Recommendations for Beginner Real Estate Investors: You Should Not Delay a Deal When You Have Borrowing Capacity

Falling euribor and low mortgage margins create favorable conditions for bolder real estate investors – but where to start, how to proceed, and over what period to calculate investment returns, and what to pay attention to in the current market situation, real estate experts explain.

Today, universal banks operating in Estonia have reduced mortgage margins to an average of 1.6%, and real estate prices have stabilized. "Even if euribor doesn't fall to the predicted 2%, but remains around 3%, which current economic forecasts rather don't predict, buying rental real estate as an investment at today's level is much more promising than, for example, in the summer or a year ago," explained Kinnisvara24 CEO Urmas Uibomäe.

According to 1Estate Kinnisvara broker Algis Liblik, activity is already beginning to be noticeable among real estate investors, and if there is borrowing capacity, one should not postpone the transaction. "Although currently investors predominate who buy real estate without borrowed funds, the number of people has also grown who, thanks to the favorable mortgage conditions currently offered by banks, use their mortgage borrowing capacity to invest in real estate," Liblik explained.

According to Uibomäe, it's difficult to catch the ideal time to invest in real estate. "In the big picture, I don't know any investor who would say that real estate seemed very cheap at the time of purchase. There's always a feeling that the price is very high now, and five or ten years later you ask yourself – why didn't I buy more back then when it was so affordable? Inflation and time do their work, and even if the market should go through some decline periods along the way, these are all temporary, and in the long perspective, real estate prices and values grow," he added.

Measuring investment returns: liquidity vs cash flow yield

When acquiring real estate with a loan, the return on investment depends largely on the bank loan conditions – whether a mortgage or a business loan is used and at what good price the apartment was purchased. For profitability calculations, calculations are made over the same period as the loan received from the bank. Without borrowed funds, investment returns are calculated on the basis of cash flow yield, meaning the annual rent is divided by the real estate value.

Location choice also plays a major role in terms of profitability. "Due to rapid price increases over the past couple of years, for example, apartments in the city center and its immediate surroundings no longer have such good returns as in some neighborhoods further away from the center," explained Liblik. "The city center, Kalamaja, and especially seaside areas like Kalaranna and Noblessner are suitable for investors looking for liquidity and who don't look so much at cash flow returns, but rather at profits resulting from value appreciation, which these areas offer."

"However, during more critical periods such as Covid, when a sudden large number of short-term rental apartments came to the long-term rental market, and in 2021-2022, when many invested in rental real estate, quality and new rental apartments maintained their price even when oversupply created strong pressure on rental prices," added Uibomäe.

According to Liblik, in recent years, for example, Uus-Veerenni has become a very high-demand area, because our unicorn offices are located precisely in this area, but rental yields remain rather modest there. "Since sales prices have been growing at a rapid pace there, the yield, as with other new developments, remains rather between 4-5%. Anyone who wants to find 6% or higher rental yields (calculated on a cash flow basis) must turn their attention to suburban areas – new developments should be left aside and good deals should be sought among older apartments," he added.

If a good rental yield appears somewhere, then as a rule a larger mass also concentrates there in a short time, which exerts pressure on prices and the yield numbers thereby fall, so a good neighborhood is less important than finding good deals. "In this regard, emotions should be put aside and focus only on Excel so that the numbers are as good as possible – money in real estate is always made by buying," added Uibomäe.