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Investing in Real Estate in Novosibirsk, Sibiria


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Friday, 16 March 2007

Looking at the relevant numbers, everything looks good in Novosibirsk, Russia (Siberia).

House (condominium) prices in the city of Novosibirsk went up about 20% annually in the last 2 year. Wages went up around 15% in the same time. The cost of a home loan is about 15% as well. I do not have data on the inflation rate but I suspect it is 12%.

The good condominums are in the center. Most Russians at this point still have no car, and in a city like Moscow or Novosibirsk, you really do not need a car. Public transportation works very good. However, since buses can be stuck in traffic, the Metro (subway) is the most efficient mode of transportation. Condos close to a subway station are worth more for that reason, maybe 10%.

As of February 2007, a condo in the center of Novosibirsk, close to a Metro station sellscurrently for 1.4M Roubles. Currently US-$ 1 = 26 Roubles, so the 1.4M R = $54k.

Such a condo will rent for about US-$ 600 per month.

Closing cost is practically non-existent, just a small government fee equivalent to $20. You can work with a real estate agent, but really, unless you want to sell while you live abroad, you do not have to.

Property tax does not exist in the form as they have it in the USA, but you have to pay approximately $8 (200 Roubles) per month to the Russian government. This protects your condo from hazards like fire or a terroristic attack. They do not call it 'insurance' but it seems to serve a similar purpose. This only covers the outside of the building and the common areas.

One of the specifics of condo developments in Russia is that the common areas (hallway, elevator) are not owned by anyone. They belong to the government. As a consequence, you see really nice, modern apartments that are top-of-the line by Western standards. But the hallways have no light fixtures (just a bulb hanging from a cable) and the elevator is full of graffiti. Usually, there is no cleaning happening in the common structures either. The Russian people ignore that. They do not want to pay $10 / month to keep these areas clean, since they only spend a few seconds every day in the hallway.

Now let's look at the financing and cash flow of such an investment.

Idea: 100% financing with a HELOC in the USA, current rate = PRIME - 1% = 7.25%

$56k purchase price

-$338 monthly interest for a loan of $56k
+$600 monthly rent
-$60 management (10%)
-$8 government
-$60 vacancy
+$134 profit

Those $134 can be used as principal to pay down the $56k loan.

Risk: The Russian government is involved in this deal (owning the common structures) and frequently changes rules. E.g. in order to suit their economic needs, they could increase the $8 monthly 'insurance' fee to $50

Last Updated (Friday, 16 March 2007)




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