What to Choose: Buying Property for Rent or Investing in Loans Secured by Real Estate?
Lithuanians usually invest in rental properties, but there are other ways to invest in real estate (RE) – for example, through real estate projects via crowdfunding platforms (CFPs). Experts share insights on where to invest now in an environment of high inflation and rising interest rates.
Before choosing an instrument, it's important to consider your capabilities and expectations. You should determine the amount of money you wish to invest, how long you intend to invest, and how actively you plan to be involved in the process.
Required Amounts
Saulius Vagonis, Head of the Valuation and Market Research Department at "Ober-Haus," and a board member of the Lithuanian Association of Property Valuers, points out that those looking to invest in rental property must have a significant amount of capital. In other words, it's not possible to buy a property for just a few hundred or a few thousand euros.
In contrast, investing in real estate projects via CFPs can start with as little as 100 euros. This means lending a specific amount of money at a fixed interest rate for an agreed-upon period.
Minimum Investment Amounts on Crowdfunding Platforms (Real Estate Projects)
The activities of CFPs operating in Lithuania are supervised by the Bank of Lithuania.
Indeed, with tens of thousands of euros, one could invest in physical real estate, but the property would most likely be in a rural area, where issues such as low rental liquidity may arise. In such cases, it is possible to borrow part of the funds from a credit institution.
However, it's important to consider that the European Central Bank (ECB) is likely to raise base interest rates again, which means loans will become more expensive. It's crucial to calculate the ratio between monthly loan payments and rental income.
"In the long term, assuming historical trends repeat, the outcome will eventually be positive, but the question remains how quickly, as no one can currently say when interest rates will stop rising, when they will start to decrease, and how much they will decrease," says S. Vagonis.
Greta Zarembiene, Head of Investor Relations at CFP "Rontgen", believes that by 2024, after inflation is controlled, a reduction in interest rates is likely. "Therefore, this year could be a good opportunity for those investing via CFPs to lock in higher interest rates," she comments.
Other Costs
When acquiring an investment property, it's important not to forget that it will need to be equipped before it is rented out. "In addition to the real estate, you'll need to acquire moveable property as well. You won't be able to rent out a property with empty walls these days. You need to buy furniture, household appliances, and so on," notes S. Vagonis. Additionally, money will be needed in the long term to maintain the property's condition as it wears out and eventually needs to be renovated, to cover administrative expenses, etc.
Responsibility and Returns
Most people prefer the tangibility of real estate investments, meaning the ability to own and touch it. This is an emotional advantage that creates a sense of security. A person who buys real estate as an investment becomes the owner of the physical asset. This means that the management and maintenance of the property are under their control.
"Capital gains can be achieved both from rental income and from price increases if the market is rising. Currently, there's no longer any talk of a sharp increase in property prices, and there is even speculation that they might fall, so this component is no longer as guaranteed, but rental income is always guaranteed," says S. Vagonis.
From long-term rental income, one can expect an annual return of 3-5%. A higher return is possible with short-term rentals (daily, monthly, etc.). However, if an investment property is typically purchased with a long-term perspective and considered passive investing, short-term rentals would be an active investment, requiring constant management, and client search. Of course, you can hire a company to manage it, but that will ultimately reduce the overall return.
G. Zarembiene notes that CFP investors benefit from investing in professionally selected properties, which reduces the risk of choosing the wrong location or that the property will be illiquid. Moreover, to protect investors' funds, real estate-backed crowdfunding provides a safety margin, i.e., the difference between the loan amount and the value of the collateral.
"If real estate prices were to drop by 10-20%, the value of the collateral typically exceeds the loan amount by 30-40%. Thus, such a property could be sold at a significant discount and still be enough to recover the invested funds, interest, and late fees," she explains. According to her, when investing through CFPs, one can expect to earn annual interest of 7-11%.
It is noted that unlike with investment properties, the investor's attention to project management is not required here; for example, they don't need to communicate with the borrower or ensure timely loan repayment, as the platform operator manages this. However, on the other hand, the investor is entirely dependent on the operator's actions.
Riskiness
In theory, when investing money in a CFP, it is clear when and at what interest rate the loan will be repaid, but in practice, this does not always happen. Sometimes loans are delayed, meaning that recovering the money may take longer than planned, and investors face inconveniences if they had planned to use the funds elsewhere.
Diversification helps to mitigate risk by investing in multiple projects and/or across different platforms.
G. Zarembiene says that the quickest way to realize all risks is to have incorrect investment expectations. She advises not to hesitate to consult with experts. "Investing should not be seen as a quick way to get rich; it's a long-term process of capital protection with moderate growth. Therefore, to earn significantly, you don't need to take on high risk, just time and discipline," she says.
Choosing Both
Vilius Visockas, Product Manager of the real estate platform "CityNow", has 5-10% of his personal investment portfolio in CFPs and about 80% in direct real estate investments.
Considering the current situation – high inflation, rising interest rates, ongoing talks about a possible recession – he compares the instruments and shares his insights on what to choose at the moment:
- If you are considering investing borrowed funds rather than your own savings, then the only option to consider would be rental property. Mortgage terms are more attractive than other borrowing methods (e.g., consumer credit), so under certain market conditions, after assessing the risk, it may be worthwhile to borrow and use rental income to manage the loan.
- If you are investing your savings, then more opportunities open up when choosing CFPs (the advantage of low minimum investment amounts).
- It is easy to diversify risk when investing in different projects through CFPs. On the other hand, during an economic slowdown, rental income tends to be more sustainable and less risky than CFP-financed developments, which are associated with liquidity, construction permit issuance, and other business risks. If the slowdown in the housing market were to persist, there is a chance that projects on platforms might not be able to repay the loan on time, as full loan repayment usually occurs upon full payment from buyers.
- If there is a need to liquidate investments, both of these investment methods currently lag behind other asset classes, such as stocks.
- This year should be the time when you invest responsibly and weigh the risks. When investing in a rental property yourself, you will likely have the opportunity to get to know it thoroughly, while with CFPs, although risk profile reports (location, developer) are provided, you often won't have the chance to thoroughly examine the business plan and evaluate all the nuances yourself.
- Currently, interest from CFPs is subject to personal income tax, while rental income is taxed either under a business license (for each property) or personal income tax. Platforms also typically have an administration fee.
What to Choose: Buying Property for Rent or Investing in Loans Secured by Real Estate?
Lithuanians usually invest in rental properties, but there are other ways to invest in real estate (RE) – for example, through real estate projects via crowdfunding platforms (CFPs). Experts share insights on where to invest now in an environment of high inflation and rising interest rates.
Before choosing an instrument, it's important to consider your capabilities and expectations. You should determine the amount of money you wish to invest, how long you intend to invest, and how actively you plan to be involved in the process.
Required Amounts
Saulius Vagonis, Head of the Valuation and Market Research Department at "Ober-Haus," and a board member of the Lithuanian Association of Property Valuers, points out that those looking to invest in rental property must have a significant amount of capital. In other words, it's not possible to buy a property for just a few hundred or a few thousand euros.
In contrast, investing in real estate projects via CFPs can start with as little as 100 euros. This means lending a specific amount of money at a fixed interest rate for an agreed-upon period.
Minimum Investment Amounts on Crowdfunding Platforms (Real Estate Projects)
The activities of CFPs operating in Lithuania are supervised by the Bank of Lithuania.
Indeed, with tens of thousands of euros, one could invest in physical real estate, but the property would most likely be in a rural area, where issues such as low rental liquidity may arise. In such cases, it is possible to borrow part of the funds from a credit institution.
However, it's important to consider that the European Central Bank (ECB) is likely to raise base interest rates again, which means loans will become more expensive. It's crucial to calculate the ratio between monthly loan payments and rental income.
"In the long term, assuming historical trends repeat, the outcome will eventually be positive, but the question remains how quickly, as no one can currently say when interest rates will stop rising, when they will start to decrease, and how much they will decrease," says S. Vagonis.
Greta Zarembiene, Head of Investor Relations at CFP "Rontgen", believes that by 2024, after inflation is controlled, a reduction in interest rates is likely. "Therefore, this year could be a good opportunity for those investing via CFPs to lock in higher interest rates," she comments.
Other Costs
When acquiring an investment property, it's important not to forget that it will need to be equipped before it is rented out. "In addition to the real estate, you'll need to acquire moveable property as well. You won't be able to rent out a property with empty walls these days. You need to buy furniture, household appliances, and so on," notes S. Vagonis. Additionally, money will be needed in the long term to maintain the property's condition as it wears out and eventually needs to be renovated, to cover administrative expenses, etc.
Responsibility and Returns
Most people prefer the tangibility of real estate investments, meaning the ability to own and touch it. This is an emotional advantage that creates a sense of security. A person who buys real estate as an investment becomes the owner of the physical asset. This means that the management and maintenance of the property are under their control.
"Capital gains can be achieved both from rental income and from price increases if the market is rising. Currently, there's no longer any talk of a sharp increase in property prices, and there is even speculation that they might fall, so this component is no longer as guaranteed, but rental income is always guaranteed," says S. Vagonis.
From long-term rental income, one can expect an annual return of 3-5%. A higher return is possible with short-term rentals (daily, monthly, etc.). However, if an investment property is typically purchased with a long-term perspective and considered passive investing, short-term rentals would be an active investment, requiring constant management, and client search. Of course, you can hire a company to manage it, but that will ultimately reduce the overall return.
G. Zarembiene notes that CFP investors benefit from investing in professionally selected properties, which reduces the risk of choosing the wrong location or that the property will be illiquid. Moreover, to protect investors' funds, real estate-backed crowdfunding provides a safety margin, i.e., the difference between the loan amount and the value of the collateral.
"If real estate prices were to drop by 10-20%, the value of the collateral typically exceeds the loan amount by 30-40%. Thus, such a property could be sold at a significant discount and still be enough to recover the invested funds, interest, and late fees," she explains. According to her, when investing through CFPs, one can expect to earn annual interest of 7-11%.
It is noted that unlike with investment properties, the investor's attention to project management is not required here; for example, they don't need to communicate with the borrower or ensure timely loan repayment, as the platform operator manages this. However, on the other hand, the investor is entirely dependent on the operator's actions.
Riskiness
In theory, when investing money in a CFP, it is clear when and at what interest rate the loan will be repaid, but in practice, this does not always happen. Sometimes loans are delayed, meaning that recovering the money may take longer than planned, and investors face inconveniences if they had planned to use the funds elsewhere.
Diversification helps to mitigate risk by investing in multiple projects and/or across different platforms.
G. Zarembiene says that the quickest way to realize all risks is to have incorrect investment expectations. She advises not to hesitate to consult with experts. "Investing should not be seen as a quick way to get rich; it's a long-term process of capital protection with moderate growth. Therefore, to earn significantly, you don't need to take on high risk, just time and discipline," she says.
Choosing Both
Vilius Visockas, Product Manager of the real estate platform "CityNow", has 5-10% of his personal investment portfolio in CFPs and about 80% in direct real estate investments.
Considering the current situation – high inflation, rising interest rates, ongoing talks about a possible recession – he compares the instruments and shares his insights on what to choose at the moment:
- If you are considering investing borrowed funds rather than your own savings, then the only option to consider would be rental property. Mortgage terms are more attractive than other borrowing methods (e.g., consumer credit), so under certain market conditions, after assessing the risk, it may be worthwhile to borrow and use rental income to manage the loan.
- If you are investing your savings, then more opportunities open up when choosing CFPs (the advantage of low minimum investment amounts).
- It is easy to diversify risk when investing in different projects through CFPs. On the other hand, during an economic slowdown, rental income tends to be more sustainable and less risky than CFP-financed developments, which are associated with liquidity, construction permit issuance, and other business risks. If the slowdown in the housing market were to persist, there is a chance that projects on platforms might not be able to repay the loan on time, as full loan repayment usually occurs upon full payment from buyers.
- If there is a need to liquidate investments, both of these investment methods currently lag behind other asset classes, such as stocks.
- This year should be the time when you invest responsibly and weigh the risks. When investing in a rental property yourself, you will likely have the opportunity to get to know it thoroughly, while with CFPs, although risk profile reports (location, developer) are provided, you often won't have the chance to thoroughly examine the business plan and evaluate all the nuances yourself.
- Currently, interest from CFPs is subject to personal income tax, while rental income is taxed either under a business license (for each property) or personal income tax. Platforms also typically have an administration fee.
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