Today you can deposit funds at a rate of 16% yearly. As an alternative, you can gain from square footage. Typically, proprietors either procure a property for lease or for resale. Nevertheless, you can opt for a more profitable approach in both scenarios.
Purchase and Conserve
Per CIAN, the mean renting costs for apartments in diverse Russian cities have surged by 65% over five years. Homeowners in Norilsk, Smolensk, Nizhnekamsk, Kislovodsk, Dzerzhinsk emerged on top, with the price escalation eclipsing 100%. Interestingly, in Moscow, Sochi, St. Petersburg, and other major cities where rent starts off costly, rental growth has been rather moderate.
The optimal scenario arises when the property has already been renovated, “packaged,” and is available for immediate lease. If this is a new construction or atypical lodging, then efforts and money will be required to upgrade the square footage. Most purchasers are unwilling to engage in this affair. If you’re inclined towards investment and aspire to live like a rentier, considering apartments might be beneficial.
From a juridical standpoint, apartments are classified as commercial real estate, though this doesn’t significantly impact saving and earning profit. Apartment costs are considerably more alluring than those for flats, usually differing by at least 10%. These properties are situated in intriguing areas and are typically surrendered to the proprietor post-renovation, thereby presenting no issues in terms of leasing.
“In Moscow, an economy class apartment can be secured for 10 million rubles, apartments for 6-8 million rubles,” elaborates realtor—practitioner Vladimir Shmelev. — The monthly rent for an apartment will be approximately 45 thousand rubles, and for apartments it will be around 60 or even higher. According to my assessments, the apartments will recoup the investment in 10 years, while the apartments will do so in 16-18 years.”
The expert adds that the yield from leasing apartments should be about 10% yearly.
“Undoubtedly, some banks are currently offering deposit rates below 16%, but it’s apparent that this situation won’t persist. Real estate, on the other hand, can generate income continuously, and its value will increase annually by at least the inflation rate,” summarizes the interviewee.
Resell and Profit
The less one disburses on purchasing an apartment, the greater the potential profitability. Flippers, who buy a pre-owned property at a discount, revamp it, and then vend it at a higher price, adhere to this principle. The net profit amount hinges on the apartment’s condition, the caliber of renovations, location, and other variables.
The buying price should be at least 10% lower, ideally 15-20% lower, than the market price. Procuring an apartment in poor condition, but at the market rate, is likely to be unprofitable, elucidates Anatoly Pysin, CEO of the real estate firm CDN, and lawyer.
“The profit from the amount invested in flipping one apartment averages 15-20% yearly in the market. The entire transaction cycle, from the purchase to the sale post-renovation, spans 4-8 months. By selecting the right properties, a flipper can secure approximately 40% profit annually. This is a very high figure in today’s real estate market. The figures can vary significantly,” he states.
The head of the Ermilova Estate real estate firm and investor Yulia Ermilova provides an example:a year past, a “two-bedroom apartment” in the capital city measuring 39 square meters on Frunzenskaya Street was acquired for 16 million Russian rubles. Major refurbishments and redesigning were required, incurring a cost of 2.1 million rubles. However, post renovations, the property’s value surged, leading to its resale at 23.9 million rubles. Factoring in tax payments, the net revenue stood at 4.8 million rubles.
An entrepreneur explained, “The least successful instances we’ve observed barely break even, with resale yielding a net profit of 200-400 thousand rubles, which is an extremely poor return for flipping.”
When is the ideal time for a purchase?
Industry experts concur that the current economic conditions have drastically curtailed investment opportunities for both flipping and leasing properties. Previously, it was feasible to utilize a mortgage for acquiring properties intended for subsequent resale, but not in the current market.
“Presently, the rate for the “secondary” market is approximately 18%. At such rates, the cost of a mortgage loan for each flipping cycle will be around 800 thousand rubles to 1 million rubles, nullifying the overall project’s profitability,” highlighted Yulia Ermilova. “It is financially advantageous to acquire properties using a mortgage if the interest rate does not surpass 11-12%. This minimizes the financial risks and enhances the project’s profitability, factoring in investments and return on invested capital calculations.”
Hence, the returns from flipping apartments can be significantly greater than those from leasing properties. Nonetheless, it demands considerably more resources to prepare and sell properties. The owner must be poised to engage in refurbishments, resolve the previous owner’s legal issues, and expedite the entire process to attain the desired profits.