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FROM FOUNDATIONS TO DETAIL - Projects, Ideas and Trends
Real estate is not automatically a good investment - What you buy, at what price, and with what strategy is crucial
Minet Musić (Photo: Privatna arhiva)
Musić is an architect and investment advisor with 20 years of experience in developing investment projects and advising investors in 19 countries, from Istanbul to Dubai to Sarajevo and Cyprus. He owns several companies, which cover the different stages of real estate investing, from financing and purchasing, to optimizing investment portfolios.
In an interview for eKapija, he talks about how to recognize profitable real estate,what the most common mistakes made by investors are, what yields can realistically be expected and in which markets of the region and beyond he sees interesting investment opportunities.
- Real estate can still be one of the most rational ways of long-term preservation and increase of capital. But I make a clear distinction between buying real estate and a good real estate investment. Owning an apartment in itself is not proof that the capital has been invested wisely.
According to him, a quality investment has a clear economic logic: sustainable demand, reasonable entry price, realistic income potential and possibility of future sale. Real estate can simultaneously bring rental income and increase in value, but it is not highly liquid, requires maintenance and can tie a large part of capital to one market.
- In advising investors, I first discuss the goal: do they want a stable monthly income, capital protection or higher capital gains at higher risk? Only then do we choose the country, city and specific project. The most expensive mistake is to buy square meters first, and only then look for an investment strategy - the interlocutor of eKapija points out.
Price growth is not a guarantee of earnings
Many buyers are still guided by the assumption that real estate is always gaining in value. However, our interlocutor warns that such an approach can lead to wrong investment decisions.
- That assumption is not certain. Real estate does not increase in price because it is real estate, but because there is a solvent and long-term sustainable demand in a certain location. Growth in the past five years is no guarantee of growth in the next five. I analyze employment and purchasing power, migration, the number of new apartments entering the market, infrastructure, credit conditions and the depth of the rental market. Equally important is the distinction between nominal and real growth. If the price rises, and inflation, holding and selling costs eat up a significant part of the difference, the investor did not achieve the profit he expected - says Music.
As he states, currency risk is added to international markets: an increase in the price in local currency does not necessarily mean profit expressed in euros.
- That`s why I often say: a large part of the investment result is already determined at the entrance. A good project bought at a bad price can turn into a bad investment - he points out.
(Photo: GaudiLab/shutterstock.com)
How to calculate the real yield?
Before buying, the investor must consider all the costs and realistically estimate the income that the real estate can bring. It is not enough to look only at the price from the ad or the expected gross rent.
- First, the total invested capital should be calculated, not just the price from the ad: the purchase price, taxes and charges, furnishing and all other initial expenses. Then maintenance, management, taxes, insurance and realistic periods without a tenant should be deducted from the gross rent. For example, a 200,000 euro apartment, with an additional 15,000 euro of costs, represents an investment of 215,000 euro. If it brings 12,000 euros in gross rent annually, but after operating costs, 9,000 euros remain, the net yield before the cost of financing is approximately 4.2%, not 6% - says Music.
As a guiding investment criterion, he adds, a net annual return of 4-6% can be interesting for quality residential property with appropriate risk. It also indicates that higher yields are not automatically better: it is often a compensation for the greater uncertainty. These ranges are not market averages or promises of returns.
- Ideally, we are looking for a combination of sustainable cash flow and real value growth potential. The capital gain remains a projection until the real estate is sold. For multi-year decisions, we also use IRR, because a total of 20% in two years is not the same as 20% in eight - the interviewee explains.
Location is crucial, but an expensive address is not always the best investment
The choice of location is one of the key factors of success, but the most expensive neighborhoods are not necessarily those that offer the best ratio of capital invested and expected return. The interlocutor believes that special attention should be paid to areas that are infrastructurally developing and have a stable base of potential tenants.
- Location is crucial, but a premium address is not an automatically premium investment. In some cases, greater investment potential is offered by the neighborhood which is developing infrastructurally, with a more favorable entrance price and a stable base of tenants - the eKapija interlocutor says.
He points out that in Bosnia and Herzegovina, Sarajevo, Banja Luka, Mostar and Zenica require different strategies. Sarajevo has a broad business, educational and touristic demand; in cities like Zenica, the relationship between the price of new construction and the purchasing power of the local market can be interesting.
- In Serbia, along with Belgrade, I would selectively analyze Novi Sad; on the Adriatic coast, I must include seasonality, operational costs and regulation of tourist rentals - he adds.
As he points out, he would never declare the entire city as "the most profitable" without analyzing an individual building.
- Two buildings at the same location can have completely different liquidity due to the quality of construction, parking, management and profile of future customers. The investor does not buy the city name - he buys a specific property and its future cash flows - Musić points out.
Emotional shopping and overlooked costs are among the biggest mistakes
Apart from the choice of location and price, investors often make mistakes because they look at real estate primarily from the perspective of their own desires, rather than the needs of the market it is intended for. Incomplete financial projections are also a problem, as well as the absence of a sales plan.
- The first mistake is emotional buying. People choose a property they would like to live in, and they only subsequently check whether there is a tenant who is ready to pay the planned rent. An investment apartment doesn`t have to be my favorite apartment; it has to be desirable to its target market - says Music.
He cites the calculation without costs and risk scenarios as the second error. As he explains, with short-term rentals, prices from the peak of the season are sometimes projected over the entire twelve months. With projects under construction, the possibility of delays, contractual protection and the financial ability of the investor are ignored.
- The third, particularly important for me, is the absence of an exit strategy. Buyers ask how to get into an investment, and rarely to whom and under what conditions they will sell in five years. Therefore, before buying, you should check the ownership, permits, contracts, tax obligations and a realistic base of future buyers. Due diligence is not an administrative formality, but capital protection - he emphasizes.
(Photo: Pixabay.com/Michael Gaida)
Long-term rent, tourist letting or resale?
The choice of investment model depends on financial goals, risk tolerance and the willingness of the owner to actively deal with the property. Long-term lease brings more predictable income, while short-term issuing can offer higher gross earnings, but also significantly more liabilities.
- A long-term lease gives priority to a more stable and predictable cash flow. It suits the investor who wants a lower operating commitment and a longer holding horizon. Short-term rental can bring higher gross rent, but with seasonality, guest management, cleaning, platform commissions and regulatory obligations. It is often a small hospitality business, not passive income - he explains.
Purchase for resale depends primarily on the entry price, the quality of the project, the dynamics of construction and the market at the time of release, believes Music. As he says, there the potential for capital gain can be higher, but the risk is also higher, especially if the sale has to be realized within a predetermined period.
- For the majority of private investors with a medium risk tolerance I consider a model in which real estate can bring long-term rent to be rational, and the growth in value represents an additional possibility, not the only reason for buying. The strategy must match the investor`s financial situation, and not the sales presentation of the project - the interlocutor says.
From Montenegro and the region to Turkey and Dubai
When it comes to the investment potential of the various markets, the interlocutor does not single out one country as universally the best option. Instead, he bases the decision on a combination of demand, price, legal certainty, income and sales opportunities.
- There is no single country that is the best choice for every investor. In our international practice, I look at the market through five filters: real demand, entry price, legal certainty, net income and liquidity at the exit. Only after that we assess the potential of capital growth - he explains.
As he says, BiH offers selective opportunities in quality new construction, but demographics and the depth of local demand should be seriously analyzed. Serbia, especially Belgrade, has the characteristics of a more developed regional investment center, which does not mean that all the prices are justified. Montenegro offers international demand for premium coastal projects, but it is sensitive to tourism and global customer sentiment. Croatia has the advantages of the Eurozone and the European regulatory framework, with high entry prices at the most sought after coastal locations.
- Turkey is a good example of why you should know the market from the inside. Istanbul has a great and varied demand, whereas Antalya and other Mediterranean locations have different dynamics. However, inflation, exchange rates and investment rules may change the result when you express it in euros. Dubai, as well as selected American and Western European markets, may be relevant for investors whose goal is international diversification - says Music and emphasizes that he is not looking for the country where the prices rose the fastest yesterday.
- I`m looking for a concrete project whose future income and value have an economic basis, even when the market becomes less bullish.
(Photo: Pixabay.com/sattysingh)
The goal is not to have as much square footage as possible, but a quality investment
Before the final decision, the investor should determine how long he plans to keep the property,
how important the availability of money is to him and how much risk he can take, advises Musić. At the same time, he adds, diversification does not necessarily mean buying more apartments, but well-thought-out distribution of capital and preservation of financial reserves.
- My advice is: don`t fall in love with real estate - fall in love with the quality of the investment calculation.
Our interlocutor states that before the decision it is necessary to define the time horizon, liquidity need and maximum loss which the investor can bear without jeopardizing the rest of his financial position. Investing almost all assets in one apartment can be a concentration risk, irrespective of the quality of the location.
He also clarifies that diversification does not mean automatically buying three apartments instead of one.
- If they are in the same building or depend on the same customer profile, the risk can remain almost identical. For some investors, a high-quality real estate with a liquid reserve is better; for others, distribution by market and asset class. In the end, the goal of investing is not to own as much square footage as possible. The goal is to have assets that preserve capital over the long term, generate sustainable income and bring greater financial freedom. A square meter is a measure of surface area - it is not a measure of investment success - Minet Musić concludes in an interview for eKapija.
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