Comparing Investments: Rental Housing or a Real Estate Crowdfunding Platform
Both investing in rental properties and investing through a real estate crowdfunding platform have their advantages and disadvantages. When making an investment decision, it is essential to rely on arguments rather than emotions or socially ingrained habits.
The return on investment (ROI) for rental properties depends on the size of the rental income and the change in the property's value. According to data from "Inreal", the ROI for rental properties, excluding the change in property value, ranged between 4.0% and 6.5% in the first quarter of 2023.
"The rental market has undergone significant changes recently – the influx of refugees increased rental prices until July 2022. Later, as the expensive heating season approached, the refugee influx slowed, and rental supply increased, rental prices dropped somewhat but remained higher than before the war," comments Tomas Sovijus Kvainickas, Head of Investments and Analysis at "Inreal" Group, about the current market situation. According to T. S. Kvainickas, the rental market is now driven by another factor – some residents moving to our major cities are unable to buy homes due to higher interest rates and increased property prices. Others who can afford to buy are hesitant, believing their needs may change in the coming years, so they delay purchasing a home. All of them add to the ranks of renters, and returns from rental properties remain relatively high, even with rising property prices.
Historical Returns
According to data from the investment index calculated by "INVL Asset Management", investing in rental properties in Lithuania between 1996 and 2022 provided the highest return among all possible investments (with an annual return of 11–14%, including property value appreciation, and average annual inflation of about 3%). However, T. S. Kvainickas cautions against expectations of property values continuing to grow 5–10% faster than inflation each year. Over the past few decades, Lithuania joined the European Union, adopted the euro, and saw faster wage growth than in Western countries. However, now the standard of living in the country has reached the EU average, so the economy is likely to grow more slowly.
"When evaluating your rental property investment project, the safest assumption is that its value growth is equal to inflation," advises T. S. Kvainickas. Long-term housing price trends are also influenced by demographic changes. According to the State Health Insurance Fund, in March 2023, there were 671,080 residents registered in Vilnius city health institutions, or 59,189 more than ten years ago. Since 2022 alone, the population of Vilnius has increased by 20,672. A trend of population growth has also been observed in Kaunas in recent years, while Klaip?da began to see population growth at the end of the last year.
Importance of Location Changes
T. S. Kvainickas notes that housing price growth can be influenced by the requirement to build only A++ energy class houses from 2021, infrastructure fee, and compensation for development on state land. These requirements apply to new projects, and the supply of older projects not subject to them is diminishing. This makes construction more expensive. Another factor that can affect the price of a particular property is area transformation.
"If you correctly foresee the trend, you can expect additional price growth. For example, this was the case with areas in Vilnius like Snipiskes, the Old Town, Uzupis, and Naujamiestis," lists T. S. Kvainickas. However, if you misjudge the location, you could lose a lot. Some areas in Lithuania lost many residents after the 2008 crisis, making the housing market sluggish. The market was slow to recover after 2008 in the Lithuanian seaside area as well.
"We don't expect significant housing price changes in the near future – demographic trends are favorably affecting prices, while rising interest rates and a likely economic downturn are having a negative impact," comments the Head of Investments and Analysis at "Inreal" Group. With EURIBOR rising from 0 to 3.6%, the monthly payment on a 100,000 Euro loan has increased by 200 Euros. Together with a bank margin of 1.8–2.2%, just the interest could now be around 460 Euros.
Two Types of Investors
Giedrius Krazauskas, Development Manager at "Rinvest", a company with over 25 years of experience in real estate development, notes that investors are often the first to enter a new real estate project because they are less afraid of buying property off-plan. This way, they secure better prices and a wider range of properties. The "B Kvadratu" project currently being developed by "Rinvest" in Vilnius was no exception. When the project first launched, most of the first buyers were natural persons and legal entities looking to invest in real estate.
"Our experience shows that the ratio of properties purchased for investment versus personal use is roughly 30% to 70%," shares G. Krazauskas. According to the Development Manager, individuals who buy apartments for investment can be divided into two types. The first type buys an apartment to rent out, while the second type buys, renovates, and sells it.
"With rising property prices and particularly due to worsened credit conditions, we are currently seeing a significant decrease in both types of investors," says G. Krazauskas. According to him, small, maximally functional apartments are the most attractive to investors. G. Krazauskas speculates that rising construction costs may positively impact rental prices.
"All market participants' margins have decreased, costs have increased significantly, project deadlines have been extended, and document approval with state institutions has been delayed, adding many additional cost lines that increase the final price," lists G. Krazauskas. On the other hand, a significantly increased supply could also affect rental prices.
"We are waiting for similar offers from banks in Lithuania as those already available in Latvia and Estonia – a 0% bank margin for the next few years. Medicinos Bankas already offers similar conditions – only EURIBOR is left for one year," shares the Development Manager.
Sometimes Emotions Play a Role
Greta Zarembiene, Head of Investor Relations at the real estate crowdfunding platform "Röntgen", notes that for some investors, the biggest advantage of investing in rental properties is the physical asset itself.
"For some people, owning property provides emotional and psychological comfort and can outweigh any calculations," G. Zarembiene notes. "Over the past few decades, in many cases, real estate has appreciated, so those who buy real estate as an investment believe that it will continue to increase in value alongside generating rental income. These expectations may be met, but the actual result depends on the time frame, the overall market environment, and the location." There have been instances in Lithuania's history (2007–2008) when property purchased at the peak did not return to its original price for nearly a decade.
When investing in real estate through a platform, you do not become a property owner. Instead, the property is mortgaged in favor of investors for the total amount of the pooled loan, which is 30–40% higher than the property's value. Investors always receive a fixed return and do not participate in the developer's profit. While buying a property allows you to earn from significant value changes, today, according to G. Zarembiene, the advantages of investing in rental properties have faded. With EURIBOR rising and borrowing rates on platforms increasing to 7–10%, they have already surpassed rental property returns. Additionally, self-managed rental properties require a lot of time and money, and the investment itself is highly illiquid.
Interest Can Be Reinvested
An individual who invests through a platform does not need to worry about loan administration: they will receive interest payments quarterly according to the payment schedule. If someone intends to invest in rental property independently, they will need to find a property, arrange financing, furnish it, find tenants, accept that the property may sometimes be vacant, maintain it, and collect payments.
By investing through a platform, the management of this investment is minimal since the platform operator takes care of everything. Additionally, the money invested on platforms works throughout the investment term, and the earned interest can be reinvested. The platform provides all information about the annual return earned by investors to the State Tax Inspectorate – the investor only needs to confirm it with one click. Interest returns up to 500 Euros per year are not taxed, and if investing in a spouse's or partner's name, the non-taxable amount per year reaches 1,000 Euros. Rental income is taxed at a rate of 15% from the first Euro, or you need to purchase a business license, and you must calculate and declare the rental income yourself.
Investment From 100 Euros
"Buying a property without a loan requires a significant investment amount – in major cities, it often reaches no less than 100,000 Euros. Through platforms, you can invest with as little as 100 Euros," G. Zarembiene compares the conditions. When buying a property with a loan, you need to consider the risk of EURIBOR fluctuations, but investing through a platform is currently an excellent time to lock in a higher return due to the increased EURIBOR. The investment term through crowdfunding platforms usually ranges from 6 to 18 months. Interest is typically paid quarterly, and the loan amount is returned at the end of the term. Therefore, almost every year, you can decide whether to reinvest in new projects or keep the money for yourself.
A Team at Work
The "Röntgen" team comprises professionals in real estate, finance, law, and other fields who carefully analyze every project offered to investors and actively communicate with the developer both before financing and throughout the entire investment project. If you purchase a rental property on your own, you need to have knowledge of the real estate market, property design, construction, locations, and have good relationships with suppliers. Without this knowledge and qualities, the future return on investment is likely to be lower and you will have to learn from your mistakes.
Comparing Investments: Rental Housing or a Real Estate Crowdfunding Platform
Both investing in rental properties and investing through a real estate crowdfunding platform have their advantages and disadvantages. When making an investment decision, it is essential to rely on arguments rather than emotions or socially ingrained habits.
The return on investment (ROI) for rental properties depends on the size of the rental income and the change in the property's value. According to data from "Inreal", the ROI for rental properties, excluding the change in property value, ranged between 4.0% and 6.5% in the first quarter of 2023.
"The rental market has undergone significant changes recently – the influx of refugees increased rental prices until July 2022. Later, as the expensive heating season approached, the refugee influx slowed, and rental supply increased, rental prices dropped somewhat but remained higher than before the war," comments Tomas Sovijus Kvainickas, Head of Investments and Analysis at "Inreal" Group, about the current market situation. According to T. S. Kvainickas, the rental market is now driven by another factor – some residents moving to our major cities are unable to buy homes due to higher interest rates and increased property prices. Others who can afford to buy are hesitant, believing their needs may change in the coming years, so they delay purchasing a home. All of them add to the ranks of renters, and returns from rental properties remain relatively high, even with rising property prices.
Historical Returns
According to data from the investment index calculated by "INVL Asset Management", investing in rental properties in Lithuania between 1996 and 2022 provided the highest return among all possible investments (with an annual return of 11–14%, including property value appreciation, and average annual inflation of about 3%). However, T. S. Kvainickas cautions against expectations of property values continuing to grow 5–10% faster than inflation each year. Over the past few decades, Lithuania joined the European Union, adopted the euro, and saw faster wage growth than in Western countries. However, now the standard of living in the country has reached the EU average, so the economy is likely to grow more slowly.
"When evaluating your rental property investment project, the safest assumption is that its value growth is equal to inflation," advises T. S. Kvainickas. Long-term housing price trends are also influenced by demographic changes. According to the State Health Insurance Fund, in March 2023, there were 671,080 residents registered in Vilnius city health institutions, or 59,189 more than ten years ago. Since 2022 alone, the population of Vilnius has increased by 20,672. A trend of population growth has also been observed in Kaunas in recent years, while Klaip?da began to see population growth at the end of the last year.
Importance of Location Changes
T. S. Kvainickas notes that housing price growth can be influenced by the requirement to build only A++ energy class houses from 2021, infrastructure fee, and compensation for development on state land. These requirements apply to new projects, and the supply of older projects not subject to them is diminishing. This makes construction more expensive. Another factor that can affect the price of a particular property is area transformation.
"If you correctly foresee the trend, you can expect additional price growth. For example, this was the case with areas in Vilnius like Snipiskes, the Old Town, Uzupis, and Naujamiestis," lists T. S. Kvainickas. However, if you misjudge the location, you could lose a lot. Some areas in Lithuania lost many residents after the 2008 crisis, making the housing market sluggish. The market was slow to recover after 2008 in the Lithuanian seaside area as well.
"We don't expect significant housing price changes in the near future – demographic trends are favorably affecting prices, while rising interest rates and a likely economic downturn are having a negative impact," comments the Head of Investments and Analysis at "Inreal" Group. With EURIBOR rising from 0 to 3.6%, the monthly payment on a 100,000 Euro loan has increased by 200 Euros. Together with a bank margin of 1.8–2.2%, just the interest could now be around 460 Euros.
Two Types of Investors
Giedrius Krazauskas, Development Manager at "Rinvest", a company with over 25 years of experience in real estate development, notes that investors are often the first to enter a new real estate project because they are less afraid of buying property off-plan. This way, they secure better prices and a wider range of properties. The "B Kvadratu" project currently being developed by "Rinvest" in Vilnius was no exception. When the project first launched, most of the first buyers were natural persons and legal entities looking to invest in real estate.
"Our experience shows that the ratio of properties purchased for investment versus personal use is roughly 30% to 70%," shares G. Krazauskas. According to the Development Manager, individuals who buy apartments for investment can be divided into two types. The first type buys an apartment to rent out, while the second type buys, renovates, and sells it.
"With rising property prices and particularly due to worsened credit conditions, we are currently seeing a significant decrease in both types of investors," says G. Krazauskas. According to him, small, maximally functional apartments are the most attractive to investors. G. Krazauskas speculates that rising construction costs may positively impact rental prices.
"All market participants' margins have decreased, costs have increased significantly, project deadlines have been extended, and document approval with state institutions has been delayed, adding many additional cost lines that increase the final price," lists G. Krazauskas. On the other hand, a significantly increased supply could also affect rental prices.
"We are waiting for similar offers from banks in Lithuania as those already available in Latvia and Estonia – a 0% bank margin for the next few years. Medicinos Bankas already offers similar conditions – only EURIBOR is left for one year," shares the Development Manager.
Sometimes Emotions Play a Role
Greta Zarembiene, Head of Investor Relations at the real estate crowdfunding platform "Röntgen", notes that for some investors, the biggest advantage of investing in rental properties is the physical asset itself.
"For some people, owning property provides emotional and psychological comfort and can outweigh any calculations," G. Zarembiene notes. "Over the past few decades, in many cases, real estate has appreciated, so those who buy real estate as an investment believe that it will continue to increase in value alongside generating rental income. These expectations may be met, but the actual result depends on the time frame, the overall market environment, and the location." There have been instances in Lithuania's history (2007–2008) when property purchased at the peak did not return to its original price for nearly a decade.
When investing in real estate through a platform, you do not become a property owner. Instead, the property is mortgaged in favor of investors for the total amount of the pooled loan, which is 30–40% higher than the property's value. Investors always receive a fixed return and do not participate in the developer's profit. While buying a property allows you to earn from significant value changes, today, according to G. Zarembiene, the advantages of investing in rental properties have faded. With EURIBOR rising and borrowing rates on platforms increasing to 7–10%, they have already surpassed rental property returns. Additionally, self-managed rental properties require a lot of time and money, and the investment itself is highly illiquid.
Interest Can Be Reinvested
An individual who invests through a platform does not need to worry about loan administration: they will receive interest payments quarterly according to the payment schedule. If someone intends to invest in rental property independently, they will need to find a property, arrange financing, furnish it, find tenants, accept that the property may sometimes be vacant, maintain it, and collect payments.
By investing through a platform, the management of this investment is minimal since the platform operator takes care of everything. Additionally, the money invested on platforms works throughout the investment term, and the earned interest can be reinvested. The platform provides all information about the annual return earned by investors to the State Tax Inspectorate – the investor only needs to confirm it with one click. Interest returns up to 500 Euros per year are not taxed, and if investing in a spouse's or partner's name, the non-taxable amount per year reaches 1,000 Euros. Rental income is taxed at a rate of 15% from the first Euro, or you need to purchase a business license, and you must calculate and declare the rental income yourself.
Investment From 100 Euros
"Buying a property without a loan requires a significant investment amount – in major cities, it often reaches no less than 100,000 Euros. Through platforms, you can invest with as little as 100 Euros," G. Zarembiene compares the conditions. When buying a property with a loan, you need to consider the risk of EURIBOR fluctuations, but investing through a platform is currently an excellent time to lock in a higher return due to the increased EURIBOR. The investment term through crowdfunding platforms usually ranges from 6 to 18 months. Interest is typically paid quarterly, and the loan amount is returned at the end of the term. Therefore, almost every year, you can decide whether to reinvest in new projects or keep the money for yourself.
A Team at Work
The "Röntgen" team comprises professionals in real estate, finance, law, and other fields who carefully analyze every project offered to investors and actively communicate with the developer both before financing and throughout the entire investment project. If you purchase a rental property on your own, you need to have knowledge of the real estate market, property design, construction, locations, and have good relationships with suppliers. Without this knowledge and qualities, the future return on investment is likely to be lower and you will have to learn from your mistakes.
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