After How Many Years of Renting Will You Have Your Invested Money Back?

Summary

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You want to invest in an apartment in Tirana. Many trouble to find an answer to the question: is it worth it? We say yes – but you have to be careful.

With this article, we link our previous two articles together. After writing about how much apartment you could buy for 100.000 EUR and how much rent can a landlord expect in Tirana?, it makes sense to connect both aspects.

In this article, we will look at

• the financial payoff of an investment in Tirana
• the safety of your investment in Tirana and Albania.

As usually, we will base our analysis on data (science) and cross-referenced facts.

Financial Payoff of an Investment

A landlord has two numbers in mind: how much he had to pay for the apartment and how much money he gets every month from his tenant. Therefrom the landlord can calculate a metric. This metric summarises the financial attractiveness of the investment. We start with two definitions of a metric. Thereafter, we look at this metric and its drivers in Tirana.

Metric 1: Annual Rate of Return

Many of you know how to get the return of investment (ROI) of an asset. It is the total amount of earnings divided by what you had to pay for an investment. Let’s say you buy something for 100.000 EUR and it earns you 10.000 EUR a year, we say the annual rate of return is 10%.

IMAGE/MATH: ROI = total earnings per year/cost of investment

While this sounds easy, we point out that there is a lot of variation in this definiton of ROI when it comes to real estate.

For the one part, there are different definitions on how to compute the cost of investment. In this article, we assume the cost of investment is what you had to pay in EUR per squaremeter of property. Other definitions might consider costs like property tax, fees for the land registry and the notary.

For the other part, you can compute the total earnings per year in a myriad ways. Throughout this article, we define the total earnings per year as what the tenant pays to you each month. We ignore tax and only look at the investment statically. (In a dynamic investment, you could incorporate cash flows).

Metric 2: the Payback Period and Rental Multiplier

While you can compare the ROI to what you would get from a bank account or at the stock exchange, in real estate there is often a more graspable definition used. You will find more often something called the payback period. The payback period in real estate is often called rental multiplier.

The rental multiplier is the inverse of the ROI. If that is too much math: divide the costs of investments by the total amount of earnings. If you buy an apartment for 100.000 and get an annual rent of 10.000, then the rental multiplier is 100.000/10.000 = 10.

IMAGE/MATH: PAYBACK = cost of investment/total earnings per year

You can thus interpret the payback period as: after how many years will I have my invested money back? In our example above we assumed 100.000 investment and 10.000 rent per year. Then, you will have your invested money back after 10 years.

Insight 1: You can make super-good and super-bad investments in Tirana

For this blog post, we again have taken a sample of 170 apartment prices all over Tirana. If you have missed it, in our previous post we wrote about how

Insight 2: There are Few Bargains Close to Downtown

Undiscounted

Discounted

Insight 3: Furbish your Property

TOD

Is it safe to buy an apartment in Tirana?

This is a huge topic and first of all, we would like to disclaim that we have “skin in the game”. We are not only analysts, but believe in what we say and own several properties in Albania and Tirana. So, yes, we believe it’s safe.

Still, let’s have a look at four important factors that apply to all kinds of foreign direct investments — thus including buying real estate. The three factors are the political, social, legal, and economic environment.

Economy

We consider the economic environment as stable, but difficult. First, the National Gross Domestic Product is nothing that in incenerates investment ambitions. The average growth has been Z. The average in the neighbouring states was V. Compare this to Europe, where the growth was H.

The economy of Albania is still underdeveloped. Among others, this is what the EU critizises. A huge part of the population works in “Fusons”. There, in hand-labour, they produce among others shoes and bags. While Tirana tries to be better at IT (quote Ramas mission), the oberall productivity and innovation is low according to the EU reports.

Politics

The political environment in Albania is difficult to comprehend. You see protests among the streets (quotes) and every now and then prior to elections people start shooting at each other (quote Elbasan).

You might wonder, what the aim of these riots are, because ultimatley this might influence your investment decision. We think people ultimately fight against corruption . Unfortunately, corruption is everywhere, it seems. While the partia demokratik has been in power from Z to Z, some argue — on the front lines the US secretary of state (quote) — that this government had been corrupt. Now under the current government of the partija sociale led by Edi Rama, the opposition claims Albania has turned into a drug-republic.

It is hard to get evidence from both sides. Truth is, Albania has always been the number one place in Europe for Cannabis, sadly (QUOTE). As well, tons of cocaine make find their ways into Europe via the port of Durres (QUOTE). If this is linked to politics is not for us to discuss. Somehow, however, no government was able to solve this issue.

What does this mean for investors? Basically, Albanian politics is focused on domestic problems. Even though Albania is a former communist state, none of the two big leading parties want to go back there. Neither the third largest party (LSI), nor any other party with a serious electorate. On the contrary, all big parties want to join the EU. All big parties support foreign investments.

Social

While Flori has been living in Albania, Dennis could experience the Albanians as a foreigner. We concur: Albanians are highly appreciative of foreigners. A wide array of travel blogs who praise the Albanian hospitality might support our claim, for example Z Z Z.

But are Albanians open to foreigners as their neighbours? OPINION FOREIGNERS IN ALBANIA, ITALIAN STUDENTS, APPRECIATION FOR FOREIGN GOODS, POLITICIANS WITH FOREIGN BACKGROUND

Overall

https://www.realdata.com/ls/rules_of_thumb_a.shtml

Make a little introduction about how to calculate/compare investments! The rental multiplier is called the “payback” theory.

Publish table about convergence between payback multiplier and steady return

https://www.lofty.ai/blog/rate-of-return-on-a-rental-property

Let’s first take a look at the overall situation. On average, you have to pay X EUR per squaremeter (EU/sqm) for a condo in Tirana. We found out, that an emty apartment yields a mean monthly rent of Y EUR/sqm. This means, you will earn about Y12 EUR/sqm. That is an annual rate of return of (Y12/X) %. In other words, if you buy an apartment, it takes X/(Y*12) years to pay the buying price back.

MAKE NICE VISUAL ABOUT THESE NUMBERS

However, these are only two ways to compute the rate of return. Most of the time, you will see one number or the other.

Rate of Returns by District

USE MAP

Should you furnish your apartment?

In case you did not know, there are several ways how to describe the rate of return for an investment.

• sum up real estate prices
• sum up rents
• compute overall rate of return
• is furnishing your apartment worth it
• rates of return for different districts (does this make sense?!)
• risks of investment with regard to Albania: economy, socially, politically
• related costs: taxation of rent (double taxation agreements); property tax; real estate agent; janitor/administration;
• market development/outlook

The END

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