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Paulaner
17-04-2009, 11:24
by mistake I sent this message to driving in Russia section so I repete it here.
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Hi Everybody,

I am planning to move to Moscow in near future. My job contract will be for 5-6 years. Company won't pay me for flat rental but they increase my salary to compensate the cost of accommodation. I am thinking about two or three room flat which rental I estimate for abt 2000 US$. The option I am also thinking of is to buy a flat and then sell it when I move out.
Is it possible to buy a flat for foreigner ? Does it required any permition ? Can I get a loan from a local bank to finance this investment ?
What would be your recommendation in this respect ?

FrenchRussian
17-04-2009, 11:51
by mistake I sent this message to driving in Russia section so I repete it here.
___________________________________________________________

Hi Everybody,

I am planning to move to Moscow in near future. My job contract will be for 5-6 years. Company won't pay me for flat rental but they increase my salary to compensate the cost of accommodation. I am thinking about two or three room flat which rental I estimate for abt 2000 US$. The option I am also thinking of is to buy a flat and then sell it when I move out.
Is it possible to buy a flat for foreigner ? Does it required any permition ? Can I get a loan from a local bank to finance this investment ?
What would be your recommendation in this respect ?

Foreigner buying flat: Yes, it is possible without problem to buy a flat for a foreigner. But if you sell it back even after 3 years, you will have to pay taxes on capital gain whereas russians do not (except if they resell their appartment less than 3 years after the purchase). Capital gain taxes are I think 13%.

Buying vs. renting: Buying is a good idea if you stay for a long time. Flat prices decreased very significantly during the last 6 months. But if you buy, buy something liquid, that is located in the center in a good quality building. It makes sense in general to buy in Moscow because rent price are high vs buying price.

For financing, the best (this is what I have done), is to get your loan from you home country where interest rates are very very low now (supposing you live in US or Western Europe). Rates in Russia are way too high (around 11-13% because of high inflation and lack of competition between banks) so there is no sense to get a loan in Russia. Nevertheless, to borrow abroad, you will have to use an abroad asset as a collateral. If you do not have one, banks will not give you credit and in this case you will have to get your credit from a bank in Russia. The choice will also depend in which currency you will get your salary.

Paulaner
17-04-2009, 12:16
thank you FR,
what would be flat cost ( say 50-60 sq m) in good liquidity area and in green region like Strogino. I need just estimation.
I didn't get what is the difference between selling before 3y and after 3years.

tzaritsa
17-04-2009, 13:46
If the landlord is selling the apts,he is getting an incom and from this income he has to pay tax 13% from the sum (minus 1000000 rub) if the property is "yanger" then 3 years,if "elder"-no.But I didnt know that non residents have to pay anycase,I have to check with the jurist and inform you ,if you would like.I know that non residents have to pay 30% tax from the incom and if there are bonus 1000000 rub I have to check also.

The middle price for the apts 50-60 metres in good areas 200-300K USD and more it depend on area,options,conditions ets.To buy now is very good situation,but to sell is quite complicated and I dont know how it will be in 5 years.And I think to rent for you will be cheaper (for 5-6 years 2000USD per month 120000-144000USD).For this money you will be able to buy not too good 1 room apt.

FrenchRussian
17-04-2009, 14:20
If the landlord is selling the apts,he is getting an incom and from this income he has to pay tax 13% from the sum (minus 1000000 rub) if the property is "yanger" then 3 years,if "elder"-no.But I didnt know that non residents have to pay anycase,I have to check with the jurist and inform you ,if you would like.I know that non residents have to pay 30% tax from the incom and if there are bonus 1000000 rub I have to check also.

The middle price for the apts 50-60 metres in good areas 200-300K USD and more it depend on area,options,conditions ets.To buy now is very good situation,but to sell is quite complicated and I dont know how it will be in 5 years.And I think to rent for you will be cheaper (for 5-6 years 2000USD per month 120000-144000USD).For this money you will be able to buy not too good 1 room apt.


Actually, capital gain = price at which you sell - price at which you buy. Price at which you buy is not always equal to 1 MM rubles. 1 MM rubles is just the minimum price you can put on the buy sell agreement to minimize taxes sellers have to pay (specially if they are russian and sell the flat less than 3 years from time of purchasing). But this is up to negociation between you and the seller. Better for you if you buy to put the official price as it can minimize your tax on capital gain if you then decide to sell.

Concerning how to assess if it is good or not to buy or rent. you should not only assess the money you save in renting during the next 5 years. You should analyse like a stock share purchase, the purchasing price of appartment being the share price and the rent being the dividends. So, assess:

* the dividend yield ((yearly rent- charges including interest on loan) /purchase price). Dividend yield in Russia is high because rent is high vs western europe and price is on par vs Western Europe.

* Evolution of flat price. Wait for another 6 months and I think price will be at the bottom. But here you really never know.

When I say liquid appartment, I meant the center, that is inside garden ring and better in the east side. Expensive but more liquid and less risky in in term of potential capital loss and easier to rent out if you leave.

Paulaner
17-04-2009, 15:38
Thanks for advices.
re: dividend
I use the different logic: flat price - $250 000, rent - $125 000
so If I buy it now after five years I have flat for half of the price. So I could easy sell it with 20% discount and still have $75 000 income.
I compute in fixed prices assuming increase of flat value will set off with interests on bank loan. Most probably value of real estate will increase in five years by far more than the cost of a loan what will genarate additional income.

am I wrong

FrenchRussian
17-04-2009, 16:42
Thanks for advices.
re: dividend
I use the different logic: flat price - $250 000, rent - $125 000
so If I buy it now after five years I have flat for half of the price. So I could easy sell it with 20% discount and still have $75 000 income.
I compute in fixed prices assuming increase of flat value will set off with interests on bank loan. Most probably value of real estate will increase in five years by far more than the cost of a loan what will genarate additional income.

am I wrong

Well, the real analysis would use what is called Net Present Value (NPV) analysis, called also free discounted cash flow analysis. In short, you assess the future cash flow of your investment and you discount them by discount rate of real estate investment in Russia with leverage you choose (Debts/ (Debts+ Equity)) .

You then use as terminal value piece at which you think you can resell your appartment, for example in 5 years. You should do all this analysis in rubles (meaning your analysis will have to include exchange rate forecast if you take in loan in an other currency than rubles).

For example you buy appartment at year 0 at 300 K$, you have:

Spredsheet will use:

Revenues sides

- Rents (or saved rent)= 25 K$ /year

Cost sides

- Communal charges= 2K $/ year

Discount rate

* WACC (weigthed average cost of capital). Depends on your leverage (the more you borrow, the lower the WACC will be), but for sake of simplicity, let's say 25% if you borrow in rubles with interest rate of 10%

The WACC measures your expected return for this kind of risky asset. Remember that return you expect for real estate in Russia is high because this is RISKY.

terminal value

- Flat will cost 250 K$ in year 5 and you sell it at year 5. You need here of course to run an analysis of what you the real estate price FOR YOUR AREA wil be in $ term in 5 year.

NPV = -300 + 23/(1+20%)+ 23/(1+20%)^2+ 23/(1+20%)^3+ 23/(1+20%)^4 + 23/(1+20%)^5 + 250/(1+20%)^5

if NPV>0, you invest, if not, you do not. You should do the same exercise with 3 or 4 scenarios on resell price in yr 5 and rents and check then what NPV is.

You need also for that to forecast the exchange rate if you really want to be precise. Exchange rate in Russia is very much based on oil price. The higher the oil price, the stronger ruble will be. This is important only if you take loan in $ and/or pay rent in $. If all money flow are in rubles, no need to worry about that.

Paulaner
17-04-2009, 17:19
using your formula I received -124 494 USD however I changed 23 into 25 since even if I rent I will cover maintenace costs of flat.
After five years I still have flat to sell which I definitelly sell for more than that.

The point is there are many variables which are unpredictable.

Looking what happen with shares prices during last six months real estate seems to be one of the most reliable investments (providing you buy at the bottom of prices)

FrenchRussian
17-04-2009, 17:36
The point is there are many variables which are unpredictable.



That is why you should do a sensitivity analysis and run 3 cases with the most sensitive variables which are resell price and rent price:

Base case: for example resell in 5 years at 300 K$ and rent at @25K$/ year

Worse case: resell in 5 years at 2003 level and rent at 2003 level

Best case: Resell in 5 years at 2007 level and rent at 2007 level

You should put probability on each case and this will be very much based on in depth analysis of how you see real estate price in Russia in 5 years in your area. Here, a good beginning is to look at historical price (in rubles/ m2) for the last 10 years in area you want to buy. The weighted average of NPV will give you the NPV of the project.

Nobody knows what will be real estate price in 5 years but to do a model force you to do your homework.

tzaritsa
17-04-2009, 23:13
Thanks for advices.
re: dividend
I use the different logic: flat price - $250 000, rent - $125 000
so If I buy it now after five years I have flat for half of the price. So I could easy sell it with 20% discount and still have $75 000 income.
I compute in fixed prices assuming increase of flat value will set off with interests on bank loan. Most probably value of real estate will increase in five years by far more than the cost of a loan what will genarate additional income.

am I wrong

I think you are wrong coz you are going to take credit.Are you going to owe the full sum or going to use your own money?You should count this scheme very properly-will you get enough money to pay the full credit during these 5 years.If not,your property will not be yours truly coz it will be under the mortgage and you will not be able to sell it by yourself-bank will sell it.

tzaritsa
17-04-2009, 23:32
[QUOTE=FrenchRussian;518015]Actually, capital gain = price at which you sell - price at which you buy. Price at which you buy is not always equal to 1 MM rubles. 1 MM rubles is just the minimum price you can put on the buy sell agreement to minimize taxes sellers have to pay (specially if they are russian and sell the flat less than 3 years from time of purchasing). But this is up to negociation between you and the seller. Better for you if you buy to put the official price as it can minimize your tax on capital gain if you then decide to sell.

The apt price now in Moscow is never equal 1 MM roubles,unfortunately.And when I was speaking about 1 MM I meant the preferential sellers tax duty.BTW,in agreement you may put any sum.This is an agrement between buyer and seller.

FrenchRussian
18-04-2009, 12:31
Looking what happen with shares prices during last six months real estate seems to be one of the most reliable investments (providing you buy at the bottom of prices)

Well, this is open to debate. This is actually with this kind of reasonning that we ended up in the subprime mess :punk: Real estate never fall they were saying

But I agree that if you plan to live for a long time like 5 or 6 years and provided you wait for the prices in Moscow to come back to their 2003-2004 level, it is a good buy. But remember, in Russia, you have the double risk. The real estate risk and the currency risk

Just to give you a good view, check out this good web site

Цены на недвижимость и квартиры, динамика московского рынка недвижимости с 2000 года (http://www.irn.ru/gd/?class=areas&type=1&period=5&step=week&grnum=1&currency=1#begin)

This gives you a view of the history of real estate price in Moscow for the last 5 years. You can play with graphic (the one I attach is by Moscow area)but what you see if that we came back to the end 2006 level in $/m2.

Paulaner
18-04-2009, 14:01
I think you are wrong coz you are going to take credit.Are you going to owe the full sum or going to use your own money?You should count this scheme very properly-will you get enough money to pay the full credit during these 5 years.If not,your property will not be yours truly coz it will be under the mortgage and you will not be able to sell it by yourself-bank will sell it.

this is something new or me. Can't I sell a flat wich is under mortgage ?

Katrine L
18-04-2009, 14:33
this is something new or me. Can't I sell a flat wich is under mortgage ?
As I know - you can do it and reimburse to bank unpaid part of mortgage. PM Dino - member here, he did it in Russia.

tzaritsa
19-04-2009, 01:32
this is something new or me. Can't I sell a flat wich is under mortgage ?

You cant till you will pay the whole mortgage.Or bank will sell it and return you money you had paid minus their profit percents cos you bought the flat using their money and in State Registration Document will be the words"under the mortgage".When the person finishs to pay the mortgage he gets the special document from the bank and gets the new SRDocument without the words and it means that now he is a real owner and may do with the apartment anything he wants.