Maximum profit, minimum risk
Risk – a word that is inherently related to investing. It is lower when the investor makes a decision fully consciously. However, there are circumstances, and not so rarely as it may seem, when tempted by good profit we unconsciously make breakneck decisions. That is why, when advising my clients, I have always been guided by the “S-M-F-P” principle, which I will introduce in the following text – explains Paweł Łączyński, Real Estate Wealth Manager at Higasa Properties.
Let’s stress it once more – any type of investment involves risk. However, cooperation with a diligent specialist helps to minimise it. Before we discuss it as widely as possible, let’s analyse the reasoning and behaviour of most Poles who want to multiply their assets. Let’s also try to outline the main advantages and disadvantages of individual solutions. Please keep in mind that the following text is an attempt to systematise and present the most important mechanisms. In order not to turn it into a book as long as a well-known Polish novel “Quo Vadis”, I present basic arguments. However, each time, for example on the occasion of an individual meeting with an investor, we discuss every aspect, such as the impact of inflation on real profit, the economic situation, current market realities etc. Diligence and reliable information is crucial for us at Higasa Properties, which I will also touch upon further on in the text.
- Purchase of an apartment and then its rental:
It is currently one of the most popular methods. Buying an apartment for cash or even “on credit” seems a tempting idea. You buy it, furnish, most often in a medium standard, and rent it. Income from rent is enough to pay the instalment, and it is possible that there are still a few pennies left in your wallet. And after paying the liabilities you own the property. However, it is worth remembering that, given the currently high prices of apartments, costs, and the margin of expenses for renovations, the average annual profit/profitability of such an investment is at a level of 4-5%. One cannot forget that there are situations such as arduous, untrustworthy tenants. Therefore, this method cannot be classified as passive, i.e. a method where money works without your interference. In addition, if you want to bring your own capital, without taking credit from a bank, the entry threshold is min. PLN 300,000.+ Pros: ownership, protection against inflation, increase in value over time.
– Cons: depreciation, problems with tenants, change of law regarding e.g. short-term rent, no tenant = costs, time-consuming business, long exit period (read: sales).
- “Flips.” Purchase, renovation and resale of an apartment with profit:
This solution is so spectacular that some TV stations in Poland and in the world even broadcast programs devoted to this topic. In my opinion, this is a method for people who like challenges, a thrill resulting from the risk (which we try to avoid in this text), placing even more question marks before the investor than the previous point. In addition, in real terms, such “games” are undertaken by a hermetic environment of specialised investors, which causes a lot of competition. To successfully “play flips” it is necessary to know the local market, and even further areas, prices and potential. Any delay, resulting, for example, from the lack of availability of a renovation team, is a cost that reduces profit. And, once more – it is not passive income and earnings are one-off. Therefore, in order for it to be a stable source of income, such investments must be regularly repeated. To avoid minefields, a good knowledge of legal issues is useful. Flipping is one-off and unpredictable. You cannot assume that every month you will find and sell an apartment with an above-average profit of e.g. PLN 20 thousand. After all, unplanned problems may occur, such as a prolonged renovation. I know from my conversations with investors that there is another problem, moral or ethical. Looking for the cheapest apartments possible, many investors resort to buying them at bailiff auctions. Here, however, you can come across a delicate topic of other people’s problems.
+ Pros: Investment liquidity, profitability, no market “fluctuations” on earnings (it is difficult to predict the value of an apartment in 10 years, but it’s easier to estimate its value in approx. 10-12 months).
– Cons: high investor involvement, no passive income, any downtime = cost, unforeseen expenses related to hidden faults or additional costs of renovation.
- Purchase of service premises:
We are entering the sphere of commercial real estate. A topic that is so attractive that currently not only the industry press deal with this subject but also daily newspapers such as Puls Biznesu or weeklies such as Newsweek. Currently, most developers dedicate the ground floors of their housing investments for service and commercial premises. Among the advantages, there is undoubtedly the lack of need to refurbish and furnish, as this will be for the most part the tenant’s responsibility. Contracts, e.g. with the owner of the store, are long-term, especially when dealing with a chain such as Żabka. Real profitability of 6-8% per annum is also tempting. Here, however, the entry threshold is about PLN 500,000. Let us remember that renting an apartment and commercialising the premises is a completely different, much more difficult challenge.
+ Pros: maintenance-free, passive profit, increase in value over time.
– Cons: commercialisation of the premises, no tenant = costs, long exit period (i.e. sales).
- Purchase of a “solo” facility:
These are free-standing buildings, rented to a single tenant. The area of the facilities varies between 500 – 1200 sq m depending on the needs of the tenant, in most cases with an associated car park for customers. The prices of individual facilities range from approx. PLN 2.5 million to 7 million. Therefore, they are intended for an experienced investor with an extensive portfolio.
With such facilities, it is important to have a contract with a chain tenant before construction, reserved land and general contractor “in starting blocks”. Any delays mean high penalties or a risk that the tenant will leave. Another important aspect for the industry is the so-called “catchment”, which is a set of factors determining the attractiveness of the investment: how many people live within 10-15 minutes of the facility, how many cars drive down the street per hour, how many inhabitants live in the town, unemployment rate, density population, purchasing power…
Of course, the investor does not need to deal with commercialising the facility. Just as with calculations, management, contracts… we can provide such transactions and services at Higasa Properties. We also offer such facilities as retail parks with several tenants.+ Plus: passive income (provided that the owner has a manager who will take care of inspections, snow removal, service, etc.), profitability of 7-9%, uncomplicated facility that can be rented in the future in different ways (one or more tenants).
– Cons: lack of tenant diversification, complicated contracts with a chain tenant, long exit period.
- Condo hotels:
The idea of investing capital in a hotel room works on people’s imagination. Not only will you earn decent interest but, depending on the operator and contractual terms, you may from time to time use such a room yourself. However… once again you must have knowledge of law, as the Tax Office may question the so-called owner’s stay, because, according to law, you cannot make money from a room and vacation in it at the same time. Therefore, the guaranteed profitability slightly decreases. Real profit of 4-6%, i.e. similar to the profit on renting an apartment (and similar entry threshold – approx. PLN 400,000), seems much more attractive. However, the above assumption is correct only when everything “goes” well. But most of the offers available on the market carry a high risk. An ignorant investor can easily fall into the trap of effective advertising offering high, even 10% profit, and a beautiful view in the package. Some of my clients have actually earned so much on some condo hotels that I have chosen for them, but I would never dare guarantee such profitability. The business assumption has always been at the level of 5-7%, and when there is something more that comes out of, it is a pleasant surprise. Meanwhile, the market is full of offers with a two-digit profitability “guarantee”. High profit is possible when the hotel operates in a well-known tourist resort and the facility is managed by a large operator with experience. The guarantee of your earnings is a constantly high tourist traffic and hotel occupancy. This business doesn’t work without guests! And finally, one important remark – there has been a lot of noise lately around the apart and condo hotel market, thanks to the campaign “Enchanted” by the Office of Competition and Consumer Protection and the Financial Supervision Authority. I would like to emphasise that this was an information campaign, and not a campaign directed against such investments. Its message is exactly the same as what we have been telling our clients: you have to read the contracts, not be fooled by round figures and promises.
+ Pros: passive profit, your own room available at a specified time
– Cons: no early exit possible. A high purchase price per square metre is associated with the lack of increase in value over time, frequent lack of indexation, profit depending on the operator’s efficiency.
So what is the “S-M-F-P” principle mentioned at the beginning? My clients invest safely, maintenance-free and profitably. Always in this order! Investing in Higasa Club is based on strong protection, just like when buying a property. What makes us different from the competition is that we do not sell bonds or shares! We do not make profit dependent on an uncertain tenant or tourist. The funds are invested in a retail park in which large commercial chains have contracts. You can give up holidays, but shopping, especially groceries, must be done. So it’s a business based on basic consumer needs.
Certainly, when reading this text, your attention was drawn to the recurring term “long exit period”. That is why we decided to prevent this by creating contracts that do not exceed two years. After this deadline, the investor gets a return on all capital, while interest flows even faster – every quarter or every half year. Thus, you can manage your funds much more efficiently – invest in another retail park built by Higas Properties, or look for other solutions. However, our previous experience with clients shows that investors remain in Higasa Club.
The time has come to answer the basic question: “What is the risk at Higasa Club?” When building this business, we focused on safety, by putting ourselves in the role of the client and his or her fears, which is why we secure the client in all possible ways: transparent contracts, commercialisation contracts with retail chains, three possible protections to choose from, land for the construction of the park bought by us, a small group of investors within one park and, most importantly, we do not sell any shares to anyone. I am convinced that we have done our homework very well, which is why I invite you to contact me and talk about Higasa Club.Back