for the firt down payment.
  • So income ratio to invested money is higher: normally 5-7% before taxation
  • Principal: future income cover future payments. It is similar to start your own business, but risk free: asset is always fixed.
  • Interest rate increase is the main risk. But it is only short-term: as soon as interest rate grows, rental market price will grow as well with dome delay.