Negative yields are already here in Europe, and according to Alan Greenspan on their way to America as well. What to do with your money? Gold should be part of your portfolio, but cannot be the only one. A real estate investment in Bulgaria can be an option. If you look hard enough in Sofia you could maybe find good deals, but if you look a little farther way, in Veliko Tarnovo, an easy 4.2% net yield, after all expenses and taxes, can be easily achieved.
Halfway between Bucharest and Sofia – a little gem
Veliko Tarnovo probably does not ring much of a bell for anyone outside of Bulgaria, but it certainly does in Bulgaria. Located on the Yantra river, it is known for being the capital of the second Bulgarian Empire which existed year 1185 to 1396, and for its unique architecture. Its population stands at about 70,000 souls.
Here’s a little video that gives an idea of the architecture in town.
Real Estate Investment in Bulgaria?
Why invest in a country which has one of the fastest declining populations in the European Union?
- Whilst the country as a whole is experiencing population decline, Veloko Tarnovo is growing.
- Veliko Tarnovo is not known outside of the border, but it is in Bulgaria. And as Bulgaria becomes richer, locals will invest more in one of their favorite cities
- Bulgaria has seen substantial growth in the last years, and the country is still growing on the back of reforms and EU money. 3.5% in 2015, 3.9% in 2016, 3.8% in 2017 and 3% in 2018 and much higher wage growth
- At slightly over 20%, it has one of the lowest debt/GDP ratios in the EU, right after Estonia. You can listen to all the Western media stories of government corruption in Bulgaria, but at least they know how to manage a budget and not sink into debt. In any case, there is room for fiscal stimulus were it to be required.
- The Bulgarian Lev has had a peg to the Euro since 1999 . This is good news. With its high debt levels, massive money printing, and complicated politics, the Euro is likelier to crash than the Bulgaria Lev with its low debt levels. In case of a Euro crash, the Lev could unpeg and do what is required for the Bulgarian economy.
- Upside in Veliko Tarnovo: the old town, which is the only place I would recommend to invest, is now included on the UNESCO tentative list of World Heritage Sites.
- A healthy rental market with 2 universities comprising over 12,000 students, including many international students who come for cheap and quality education. Airbnb is also an option with growing tourism in Eastern Europe/the Balkans. About halfway between Sofia & Bucharest, there is scope for growth. When I was there, quite a few foreign tourists were around.
- Income tax rate of 10%, Corporate tax rate of 10%, Capital Gains tax rate of 10%, very small property taxes, tiny inheritance taxes, the list goes on. Yes it’s possible to have low taxes, good growth, low unemployment, adequate infrastructure, and little government debt.
All of this at less than 1000€ per square meter
Yes, you can find historical houses in what will hopefully be a UNESCO Heritage Site, renovate them, get 4.2% net yield, and still spend less than 1000€ a square meter. A real estate investment in Bulgaria is an interesting option for one’s portfolio.
A case study of a Real Estate Investment in a Historical House in Veliko Tarnovo, Bulgaria
When prices are this cheap, don’t compromise and go for the best. It’s the best way to both gain upside and minimize losses in case of a downtown.
Here’s a 80m2 3 bedroom apartment in a historical house right in the middle of the old town, with gorgeous views. At 37,999€, less than 500€ per m2, it’s a bargain in the grand scheme of things. Major renovations are required though.
Here are the numbers, and the assumptions:
- Listed at 37,999€, with some minor negotiations, you can end up paying this price covering the agency costs (which the buyer typically pays in this market – about 2.5% of value), and your lawyer fees
- Major renovations are needed. The windows were replaced, but the reality is that bar that and the roof, everything is to be redone. In Sofia, for entry level apartment buildings, one can get construction costs of about 400€ per/m2. Here, we can run with the safe assumption that we’ll pay 350€ per m2 including fixtures and IKEA-like furniture. 80×350€ = an extra 28,000€. One ends up at 66,000€ all in. So 825€ per square meter for a fully renovated, and furnished 3 bedroom unit in the historical town.
How much income?
- The way the market works, foreign students typically sign 9 month leases. One could probably get 150€ per bedroom. An agency can get a lease signed per room. So 450€ per month for 9 months. Count 1 month in fees for finding the tenants, another month in management, and 1.5 month for maintenance & empty months. 5.5 x 450 = 2475€ net for the student part.
- Then there are 3 months in Summer for Airbnb. The main issue being a lack of parking for the unit, and any sort of parking being at least a 20 minute walk away. This restricts the market. One could probably only get an average of 28€ per night for the place, mostly thanks to the amazing views from the balcony. After various agency fees & the like, conservatively you’ll end up getting 20€ per night. Count an occupancy rate of 40% for three months. 90X20x40% = 720 euros for the Airbnb part.
- 2475€ + 720€ = 3,195€
- Pay your 10% taxes = 2,812€ (most people would heavily under declare in Bulgaria, but I don’t recommend you do. Foreigners are easy targets)
- 2,812€ / 66,000€ = 4.2%
Will this investment make you rich quickly? Probably not. But what’s interesting here is:
- Getting in an historical town that may get UNESCO status – at less than 1000€ per m2
- at a low price point (= higher liquidity)
- whilst getting decent yields.
There is upside, and little downside to such an investment. In today’s world, such opportunities are very limited. It’s infinitely more interesting than buying a property in Western Europe with low yields, high regulations, anti landlord laws, high taxes, extremely high maintenance costs that eat into your yield, and little upside.
How to purchase your real estate investment in Veliko Tarnovo, Bulgaria
To be transparent, it’s the second time I went to Veliko Tarnovo. Each time I spent a pleasant afternoon in the old town. This time around I decided to look into the property market, and simply walked into an agency (Yantra Homes) and asked to visit this particular property as the headline numbers were interesting. I then did some more research to look into various costs & rents in the area.
I’d recommend the following approach:
- Book an Airbnb for a week or two in the old town to get the vibe.
- Walk into a few agencies. Get the listings of apartments/houses in the old town.
- Put multiple offers through & negotiate hard.
- One of them will work out, and you’ll get even better numbers than the above. I just went for the first I saw and ran with conservative assumptions.
- Do not go for agency recommended lawyers, and do try to skimp on lawyer costs. Get the best as there can often be title deed issues/claims in that part of the world.
Happy investing. Time for me to wander off somewhere else.
*a consulting session is a discussion about your portfolio and objectives. It does not constitute legal, financial, tax or investment advice.