The following article was published in "Verslo Žinios" news portal.
With real estate prices shooting up, such a price rally could look a tad misleading for investors. The thing is that over the last decade, inflation has largely affected real estate prices, explain the managers of InRento, the first licenced platform exclusively for rental properties. Thus, to estimate the actual return of investment on a buy-to-let property, you should additionally consider inflation and lease administration costs. The good news is that rental property investments can pay off even without taking these into account.
Seeing the real estate prices in Lithuania escalating, many brokers hope that the growth will not slow down in the foreseeable future. But looking ahead, there are two likely scenarios, believes the founder of InRento, Gustas Germanavicius: the prices will continue to grow along with inflation; or the prices will rise, descend, and ultimately settle to a certain level. Whether the costs will be higher or lower than today – is still an open question.
In any case, investing in a rental property today remains an attractive opportunity since real estate and rental prices increase along with inflation, while capital growth remains a stable indicator throughout the process.
"The return of real estate investment consists of rental income and capital gains. But frequent investors today look only at what they receive from the lease and often forget the other component of the return. Estimates show that since the twentieth century, the real average capital gain or change in assets value in Western economies has been 1.2% – an actual change in the real estate prices, calculated from the growth of the real estate prices minus the inflation rate," says Germanavicius.
Evaluate the administration costs
While analysts expected at least 6-7% annual return from buy-to-let property investments in Lithuania, booming prices sparked interest among more investors. In the past year and a half, the growth of real estate prices in Lithuania and other Western economies has been greatly influenced by a few factors. First of all, money-printing and state aid that the economies have accepted played their role. Secondly, even before the pandemic, Lithuania and other Western countries witnessed record amounts of deposits, while during the pandemic, people grew their savings significantly. Since real estate investments are much more popular than the stock markets in Lithuania, buyers' demand began to exceed supply and raised prices dramatically.
Germanavicius says that in terms of the return on rental property investment for individual investor, the real amount of the return depends a lot on the administrative costs. For instance, buying a small office to split up and rent out as individual workplaces for different employers is always more profitable, but the cost of administering this type of rent is high. Thus, the real return is lower than expected.
"Administration can be costly, especially if investors do the work themselves and value their work hours. Sometimes, it can be a serious headache. Of course, it is possible to hire or outsource this job to someone else, but it always costs extra and ultimately reduces the real return. Therefore, when investing, it is worth taking into account not only the growth of prices but also the growth of capital, to understand what is the best opportunity to increase value and bring more liquidity," shares Germanavicius.
Discover a more convenient way
It was to solve this variety of challenges that the idea to create a rental property investment platform, convenient for a wider circle of potential investors – both large and small, originated.
"Our mission is to make the most popular way of investing in Lithuania even more accessible. We are the first licensed platform in the eurozone to enable people to invest in real estate rental properties, and the Bank of Lithuania regulates our activities," says the founder of InRento.
Here's how the platform operates: it brings investors together with real estate administrators who need funds to acquire real estate assets. It can be commercial and residential, warehousing or any other type of real estate meant for rent. The investor receives over 80% of the rental income. The rest goes to the project owner for the administration of the property.
Thus, the entire administrative burden is relieved from the investor. If the property is not leased, the owner or administrator undertakes to pay an agreed amount of fixed interest, so the income stream is not interrupted. If assets are sold at a higher price, the capital gain is distributed proportionally among the investors, the platform and the project owner.
"Almost a million euros worth of asset transactions were financed through our platform this year, with the majority of them being in Vilnius," shares Germanavicius. "We are now working to make it possible to invest via the platform outside of Lithuania to have as many opportunities to diversify investments as possible. The former offer included both large and small apartments, offices, warehouses and other assets. Diversifying investments is one of the most important tips, and it applies to all investors," he adds.
Liquidity is the price for stability
According to Germanavicius, historically, when choosing real estate, investors had to pay the price of liquidity for stability. The InRento platform solves the liquidity problem for investors by creating a secondary market where existing investment contracts can be sold ahead of schedule.
InRento's team pays a lot of attention to risk assessment, and that not only includes the selection of the leased property, its owners and administrators, but also the tenants. InRento's team are all licensed financial and investment advisers working in investment and real estate for many years, with international funds such as Startup Wise Guys and Business Angels Fund supporting them.
"InRento is not just another platform where you can lend money to someone for a few months at a fixed interest rate. The goal is to bring a safer way to invest money over the long term so that the income can be adjusted to inflation to ensure stable returns," explains the founder of InRento.