Investing in Income Real Estate: Preface
Alexander, to whom the new year at its very beginning managed to finish his 50th anniversary, talked to me just a few days after a warm friendly celebration of this event, which I attended with great pleasure (thank you, Sasha, again so much for such pleasant emotions – and again – cheers!)
We agreed to finally find out the details of his decision to move to Portugal and start investing in income-producing real estate here. Despite the fact that Sascha has been our client for six months now, we only now agreed to write down and (with his permission) tell his story in detail. I knew from the beginning that it would be interesting, but once I found out the details, I was 100% convinced.
The narrative will be in third person, a format I suggested and determined by the protagonist himself to be the most appropriate.
Sasha stood at the window, nervously glancing around his suburban lot. He’d just gotten a call from his fourth, largest, tenant, telling him he couldn’t pay his rent because of the quarantine. He simply wasn’t allowed to work. The same thing was reported a week earlier by the other three. In the last quarter, three more big orders had gone down, and the construction company where Alexander was one of the founders was having a very bad time. In general, the situation was not so good, but we had to live somehow.
investing in income-producing real estate. In theory, it was more profitable than a deposit, and much less risky than the stock market.
For many years this strategy paid off. But now, as he began going through the assets in his head, figuring out what he could promptly sell at a reasonable price – Sasha stumbled upon the word “illiquid” – which appeared behind every possible estimate.
This was no surprise. In recent years, Sasha had been thinking more and more about moving at least some of his capital to another market that was more reliable and profitable than Russia, if possible. The deteriorating economic situation clearly signaled that this course of thought was the right one. But the usual course of things, the familiar picture of life, was dragging by inertia.
But this time it was different. Sasha realized that his cup was full. That the most precious thing was time, and there was nothing to waste it in anticipation of the very dim prospects in the domestic market.
Sasha really wanted to bring back the stability and predictability to his cash flow that had accompanied all of his ventures a few years ago. As well as confidence, calm and measuredness in his life. He wanted to get to a place where passive income was really about enjoying life, getting notifications of the deposits in his account.
Sasha, of course, was thinking about Europe. The problem was that he had no idea which country to choose. Also, there was no certainty at all about a quick and reasonably priced sale of Russian assets. Simply put, there was not much to sell.
But perhaps the most important obstacle was convincing his wife and adult student daughter of the need to move since Sasha had habitually figured it was better to live near money. And he had to convince himself that this venture would not turn into a disaster, because he would have to operate in an unknown market and deal with unfamiliar people.
It’s not that simple
It had only been a few days, and Sasha already had a lot to think about. First, rushing to call around his acquaintances, he quickly found some mutual buddies who lived somewhere. A couple of them had long since dropped anchor in Spain (Barcelona and the suburbs of Torrevieja); a childhood friend had moved to the Tuscan hills a couple of years ago; a couple of other acquaintances had bought seven apartments in Antalya for three people and were renting them out.
The Spanish and Italian buddies were buying for themselves-but when Sasha asked how the value of their properties had changed since purchase, he felt disappointed. The price seemed to have risen, but very little. The supply market was oversaturated with such country houses, and because of the sagging rental market, the annual yields were not much higher than the rates of deposits in foreign currency in domestic banks.
With regard to investing in hot Turkey — for Antalya, the absence of tourists during this quarantine year led to a negative performance — both in terms of capitalization and in terms of annualized returns — property maintenance exceeded income.
So is it really that bad everywhere else? Sasha began to gather more information, and dove headlong into the abyss of the Internet. Google, like a skilled cook, didn’t let him down and pretty soon served up such an informational stew that Sasha quickly ate and lay on the couch, heavily digesting. Migrant hostels in Germany, hotels in Lombardy and Slovenia, chalets in the Alps, and lodges in Montenegro…
The plethora of options slowly began to bore him and Sasha decided to narrow his search. To do so, he first clearly outlined what he wasn’t interested in – buying properties wholly dependent on the tourist season – 2020 clearly showed how quickly you can drive into a wall on such a path.
Further on, Sasha thought the geography should be narrowed down to where he himself would like to live and be on his own. Sasha was an experienced tourist and had watched Mediterranean sunsets from many towns and villages. Therefore, after comparing the prospect of living somewhere near Berlin or Vienna, with the option on the seashore, he realized that such a prospect is not a viable one. In short, after a little hesitation between Nice and Marbella, I decided not to go ahead and look at both cities and their surroundings.
Having quickly researched the cost of buying and renting housing in these regions, Sasha sensibly decided that he could rent a place to live at first, but that he needed to secure his income there first.
However, the first thing he wanted to do was to look for a place to live and a place to live.
A couple of hours of Internet wandering later, the obvious conclusion was that we had to go and look locally. Under quarantine conditions, this was impossible. What to do?
In his search for an answer, Sasha mentally stumbled upon how things have changed lately, and the development of remote education in particular. And after that, he decided to look to Google for another batch of information.
This time Sasha decided to ask if there were any investment funds, agencies, or construction companies that specialized exclusively in profitability for their clients and were able to remotely select an interesting property, do all the paperwork, and go in and out of the deal.
As it turned out – such proposals are also more than enough, but mostly it was real estate agencies that were selling properties, declaring that by reconstructing or making repairs, these objects can be resold more expensive. At the expense of what exactly they will be more expensive and by how much – they did not explain, offering to sign up for a consultation.
The investment funds were immediately baffling — asking for all possible financial information, which should have taken time to gather, promising no substantial earnings, while asking for very substantial money and for a relatively long period of time.
Objects from the builder, too, but mostly all interesting – already at the stage of completion – which meant the maximum current market value, respectively, very little income, and that depended on market conditions, which was already paralyzed by covid.
From all the options listed above, Sasha settled on several local real estate agencies — and began signing up for consultations.
In terms of choosing properties to invest in, Sasha settled on an option where he could make money by making understandable and not too complicated improvements – building renovations or even small repairs. As a last resort, Sasha also decided to look at land for construction.
The plan was simple and straightforward: find an agency that would be able to select an interesting investment project for renovation and properly execute the purchase (remotely if necessary). Then it was necessary to organize the reconstruction of hired contractors, who will also help to obtain all necessary permits and put into operation. Then the plan was to rent out the property to young families on a long-term basis and then sell the renovated and rented (and therefore income-generating) facility – with a good return on the money invested.
All of this, Sasha intended to do within six months, hoping to do some recon before he thinks about moving. Sasha also decided to wait with the passive income. It would be better to make some good deals and then to put the capital down in a couple of good properties and rent them out without worrying about anything.
It took a few weeks of information gathering and negotiation. And a picture began to emerge.
First, on closer inspection, and prying information out of realtors, it turned out that the options for renovation or quick construction and sale were pretty much nonexistent. The second unpleasant revelation was that the yield on the selected markets, even if the object is formed – so-so. If you get to sell for 15% more expensive – then you’re lucky. In the south of France and southern Spain, the market has long overheated and was in stagnation – and there were no objective prerequisites for its revival.
But that wasn’t even the problem.
And it was seen in the lack of a clear understanding of the process and legal intricacies of legitimizing the project and conducting the reconstruction itself. And who, in fact, will do it?
Agencies flatly refused such a prospect, and only a couple suggested some builders they know who do such things.
There was no way I was going to fly and do everything myself. Sasha still had the task of realizing at least one of the Russian assets. The process was already in motion here; something had to be done, and Sasha understood that if not now, he would have to keep floundering in Russian realities and, most likely, eat up the capital that remained after the mice of inflation.
The time passed and no solution was found. A couple of companies procrastinated, and the rest simply said, “Come on over, we’ll figure it out locally.
One evening Sasha was sitting in his office and after saying to himself “what the heck,” he decided to look for offers that matched his needs elsewhere. Armed with a Google-map and a search engine with the same name, Sasha slowly moved westward from Marbella, which he decided to start with. And so, little by little, he ended up in Portugal.
At first, he just looked disinterested – this market wasn’t one of his preferences at all. But when he quickly found an idealistic. pt, he stayed there for a long time. It was exactly what he was interested in. A huge number of projects for renovation, excellent price dynamics in the market for the last 5-7 years. And, as written all over the place, the upside potential was still huge.
But Portugal? Sasha had never been there and knew nothing about it except what any educated person should – the island of Madeira, the port, the seafarers, the colonies, the ocean. All in all, in Sasha’s mind, it was some shallow periphery of Europe, at the edge of the earth.
But after taking a closer look and reading a dozen reviews in which the word “paradise” prevailed, Sasha suddenly chuckled and looked at this small country with entirely different eyes.
Well, there had to be a change of plan. So Sasha began the whole process of negotiating with the agencies from the beginning. After a week, he realized that there was only one company that could provide a turnkey solution remotely – Roca Invest.
The guys offered a clear process for getting in and out of a deal; committed to the renovation project; undertook to find tenants and sell the property, providing a return on investment that promised more than double Sasha’s expectations from the Spanish or French market.
We had to make up our minds. A buyer for the Moscow office was just looming on the horizon and realizing that there was no way out in the near future, there was one important decision to make. How to trust 500 thousand euros to a company that promises to conduct a remote transaction with the property at the edge of the earth? Is it realistic? Living in Russian reality, Sasha was not used to trusting people.
So what happened
The project was found quickly–three weeks after the first call, Sascha was already sitting and rotating a redevelopment plan on his computer for a small, 220-square-foot apartment building on the outskirts of Lisbon.
The math turned out well: the property was worth 500K and required renovation, which was tentatively, with a small margin, estimated at 150K. The four apartments that were to come out could be rented for at least 4K a month, which at an investment of 650K gave a 7.3% APR (48K a year). Not bad for Europe. After thinking and consulting if you can twist more – it turned out that yes – at the expense of tourists. Preliminarily estimated so: the facility is able to generate 450 euros per day. At 60% annual load turned out 97.2K per year. And that is 15% per annum, which is fantastic for Europe.
Bearing in mind that deposit rates in Europe, and in Portugal in particular, are about zero – it’s easy to conclude that for an investor focused on passive income, even 5% – it’s space. It was this group of people that the guys at Roca Invest proposed as a target buyer to get out of the deal. And it is from these calculations was made a preliminary assessment of the sale value of the object. And then the decision was made to put it on the market. Here’s what came up.
First option: if we lease long-term, then our sought-after 5% annual rate is 48K per year; which means the appraised value of the property is 960K.
The second option was still not exactly a passive income for the end buyer (and a lot of risks), so the prospective investor would be unlikely to agree to an income of less than 10% per annum. Assuming 10% is 97.2K, then the appraised value of the property was 972K.
We got a sales price of 4364 per square foot and 4418, respectively.
Checked with the market and saw a spread for finished, this level of housing, in the same neighborhood (and this is very important), from 4000 to 5500 per square foot.
After that we had a short discussion and decided that we could not go wrong if we took the price of 4600 per square meter as a basis for calculations – that’s with a margin so we could go down even to the minimum 4364 – which is a significant argument, worth more than 50K, in negotiations.
After such a mathematical exercise, it remained to conclude – so how much would such an investment bring, and for how long? With an investment of 650K and a sales value of 960K, it worked out perfectly – 310K, which was +47.7% to the capital invested.
However, the guys, although they couldn’t guarantee it, assumed, and very reasonably so, that it would take about a year for the whole process, all the way through to the exit from the deal.
But Sascha thought that even if it all dragged on for two – about 25% per annum – that was pretty good, too.
It’s also important to note, of course, that these calculations don’t include taxes, but the guys at Roca Invest know their job – so this minor expense item, in this case, could be neglected. After all, a good understanding of local law and some accounting tricks – you can save very well, for example, absolutely legally and officially exempt from paying tax on the subsequent sale.
So, here we go. Remotely closed the deal to buy the building, contracted with contractors, and started the renovations. Everything spun quickly and the entire renovation, along with approvals and commissioning, took six months.
Earlier in the fall, Sacha flew to Lisbon with his family. It turned out that even with covid – it’s possible if you work with a good partner – who will both send the necessary invitations, and meet and settle in. Since then, Sacha has been in Portugal, in the town of Cascais, not far from where his debut investment shines with new painted sides.
Today, Sasha is in for a pleasant chore — furnishing the brand-new apartments. This, with great enthusiasm and expertise, has been taken care of by his wife Marina. No one doubts that everything will be very stylish. Sasha is confident that it will not take more than a month to finally cut the ribbon and receive the first visitors.
There will then follow the handing over of the facility – plenty of young families wanting to live in a cozy, dynamic, beautiful and healthy Portugal. Well, the cherry on the cake will be getting out of the deal and finding new investment achievements. Yes, that’s exactly what Sasha has been going for so long.
The pandemic has opened the eyes of people around the world to the possibilities of remote work. You no longer have to huddle in big cities–you can enjoy life outdoors, breathing in the salty air of the ocean, feeling its power and the freedom it fully shares with you.
This is how Sacha decided for himself to tie his fate to this beautiful place of our planet, Portugal.
The student’s daughter has stayed in Moscow for now but is going to visit her parents in the spring. Sasha hopes for good.
Late at night, as I was taking my final notes at our favorite cliffside cafe, writing down his story, Sasha, gazing out into the distant ocean with a smile, remarked, “You know, and yet it is true what they say – happiness smiles on those who smile toward it.”