How to Become a Real Estate Investor
US News publishes an interesting article on the mental and financial preparation you would need in order to be called a real estate investor. I have carefully read it and, as I have a good record of real estate deals, I will try to apply the global principles to the Romanian market. The text below is useful especially to beginner investors.
A Global Perspective
According to the publication mentioned above, you need to take four steps in order to be successful in real estate.
- Put your personal finances in order. The guideline is the 50-30-20 rule, which says that you should spend 50% of your personal income on your needs, 30% for desires and save the remaining 20%. Real estate acquisitions are made from surplus, that is from savings.
- Prepare yourself to learn. First of all, learn about contracts, notary’s fees, state taxes and even procedures regarding the issuance of ID documents, if the future tenant wants their address registered on their ID. The times when you merely handed over a key in exchange for a monthly amount are about to die out. A contract also protects you, the so-called lessor, that is the one who lets the property, and the taxes are not that high (10% in Romania, currently).
- Have you studied the market? It is not enough to keep an eye on the rates of apartments and the average rent of a certain area. You may also invest in real estate by means of a constructions or interior decorations company. Or by a real estate investment fund.
- Consider the maintenance and renovation costs. If you have ever rented an apartment for a few years, you know the tenants will ask for money for certain repairs and they are entitled to do that. Also, when a tenant leaves, you should be prepared to renovate the house, even if the tenant has kept it in good condition.
Remember that in Romania, repairs and renovations are a problem bigger than on other markets, as most of the good workers have left the country for better wages in Western countries and, logically, the demand being high, the companies that execute such works have relatively high rates.
The Romanian Perspective
Besides the way in which I have tried to apply the recommendations above on the local market, I believe that it would be useful to add some pieces of advice that prove useful especially in Romania.
- Do you have/can get EUR 70,000? This is just an example amount, on which we may practice, but the size does matter. Let’s assume that this is the cost of an apartment in a relatively good area of Bucharest, from which you may get a EUR 300 a month rent. Simple mathematics tell you that you may recover all your investment from rent in 233 months, that is in almost 20 years. This, however, is a stupid calculation, as the apartment remains yours and you may resell it at a certain point. What really matters in such a case is the annual yield, of EUR 3,600, that is about 5.1%. This yield is well above the interests for a bank deposit, which range from 0.5% and 1.5% for Euro. This calculation disregards, however, the maintenance costs, taxes and work invested by you in the business.
As EUR 70,000 is a significant amount given the average wage in Romania, I will add that you may be an investor with less money, considering that you may take a loan to buy the respective apartment. All you need is start with only EUR 25-30,000 cash, but in this case, you will have to deduct the loan related costs from the whole business.
- Forget about speculations. The Romanian market is difficult and the times when you could buy a plot of land to erect a house for EUR 20,000 in order to resell it for EUR 30,000 have long gone. Next year, the global economy might enter a recession, not necessarily a very serious one, but this will change the development of the real estate market. To buy and sell property is indeed a good business, but only for specialized investors with liquidities of hundreds of thousand Euro. If you want to make money from this kind of business, find a trustworthy real estate investment fund. The success you will build will allow you to have enough liquidities and a background that recommends you for a substantial participation, with decision making rights, in a bigger business.
- Think in perspective. Are we going to have a recession? If yes, the value of the example apartment of EUR 70,000 might drop to EUR 60,000 in three years. Real estate is however a business which involves investments lasting for a few decades. More than the recession, what counts, in this case, is the development prospects of the area. If we deal with residential buildings, the center of Bucharest or of other big cities will most certainly have the tendency to increase in price more than the neighborhoods built during communism. An area that has massively developed, such as Lujerului in Bucharest, has doubled or tripled the value of the neighboring apartments, given the malls, hypermarkets and transport facilities that have subsequently become available. Drumul Taberei is, in principle, a desirable neighborhood, but the eternal problem of the underground metro decreases dramatically both the prices of the properties and the rents.
- Act with caution. I’ve already mentioned the recession and the fact that it matters less in the long run. On medium term, however, the Romanian real estate market is still a very volatile one, after the 2008-2010 crisis. The prudential measures you need to take refer to contracts on terms as long as possible, with a value set in EUR and other similar measures. Going back to the example apartment above, a two-year contract with a 300-EUR rent will bring you EUR 7,200. Assuming that the apartment will remain unoccupied another six months afterwards, you may add another EUR 1,800 for the third year, that is a total of EUR 9,000 for all the three years. If you rent for three years in exchange for EUR 275 per month, you would get EUR 9,900, that is more. Also, in the scenario with six unoccupied months, I have disregarded the repairs and/or renovation – and also the work needed to find a new tenant, which also means money.
- Check your potential partners or tenants. For a beginner investor, this means simple things, such as a Google or Facebook search or, in case of businessmen, a Linkedin search. People tell a lot of things about themselves online and create an accurate enough image.
- Keep in touch with the real estate agencies. I have mentioned above documenting and classified websites, which are a useful starting point. However, you should keep in mind that in our country the rates in the real estate ads are quite different from those of real deals. Very simply put, it is the amount demanded by the seller. What he gets is most likely less. Or, more importantly, in some areas, properties are simply not traded and this matters as an initial red flag – although it can be considered a medium term opportunity for specialized investors.